The headline revenue jump was mostly tax flowing through the books. Strip it out and the underlying business shrank. According to the latest quaterly numbers, ITC’s cigarette revenue fell 31.45%, while Godfrey Phillips saw net profit drop 44.3% and VST’s monthly cigarette volumes slid 14%.

Together, these three companies account for over 90% of India’s cigarette market, which is estimated to have an annual volume of more than 100-120 billion sticks.

Revenues up, underlying business down

Though all three companies reported a sharp rise in revenue from operations, the increase was largely due to the higher tax component being showcased in sales.

However, their net revenue, which excludes duties and provides a clearer picture of underlying business performance, declined during the quarter, showing weak demand and lower cigarette volumes following the tax hike.

ITC sees fall in underlying cigarette revenue

Market leader ITC, which commands more than three-fourths of India’s cigarette market, reported a 73.7% increase in revenue from its cigarette business to Rs 16,596.67 crore in the June quarter, compared with Rs 9,553.86 crore a year earlier.

However, the company attributed the increase to its “staggered pricing approach amidst unprecedented increase in tax”.

ITC’s gross revenue from cigarette sales, excluding duty pass-through, declined 31.45% to Rs 3,769.11 crore from Rs 5,498.93 crore in the corresponding quarter last year.

The company said it had adopted a “strategic and calibrated response” to the tax increase while balancing the interests of stakeholders, PTI reported.

Godfrey Phillips reports lower profit

Godfrey Phillips India posted a 44.3% decline in consolidated net profit to Rs 198.39 crore for the April-June quarter. Its revenue from operations nearly doubled to Rs 3,819.56 crore, primarily due to the Rs 2,614 crore excise duty reflected in reported sales.

Excluding excise duty, however, the company’s net revenue fell 18.8% to Rs 1,206 crore, compared with Rs 1,486 crore in the year-ago period.

Godfrey Phillips manufactures cigarette brands such as Cavanders, Four Square, Red & White, Stellar, North Pole and Tipper, besides producing Marlboro under licence from Philip Morris.

VST Industries records lower volumes

VST Industries also reported weaker operational performance after the tax revision. While revenue from operations nearly doubled to Rs 881.49 crore from Rs 424.93 crore a year ago, its profit after tax declined 24.4% to Rs 42.42 crore.

The company’s net revenue fell 13.5% to Rs 256 crore, with cigarette revenue declining to Rs 216 crore from Rs 255 crore in the corresponding quarter last year.

The monthly average cigarette volumes of VST also dropped 14%, falling to 611 million sticks from 714 million sticks in the same quarter of the previous financial year.

The company’s portfolio includes brands such as Total, Editions and Charms.

What changed in the tax regime?

The central government had revamped the taxation structure for tobacco products with effect from February 1, replacing the earlier regime of 28% GST plus compensation cess, which had been in place since the rollout of GST in 2017.

Under the revised framework, cigarettes and tobacco products now attract a flat 40% GST, along with a new additional excise duty ranging from Rs 2,100 to Rs 8,500 per 1,000 sticks, depending on cigarette length.

The Centre also introduced a health cess on pan masala as part of the broader restructuring.

For instance, short non-filter cigarettes of up to 65 mm now attract an additional duty of around Rs 2.05 per stick, while short filter cigarettes of the same length are subject to an additional duty of about Rs 2.10 per stick.

Following the revised tax structure implementation, cigarette manufacturers increased retail prices by around Rs 22-25 per pack of 10 cigarettes across several categories. Companies subsequently adopted calibrated price hikes and adjusted their product portfolios to manage the impact of the higher tax burden.