Tobacco company stocks fell sharply on Thursday after the Ministry of Finance announced a new tax regime on tobacco products starting next month.
How did ITC shares react to the tax announcement?
The stock of ITC, the market leader in Indian cigarette manufacturing, declined 9.7 per cent to close at ₹364, its lowest level since April 3, 2023, marking its biggest single-day fall since March 23, 2020.
In a note on ITC, Jefferies said the company would need to raise 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.
Why are analysts worried about cigarette demand?
G Chokkalingam, founder of Equinomics, said the tax hikes would hurt cigarette demand.
“The problem for ITC is that its paper segment is not doing well, its IT subsidiary is not growing, and other FMCG 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,” Chokkalingam said.
What is the overhang from BAT’s stake sale?
Chokkalingam added that British American Tobacco (BAT) could dilute its stake further in ITC, adding pressure on the stock. In December, BAT sold a 9 per cent stake in ITC Hotels for ₹3,820 crore, reducing its holding in the company to 6.3 per cent.
How did other tobacco stocks perform?
Shares of Godfrey Phillips India, which manufactures and distributes Marlboro cigarettes in India, plunged 17.09 per cent, marking their biggest single-day fall since November 16, 2016.
Shares of NTC Industries fell 2.6 per cent, while those of VST Industries declined 0.6 per cent.
What does the new tax regime entail?
As per the notifications, the new GST rate for tobacco products other than bidis will be 40 per cent. The Central Excise (Amendment) Bill, 2025, which replaces a temporary levy on products including cigarettes, will come into effect from February 1, 2026.
Under the revised structure, excise duty on cigarettes will range from ₹2,050 to ₹8,500 per 1,000 sticks, depending on cigarette length, and will be levied in addition to GST.
What should investors watch next?
Analysts said the impact of the new taxes will start reflecting in the March quarter numbers and advised investors to approach tobacco stocks with caution.