Tax hike, competition from illicit cigarettes choke BATBC sales

British American Tobacco Bangladesh recorded a 14 percent year-on-year decline in domestic cigarette sales volume in the first quarter of FY2025-26, as tax-driven affordability pressures, downtrading, and competition from illicit cigarettes weighed on sales, according to an earnings update by BRAC EPL Stock Brokerage Ltd.

Domestic gross revenue fell 10.7 percent year-on-year, while net revenue dropped 21 percent as the total tax burden rose to 84.1 percent from 82 percent in the same quarter last year.

A modest 3.8 percent growth in unit revenue failed to offset the combined drag of lower volumes and higher taxes.

The Bangladesh Cigarette Manufacturers’ Association estimates that illicit cigarettes now account for 15 to 18 percent of the total market, posing a structural challenge for compliant manufacturers.

Non-core revenue offered little relief. Cigarette exports remained zero for the third consecutive quarter, while leaf export revenue fell 22.5 percent year-on-year due to a 27.1 percent decline in volume, partly offset by a 6.3 percent rise in unit price.

Revenue from third-party contract manufacturing -- now in its second quarter -- plunged 68 percent quarter-on-quarter, while no revenue was generated from semi-finished goods.

Gross profit fell 12 percent year-on-year to Tk 802 crore, although gross margin expanded by 707 basis points to 56 percent as cost of sales dropped 33.8 percent year-on-year, outpacing the 23.1 percent decline in total net revenue.

BATBC did not explain the margin improvement, which likely reflected price-mix benefits, input cost normalisation, and efficiency gains from consolidated production.

Operating expenses surged 40.7 percent year-on-year despite the revenue contraction, with no explanation offered. Salaries, IT costs, and technical assistance fees are the principal expense heads, according to the company’s 2025 annual report.

Net finance expenses eased to Tk 49.2 crore from Tk 53.9 crore a year earlier, mainly due to lower lease costs.

Total interest-bearing debt rose sharply to Tk 2,381 crore at the end of March from Tk 1,489 crore in December.

Operating cash outflow widened to Tk 1,226 crore from Tk 952 crore a year earlier, driven by lower profitability and inventory build-up.

Inventories climbed to Tk 5,386 crore from Tk 3,829 crore at year-end, prompting the company to increase short-term borrowing to manage operations.