Tobacco Stocks in Freefall: What Triggered the Crash, and What Comes Next

Tobacco stocks plunged after India announced steep excise duty hikes on cigarettes, ending seven years of tax stability. ITC and Godfrey Phillips have lost massive market value as investors brace for higher prices, margin pressure, and possible down-trading. The bigger test will come when the new taxes take effect in February 2026.

Why are tobacco stocks crashing?

India’s tobacco stocks entered a brutal selloff after the government notified a steep hike in excise duties on cigarettes and tobacco products, effective February 1, 2026. The move abruptly ends a seven-year period of near-frozen excise rates and has rattled investors who were pricing in regulatory stability.

On January 2, ITC slid another 5.1% to a one-year low, while Godfrey Phillips India fell 4.6%, extending losses from the previous session. In just two days, ITC has shed over ₹45,000 crore in market value, making it the single biggest drag on the broader FMCG index.

What is changing in cigarette taxation?

The Finance Ministry has notified specific excise duties ranging from ₹2,050 to ₹8,500 per 1,000 sticks, depending on cigarette length and whether they are filtered. This marks a dramatic shift from the previous regime, where excise duty had effectively remained unchanged at ₹5 per 1,000 sticks since 2017. In addition, cigarettes will continue to attract 40% GST, while bidis remain taxed at 18% GST.

How much will cigarette prices rise?

Brokerage estimates suggest cigarette prices will rise 15–28%, depending on the category. While ICICI Securities estimates a 22–28% increase in overall costs for popular mid-length cigarettes, Jefferies expects manufacturers to push through at least a 15% retail price hike to protect margins. On a per-stick basis, excise duty alone could now range from ₹2 to over ₹5, sharply altering consumer price points.

Why is the government doing this now?

The tax overhaul brings India closer to global tobacco-control norms.

According to the World Health Organization, tobacco taxes should account for at least 75% of retail prices to meaningfully curb consumption. India’s total tax incidence on cigarettes was around 53%, well below that benchmark.

The move also coincides with the impending expiry of the GST compensation cess in March 2026, giving the government fiscal headroom to reset tobacco taxation while framing it as a public-health intervention.

What does this mean for ITC and Godfrey Phillips?

Investors are worried about volume erosion, margin pressure, and down-trading.

Analysts warn that sharp price hikes—especially in premium and king-size cigarettes—could push consumers toward cheaper variants or illicit products. Brokerages have already turned cautious, with target price cuts and downgrades following the selloff. The impact is not limited to tobacco stocks alone. ITC’s fall has weighed heavily on the Nifty 50 and FMCG indices, amplifying market anxiety.

Will higher taxes actually reduce tobacco consumption?

That remains uncertain.

Legal cigarettes account for only about 10% of India’s total tobacco consumption. The rest is dominated by bidis, chewing tobacco, and illicit cigarettes, which remain far cheaper. Public-health experts argue that unless taxation is harmonised across all tobacco products and enforcement against illicit trade is strengthened, higher cigarette taxes may simply shift consumption, not reduce it.

What should investors watch next?

All eyes are now on February 1, 2026, when the new excise regime kicks in. Investors will closely track three things. First, how aggressively companies raise prices. Second, the impact on volumes and margins. And lastly, signs of increased illicit trade. The broader question is whether India can strike a balance between public health goals, fiscal needs, and market stability without triggering unintended consequences.

(yMedia is the content partner for this story)