India’s tobacco industry was jolted this week after the government announced a sharp increase in excise duties on cigarettes, setting off a broad market reaction.
The policy shift triggered a steep selloff in tobacco stocks and forced analysts to revisit earnings assumptions across the sector.
At the centre of the reaction was ITC Ltd., the country’s largest cigarette maker by market share.
As investors digested the scale of the tax hike and its timing, attention quickly turned to pricing power, demand risks, and how quickly manufacturers can adjust to protect profitability.
Market selloff
ITC shares fell as much as 5.1% on Friday, touching their lowest level since February 2023.
The decline extended losses from the previous session, taking the two-day slide to nearly 10%.
The selloff wiped out around $7 billion in ITC’s market capitalisation, as per Bloomberg, marking one of the sharpest reactions the stock has seen in recent years.
The move reflected growing uncertainty around near-term earnings.
Investors broadly reassessed exposure to tobacco stocks after the tax decision, leading to heavy trading volumes and heightened volatility.
Policy shift and analysts’ reassessment
The selloff followed a government notification issued late Wednesday that raised excise duties on cigarettes.
Under the revised structure, duties will increase to a range of ₹2,050 to ₹8,500 per 1,000 sticks, effective from February 1.
The hike was larger than many market participants had anticipated, amplifying concerns over its immediate impact.
Higher excise duties directly raise the cost base for cigarette makers.
While price increases are a common response, the scale of the hike has revived concerns about demand elasticity in a price-sensitive market like India.
Following the announcement, at least 11 brokerages downgraded ITC’s stock.
These included Goldman Sachs Group Inc., JPMorgan Chase & Co., and Morgan Stanley.
Analysts highlighted that the higher tax burden could compress margins until pricing actions are implemented and absorbed by consumers.
Some also flagged the risk that aggressive price hikes could slow volumes before demand stabilises.
Wider impact
The policy move rippled across the sector.
Shares of Godfrey Phillips India Ltd. fell more than 20% over two sessions to Friday, underlining broader concerns about earnings visibility for cigarette manufacturers.
An industry body cautioned that higher levies could hurt the tobacco business and increase illicit cigarette trade, which has historically gained ground when legal prices rise sharply.
Analysts at Morgan Stanley estimated that cigarette prices may need to rise by as much as 40% to fully pass on the impact of the higher levies to consumers, a move likely to weigh on sales volumes in the short term.
The episode has reinforced how quickly fiscal changes can alter sentiment toward tobacco stocks, with investors now watching for signs that volumes are stabilising and pricing actions are gaining traction.
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