Cigarettes & Tobacco Industry

 

Overview

Tobacco as a product has a very inelastic demand and thus the set of customers catered to by the companies would not lessen majorly even with increased taxes on the products being imposed by the government. A major source of revenue for the government, the industry significantly provides employment and thus generates high margin income.
In terms of exports as well, it is a major foreign exchange generator for the economy. The segmentation of different products in the industry out of the total production of tobacco is:

 

 

Buy Industry Analysis

 
Scientifically, there are 65 types of tobacco but among them, the industry uses only 2 specific species viz; Nicotiana Tabacum and Nicotiana Rustica. Indian production includes both the species however higher proportion of the produce is of the Nicotina Tabacum. This is due to the tropical nature of the Indian Subcontinent as Nicotina Rustica requires a cooler climate and is thus cultivated only in the northern and north-eastern regions.

Domestic and Global Outlook
As the tobacco industry is a significant contributor to the economy, it earns USD 900 million in foreign exchange, creates large of influx of Excise duty to the central exchequer through excise duty of around USD 3.4 billion and also creates ensures employment to approximately 36 million people engaged in various stages of the process – Cultivation to Selling.
Due to the increased tax duties, the industry has seen a slump of growth over the past decade but high margins have sustained profits of companies like ITC Ltd. and thus ensured growth.
The barriers to entry in this industry are very high and thus the monopolistic position of ITC Ltd. with over 72% of the market share across the sector makes this company in particular very well positioned for further horizontal diversification in terms of FMCG and consumer goods.
 
 

In terms of Exports, India is the largest exporter of FCV tobacco in the world and its tobacco is exported to more than 100 countries. By favoring the Indian tobacco market, the huge potential of the market can be enhanced and elements of cost efficiency and low unit production cost can be used for more competitive pricing.

 

Major Issues Faced by the Industry

The effects of punitive taxation and a discriminatory regulatory policy has had adverse impact on the industry. With the duty rise that has taken place in July 2015 and February 2015, the front line price of cigarettes has shot up drastically having a direct impact in reduction of sales quantity of the players. This also has an indirect impact on the industry as high legal costs induces smaller player to gain more market share in the market by selling cigarettes illegally and thus the potential revenue that can be earned by the government also reduces greatly. This is visible in the Indian industry factually too as over the years, the share of legal cigarettes in total tobacco consumption has declined form 21% in 1981-82 to below 12% in 2014-15. This is to be seen in accordance to the fact that the overall tobacco consumption of has increased over the same period.

 

Future Potential

Taking in the consideration the present state of the economy, the industry has high growth potential in terms of consumption due to the increase in disposable incomes of the average Indian even with higher levying of duties and taxes. In light of no possible FDI in this sector, allowed by the government, the industry has very less active players, this will lead to growth of some companies and acquisition on the long term of others. India also as a market and export zone is well placed for attaining higher share in the global production but that will only happen with the Pro-Industry Policies of the government, the near future of which seems bleak because of a pro – Poor and Pro Health Government coming to power in the 2014 elections.

What this report contains:

  • A detailed overview of the industry

  • Structure of the industry from both, domestic and international perspectives

  • Related industries that this industry has inter-dependencies with and their understanding

  • Detailed analysis of industry segments in terms of the value and depth of corresponding market

  • Analysis & insights about the elements and critical success factors of this industry using strategic models

  • A forecast on the state of this industry in 2020, predicting the growth and movement patterns for 2016 - 2020

  • Our professional analysis on the future of the industry based on strategic actions adopted by major industry participants

  • Quantitative estimates and forecasts of the growth prospects of the industry using revenue and financial forecasting models

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