This report profiles India’s tobacco industry, discussing market trends through 2014 and outlook for 2015 and beyond. The report also highlights leading players in the sector including ITC Ltd, Godfrey Phillips India Ltd and VST Industries Ltd.

Tobacco is one of the major commercial crops in India. Despite the health hazards associated with it, the tobacco industry contributes significantly to the economy in terms of employment, income and government revenue. It was the second largest sector in terms of central excise revenue contribution after oil and gas sector. The industry also acts as a major foreign exchange earner for the government. Besides tobacco farming and production, the Indian tobacco industry also consists of companies involved in manufacturing, sales and distribution of tobacco products like cigarettes, cigars, beedis and chewing tobacco.

Fiscal year ended March 2015 was another tough year for the Indian tobacco industry, continuing its challenging environment from FY14. The increase in excise duty induced pressure on the sales volume of cigarette companies in the sector. The tobacco production index saw a marginal growth in FY15, lower than that of the last fiscal year. Steep increase in excise duties and stringent packaging norms has contributed to the lower consumption, particularly of branded cigarettes. Of late, there has been a rise in the sale of illegal and counterfeit products in India. Price hikes by cigarette manufacturers in FY15 resulted in the improvement of profit margins, despite a lower sales volume. However, the consistent rise in excise duty, illegal and counterfeit products and regulatory restrictions remain the biggest challenges for the organized players in the sector.

Key Points:

• During 2010-13, central excise revenues from tobacco products grew at a CAGR of 21%. However, in FY14, excise revenues declined by 10% y/y due to a fall in production.

• During 2007-10, the value of tobacco exports grew rapidly at a CAGR of 35%. Thereafter, it saw a period of contraction followed by double digit growth in the last two years. In FY15, it contracted by 5%.

• The area under tobacco cultivation grew at a CAGR of 7% during 2007-11. The increase in area under cultivation was accompanied by an increase in production. Domestic tobacco production grew at a CAGR of 17% during the same period.

• The index of industrial production grew by 2.8% y/y in FY15. During 2007-13, the production index for tobacco products grew at a CAGR of 1%. In FY15, it saw a growth of 0.9% y/y. Thus, tobacco manufacturing underperformed the overall index in FY15.