Cigarette Sales Plummet Following Tax Increase: A Reevaluation of ITC and Godfrey Phillips Stock Holdings

Cigarette Sales Plummet as Tax Hikes Bite into Profit Margins

Cigarette makers such as ITC and Godfrey Phillips have seen their sales figures decline significantly in recent months, with cigarette sales falling up to 5% in March and further in April. The impact of the tax hikes is expected to show up in the March quarter numbers.

The government's decision to impose an additional excise duty on cigarettes and tobacco products, effective February 1, has led to a minimum price hike of ₹22 to ₹25 per pack of 10 sticks and a maximum hike of ₹55. The excise duty hike varies in the range of ₹2,050-₹8,500 per thousand sticks based on the length and type of the product.

As a result, cigarette stocks have declined between 10-17% since the tax hike announcement made at the beginning of the year. ITC, the industry leader, has emerged as the top loser, with its shares down 17.55% at the ₹300 levels currently. Meanwhile, Godfrey Phillips shares have lost 10%, and VST Industries is down 11%.

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Analysts expect a hit on the companies' margins as they see the price hike to be insufficient to offset the tax impact. Research Analyst Nitant Darekar from Bonanza estimates that sales volumes are likely to decline by 10%, with near-term cigarette segment profit potentially falling 15-20%.

The Impact on Cigarette Companies

The tax hike is expected to have a significant impact on cigarette companies, particularly those with a high dependence on cigarette sales. For ITC, cigarettes still contribute over 80% of operating profit, making the earnings hit meaningful. However, the company's diversification into FMCG, agribusiness, and paperboards, which account for over 60% of topline, is expected to provide a structural cushion that most tobacco peers lack.

Kotak Institutional Equities notes that ITC's cigarette business in 4QFY26 was affected by the shift to the new tax structure, but the numbers don't fully reflect actual demand due to some one-time gains in February. The brokerage expects profit growth from cigarettes at around 3% year-on-year (YoY) in Q4FY26, but margins to have declined slightly due to higher raw material costs and weak demand in March.

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Should Investors Sell Cigarette Stocks?

Despite the decline in sales, analysts have a mixed view on whether investors should consider exiting ITC and Godfrey Phillips shares. Kranthi Bathini from Wealthmills Securities advises against selling the stock, citing the company's historical ability to survive and grow despite multiple tax hikes over decades. Nitant Darekar from Bonanza, on the other hand, suggests that a blanket exit seems premature for ITC, given the diversification runway, but for Godfrey Phillips, the risk-reward has clearly deteriorated.

Note: The share price changes are based on the current market price and may not reflect the exact changes at the time of writing.