Return of a large number of workforce to offices, coupled with a stable tax regime, is likely to push up cigarette demand by 7-9 per cent this fiscal, according to a report.

Cigarette volumes saw an 18 per cent rebound in the last fiscal after the pandemic hit demand in the previous two financial years, the report by Crisil Ratings said on Thursday.

Going forward, volume growth is expected to move closer to the long-term average of 5 per cent, the rating agency said in the report.

On the other hand, profitability of manufacturers is likely to remain strong despite input cost pressures in FY24 as they focus on premium cigarettes and hike prices in select categories, the report said.

Healthy balance sheets will support credit profiles, the report, which is based on an analysis of cigarette manufacturers accounting for over 90 per cent of the organised segment’s sales volume, said.

Anand Kulkarni, a Director at Crisil Ratings, said physical occupancy at the workplace plays a significant role in driving cigarette volumes.

Physical occupancy in offices is expected to be 65-70 per cent this fiscal as against 40 per cent last fiscal, he said, adding that stability in the tax regime, which has a huge impact on demand, will also support growth.

A substantial increase in levies, including excise duty and goods and services tax, had dragged down the share of organised cigarette sales between FY13 and FY18.

Though the national calamity contingent duty was hiked on cigarettes by 16 per cent in the FY24 Union Budget, the cost impact on the industry is marginal at 1-2 per cent, the report said, adding that manufacturers have passed on the impact through limited price hikes of 3-5 per cent in mid-premium and premium categories.

Cigarette manufacturers have seen cost pressures as tobacco prices, which account for 50-55 per cent of the manufacturing cost, have logged a compound annual growth of 20-25 per cent over the past three fiscals and is likely to go up in FY24 as well, the report said.

Rucha Narkar, an associate director at Crisil, said the rise in input costs may hurt profitability by only 50-100 bps this fiscal, with operating margins expected to be about 65 per cent.