Godfrey Phillips vs ITC vs VST: Should you buy cigarette stocks after Q1?

Godfrey Phillips vs itc vs VST Industries: Shares of cigarette makers have been buzzing in trade over the past few sessions, with Godfrey Phillips leading the gains despite reporting a sharp 44 per cent decline in Q1 FY27 profit. ITC, which dominates the market with more than 70 per cent share, too reported a 15.6 per cent fall in Q1 profit as higher cigarette taxes impacted earnings. Similarly, VST Industries’ net profit slipped 25 per cent. 

 

During Tuesday’s trade, Godfrey Phillips extended its gains for the fifth straight session, rising more than 7 per cent. The stock opened 3.08 per cent higher at ₹2,250.10 on the National Stock Exchange (NSE) and climbed to an intraday high of ₹2,410.

 

 

VST Industries shares traded 1 per cent higher at ₹222 apiece around noon, while ITC traded largely flat at ₹287.

 

Over the past five sessions, Godfrey Phillips shares have surged more than 16 per cent, while VST Industries shares have gained 2 per cent. ITC, however, has remained unchanged.  Why are Godfrey Phillips shares rising?  Analysts said the outlook for cigarette stocks remains cautious and that the recent move in Godfrey Phillips is driven by company-specific developments. Independent analyst Deepak Jasani noted that promoters of Godfrey Phillips have likely reached a settlement and this is why the stock is rising. 

 

"Samir Modi, one of the promoters, said yesterday that he is ending the dispute with his mother, which has excited investors about the company’s prospects. Whenever an internal promoter dispute comes to an end, investors tend to look at the company in a better light, hoping that its performance will improve. That is the key reason why Godfrey Phillips is doing well,” he said.  'Avoid' cigarette stocks: Analysts   From an overall industry perspective, analysts said that cigarette stocks are clearly an "avoid" in the current environment. Taxes have risen, while volume growth is also decelerating, which is not a good signal for the industry.

 

Gaurav Sharma, head of research, equity, Globe Capital, said that cigarette stocks remain among the weakest counters in the markets. Despite an uptick in revenue on a sequential basis, the growth remained weak, and profitability continues to be a concern.

 

"Margin contraction is one of the key reasons behind the decline in earnings. We see not much comfort in cigarette stocks at the moment,” he said. "Cigarette stocks are a clear avoid for now."

 

"Cigarettes remain a cash-generative business, but subdued volume growth and profitability are unlikely to excite investors," Deepak said. 

Effective February 1 this year, the government raised the GST on cigarettes and tobacco products to a flat 40 per cent. It replaced the compensation cess with a new additional excise duty ranging from ₹2,100-8,500 per 1,000 sticks, depending on cigarette length.

 

The three companies (ITC, Godfrey Phillips and VST Industries) together account for more than 90 per cent of the domestic cigarette market, which, according to some reports, has an estimated annual volume of over 100-120 billion sticks.  Path to recovery   Analysts aid that while all major players have initiated corrective measures aimed at restoring volume growth, the path to margin recovery won't be that easy in the coming quarters.

 

In Q1, ITC's revenue from the cigarettes business increased by 73 per cent Y-o-Y to ₹16,596.67 crore, with the company attributing it to a "staggered pricing approach". But its gross revenue (from sale of products and services) in the cigarettes segment, which strips out duty pass-through, actually fell 31.45 per cent to ₹3,769, indicating a hit on underlying sales volumes.

 

In the case of Godfrey Phillips, excluding excise, its net revenue fell 18.8 per cent Y-o-Y to ₹1,206 crore in Q1. VST Industries' revenue from the cigarette business declined by 15 per cent to ₹216 crore.

 

Rajesh Agarwal, head of research at AUM Capital Market, said that Godfrey and VST's single business exposure makes them more vulnerable to tax and margin pressures. He said that ITC appears as the stronger play because its diversified FMCG growth cushions cigarette weakness.

 

"With a strong balance sheet, debt free status, and a dividend yield above 5 per cent, ITC stands out as a resilient and rewarding investment choice," he said.  ================================================= 

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