Tobacco stocks tank as new taxes to come into effect from February 1

Shares of cigarette makers fell sharply after the Centre announced higher GST and excise duties on tobacco products from February, raising concerns over price hikes, volumes and margins

Tobacco company stocks fell sharply on Thursday after the Ministry of Finance announced a new tax regime on tobacco products starting next month.

 

The stock of ITC, the market leader in Indian cigarette manufacturing, declined by 9.7 per cent and ended the session at ₹364, its lowest level since April 3, 2023, and the biggest single-day fall since March 23, 2020.

 

In a note on ITC, Jefferies said the company will have to hike prices by at least 15 per cent to pass on the overall impact to consumers.

 

"This will be a clear negative as volumes will be impacted and concerns would also re-emerge on risk of losing some volumes to the illicit industry,” the note said.

 

 

G Chokkalinagam, founder of Equinomics, said the tax hikes will have an impact on cigarette demand.

 

"The problem for ITC is that its paper segment is not doing well, its information technology (IT) subsidiary is not growing, and other FMCG (fast-moving consumer goods) segments are also not showing growth. Cigarettes have been its major cash cow, and a blow to that segment is negative. But it's in a better position, thanks to its differentiated product mix. It is highly inelastic. But the tax hike is substantial, and this is not the end of the high incidence of tobacco tax," said Chokkalingam.

 

British American Tobacco (BAT) could dilute its stake further in ITC, putting more pressure on its stock, Chokkalingam added. BAT in December sold a 9 per cent stake in ITC Hotels for ₹3,820 crore, paring its holding in the company to 6.3 per cent.

 

The share price of Godfrey Phillips India, which manufactures and distributes Marlboro cigarettes in India, plummeted 17.09 per cent in its biggest single-day fall since November 16, 2016.

 

The stocks of NTC Industries fell by 2.6 per cent, and those of VST Industries by 0.6 per cent.

 

According to the notifications, the new goods and services tax (GST) rates for tobacco products other than bidis will be 40 per cent, and the Central Excise (Amendment) Bill 2025, which will replace a temporary levy on products including cigarettes, will come into effect from February 1, 2026. The excise duty will range from ₹2,050 to ₹8,500 per 1,000 sticks, depending on cigarette length, and will be in addition to the GST.

 

Analysts said the impact of new taxes will be visible in the March quarter numbers, and they advised investors to tread tobacco stocks with caution.