Cigarette Stocks Surge as Price Hikes Cushion Impact of New Tobacco Taxes

Shares of cigarette makers ITC Ltd, Godfrey Phillips India Ltd, and VST Industries rose after reports said the companies had increased prices to deal with higher costs, passing part of the burden to consumers.

The hikes came after a revised tobacco tax structure, which had earlier sparked concerns about margin pressure and demand. With prices adjusted, some of those worries eased, and sentiment turned positive, leading to gains in these stocks during the session.

What Triggered the Rally?

• Companies raised cigarette prices to offset the recent excise duty increase, reducing the expected earnings before interest and taxes (EBIT) decline to around 2%, versus earlier estimates of 8–15%.

• ITC is expected to raise cigarette prices by 20–40% across brands, with fresh shipments reaching the market soon and existing inventory also being sold at higher prices.

• Godfrey Phillips surged 20% to hit the upper circuit at ₹2,481, while ITC rose 2% on the day to ₹331 and VST Industries advanced 3.3%.

How Did Tax Changes Shape Sentiment?

The government announced the termination of the Goods and Services Tax (GST) compensation cess and implemented a new tobacco taxation regime starting February 1, which changed the tax system for cigarette manufacturers.

Within the new framework, excise duties on cigarettes are now reorganised at a scale of ₹2,050 to ₹8,500 per 1,000 sticks, and a 40% GST is added, significantly increasing the headline tax rates on cigarettes.

Demand elasticity had become a concern after these changes, along with pressure on margins and the risk of a rise in illegal trade. This pushed companies to quickly take pricing decisions.

What About NCCD and Near-Term Risk?

The budget increased the statutory National Calamity Contingent Duty (NCCD) rate on tobacco products from 25% to 60%, effective 1 May, 2026. However, the government clarified through a notification that the effective duty will continue at 25% for now, meaning cigarette companies are not seeing an immediate increase in tax outgo.

In simple terms, this is more of a provision for the future rather than a near-term tax hike. It eases immediate margin concerns, but keeps regulatory risk in place over the longer term.

How Do ITC’s Q3 Numbers Fit In?

ITC has recorded 6.2% year-on-year (YoY) revenue growth in the December quarter, led by FMCG-Others and continued momentum in the cigarette segment. Cigarette revenues grew 8%, supported by 7% volume growth.

Cigarette segment margins declined to 59.9%, a 163-basis-point YoY as a result of the usage of more expensive leaf inventory. The management noted that the cost of procuring leaves has been moderate in the current crop cycle, and this could substantiate the margins in the next few quarters.

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Key Investor Takeaway

To investors, the surge in cigarette stocks is an indication that pricing power will be able to absorb short-term tax changes and mitigate the damage to earnings, as reflected in the lower EBIT impact projection.

As of the morning session on February 19, 2026, ITC Ltd was trading at ₹332.45, while Godfrey Phillips India Ltd was at ₹2,477.7.

But with a more headline tax structure installed and the statutory NCCD rate increased as an option in the future, the main issue is whether sustained price increases can cushion volumes and margins in the medium run without faster demand destruction or illegal trade.

Sources:

EconomicTimes

Kotak NEO