Excise hike lights up margin, illicit trade risks for cigarette stocks

Subscribe to enjoy similar stories. MUMBAI: A recent excise duty hike on cigarettes has rattled tobacco stocks, with investors bracing for margin pressure, potential volume erosion and a possible surge in illicit trade, even as underlying demand remains sticky. An additional excise duty on cigarettes and other tobacco products, over and above the highest 40% goods and services tax (GST) rate, took effect on 1 February.

As a result, cigarette prices have increased by ₹22-25 per pack of 10 sticks. Shares of ITC Ltd, the country’s largest cigarette maker, have fallen 21%since the excise duty hike was announced on31 December 2025, whileGodfrey Phillips India Ltd is down22% since the announcement. The selloff reflects concern that higher prices will squeeze margins and weigh on volumes. While cigarette consumption is widely viewed as habit-driven rather than discretionary, sharp tax increases have historically weighed on volumes and encouraged downtrading, including shifts to loose cigarettes and illicit products.

“Our estimates suggest that the overall tax burden could result in an effective hike of 50% at the portfolio level, assuming no mix change and status quo on the NCCD," Jefferies India had said in a 1 January report. The NCCD is the national calamity contingent duty. “While tweaks in taxation were expected, the quantum has negatively surprised the Street," analysts at Centrum Broking Ltd noted.

Historical precedent has also unsettled investors. “During FY14-18 when the taxation on cigarettes was increased, ITC delivered a volume decline of 6-7% CAGR while realizations improved by 1-2%," analysts at Antique Broking said in a report dated 2 January. Broker sentiment has also weakened since the announcement.