Cigarette stocks in smoke

Godfrey Phillips and ITC are the top losers on the BSE after the government notified higher excise duties on cigarettes and related products, triggering a broad sell-off across the sector. ITC shares fell nearly 9 to10% intraday, while Godfrey Phillips India declined over 19%. VST Industries also traded sharply lower, reflecting investor concerns over margin compression and demand impact following the tax revision.

The government has notified a revised excise duty structure effective February 1, 2026, introducing higher levies across cigarette categories. Under the new framework, cigarettes will attract excise duties ranging between Rs 2,050 and Rs 8,500 per 1,000 sticks, depending on length. While cigarettes up to 65 mm may see limited impact, longer-length products, particularly those above 75 mm, are expected to face a steep 45 to 50% increase in duty. In addition, a new Health and National Security Cess has been imposed on pan masala and tobacco products, further tightening the tax environment for the sector.

Market participants reacted negatively as the revised tax structure materially alters pricing dynamics and compresses near-term margins. Analysts note that while companies such as ITC and Godfrey Phillips possess strong pricing power and resilient cash flows, the sharp increase in duties could temporarily disrupt volume growth, especially in the premium cigarette segment. The move also raises the risk of down-trading and a shift towards illicit products, a recurring concern whenever sharp tax hikes are introduced.

From a financial perspective, ITC continues to remain fundamentally strong with diversified cash flows from FMCG, hotels and paperboards, but the near-term earnings trajectory for its cigarette business could face pressure. Godfrey Phillips, with a higher dependence on cigarette revenues, is seen as more exposed to the immediate impact of the tax changes. Analysts, however, point out that the industry has historically managed to recalibrate through calibrated price hikes and cost controls over time.

Overall, the market reaction reflects near-term uncertainty rather than a structural negative. While the revised excise regime may weigh on sentiment in the short run, longer-term investors will track how effectively companies pass on costs, protect volumes, and sustain profitability amid a tightening regulatory environment.