Cigarette Stocks Ignite on Dalal Street Following Price Increases
Shares of major cigarette manufacturers experienced a significant rally on Wednesday, fueled by reports that companies have implemented price hikes to mitigate the impact of recent tax increases. This strategic move by the industry aimed to protect profit margins in the face of a revised taxation framework.
Stock Performance Highlights
Godfrey Phillips India Ltd led the surge, trading at ₹2,386 by early afternoon, marking a substantial gain of ₹318 or 15.4%. ITC Ltd, the country's largest cigarette maker, saw its shares rise 2% to ₹331, extending gains for a third consecutive day with a cumulative increase of approximately 5.5% over the period. Meanwhile, VST Industries Ltd strengthened to ₹244, adding 2% during the session and advancing 3.3% in morning deals.
The market reaction was swift and pronounced, with Godfrey Phillips jumping 12% to ₹2,315 per share on the BSE, reflecting a more than 15% gain over two days. This upward momentum followed media reports confirming that cigarette manufacturers had raised prices to pass on the burden of higher taxes to consumers.
Taxation Changes Driving the Move
The price adjustments come in response to the government's notification on February 1, which ended the GST compensation cess and introduced a new tobacco taxation framework. This reset excise duties on cigarettes to a range of ₹2,050 to ₹8,500 per 1,000 sticks, alongside a consistent 40% GST rate.
The revised regime has materially increased the overall tax burden on cigarette companies, raising concerns about potential demand trends, margin pressures, and the risk of increased illicit trade. However, the immediate price hikes are seen as a protective measure, with the expected decline in EBIT now projected at around 2%, significantly lower than earlier estimates of 8–15%.
Price Increases and Market Impact
ITC Ltd is likely to implement cigarette price increases of 20–40% across its various brands. Fresh shipments reflecting these revised prices are expected to reach the market soon, while retailers have reportedly begun selling existing inventory at higher rates.
This proactive step by cigarette makers is viewed as essential for safeguarding margins in a challenging regulatory environment. The move demonstrates the industry's responsiveness to fiscal changes and its ability to adapt pricing strategies accordingly.
Technical Changes in Taxation Structure
The recent Budget also introduced a technical modification to the National Calamity Contingent Duty (NCCD). The statutory NCCD rate on tobacco products has been raised from 25% to 60%, effective May 1, 2026. However, it was clarified that the effective duty rate will continue at 25% through a notification, meaning there is no immediate increase in tax outgo for cigarette companies.
In effect, while the duty remains unchanged for the present, the government has enabled a future increase without requiring another amendment to the law, providing flexibility for future fiscal adjustments.
Recent Financial Performance
In the December quarter, ITC reported revenue growth of 6.2% year-on-year, supported by double-digit expansion in its FMCG-Others business and steady momentum in cigarettes. Cigarette revenues specifically rose 8%, driven by 7% growth in volumes.
However, margins in the cigarette segment fell to 59.9%, a multi-quarter low, contracting by 163 basis points year-on-year due to the consumption of high-cost leaf inventory. Management indicated that leaf procurement prices have moderated in the current crop cycle, which could help support margins in the coming quarters.
The combination of strategic price increases and moderated input costs may provide a buffer against the heightened tax environment, allowing cigarette manufacturers to maintain profitability while navigating regulatory challenges.
