Cigarette stocks on fire: ITC and Godfrey Phillips pass on steep tax hikes

Shares of major Indian cigarette manufacturers, including ITC Ltd, Godfrey Phillips India (GPI), and VST Industries, staged a dramatic recovery Thursday. The rally follows reports that these companies have successfully implemented price hikes of up to 41% to offset the massive tax overhaul that came into effect on February 1, 2026.

Godfrey Phillips saw its stock soar by 12%, hitting an intraday high of ₹2,314.30, while ITC climbed toward ₹331. The surge marks a turning point after a brutal January, where the sector lost over ₹1 lakh crore in market value due to fears that the new tax regime would crush volumes.

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The 2026 Tobacco Tax Revolution

The Indian government officially scrapped the GST compensation cess on February 1, replacing it with a more aggressive 40% GST and a length-based excise duty. This specific excise duty ranges from ₹2,050 to ₹8,500 per 1,000 sticks, depending on the cigarette length.

Meanwhile, the National Calamity Contingent Duty (NCCD) statutory rate was raised to 60%, though the effective rate remains at 25% for now. Therefore, while the immediate tax outgo hasn’t spiked further, the government has created an “enabling provision” to hike taxes again without needing a parliamentary amendment.

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ITC’s Strategic Pricing: Premium vs. Value

ITC has adopted a calibrated approach to pass on the 22%–28% increase in total tax incidence. The company has fully passed on the hikes in the premium segment, while keeping them minimal in price-sensitive “value” categories to protect its volume base.

• Premium (84mm): Brands like Gold Flake and Classic saw a 41% price hike, moving from roughly ₹17 to ₹24 per stick.

• Mid-Tier (69mm): Gold Flake Regular increased by 32%, now priced at ₹125 for a pack of 10.

• Value (64mm): Price hikes were kept around 18%–20%, with Gold Flake Superstar now retailing at ₹7 per stick.

Next, ITC launched a new “Deluxe” size (64mm) variant for Gold Flake at ₹9.4 per stick. This is a tactical maneuver to capture consumers who might “down-trade” from the more expensive 69mm regular size. In fact, brokerage UBS noted that this tiered pricing is likely to keep the impact on ITC’s EBIT and volumes to a minimum.

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Q3 FY26: Resilience Amid Regulatory Provisions

In its December quarter results (Q3 FY26), ITC reported a standalone net profit of ₹5,088.83 crore. While revenue grew 5.8% YoY, profit was muted due to a one-time provision of ₹273 crore related to new labour codes and wage definitions.

Furthermore, cigarette margins contracted by 163 basis points to 59.9%—a multi-quarter low. This was primarily due to the consumption of high-cost leaf tobacco inventory. However, management indicated that leaf procurement prices have since moderated, which could provide a tailwind for margins in the upcoming quarters as the new prices take full effect.

Reality Check

Brokerages are calling for a “Buy” on ITC, citing its strong pricing power. Still, the 15%–20% average price hike is a massive leap for a single quarter. Therefore, the “stickiness” of cigarette consumption will be truly tested in Q4 FY26. In fact, illicit trade already accounts for nearly 25%–30% of the Indian market. Thus, if the price gap between legal and smuggled brands grows too wide, the volume decline could exceed the anticipated 5%–10%.

The Loopholes

The government introduced an MRP-based valuation for GST calculation from February 1. In fact, some retailers are still selling “old stock” at “new prices” to pocket the difference. Therefore, the immediate “surge” in stock prices reflects investor relief rather than actual consumer data. Still, the “Health and National Security Cess” loophole allows the government to raise the duty later this year, potentially creating a second round of price hikes that the market hasn’t priced in yet.

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What This Means for You

If you are a dividend-seeking investor, ITC’s 4.3% yield and debt-free balance sheet provide a solid defensive floor. First, track the March 2026 volume data; if volumes hold up despite the 41% hike in premium brands, the stock is likely to re-rate toward ₹400. Then, monitor the illicit trade enforcement reports from the CBIC.

Finally, realize that the tobacco sector is becoming a “cash-flow play” rather than a growth engine. You should consider accumulating on dips if you seek steady dividends, but keep an eye on ESG-related constraints that may limit institutional buying. Before making a move, check if the Gold Flake 69mm price is stabilized at ₹12.50, as it is the most critical volume driver for ITC.

What’s Next

ITC will pay its ₹6.50 interim dividend between February 26 and February 28, 2026. Then, the next GST Council meeting in late March will be the critical event to watch for any tax rate rationalization. Finally, the effective NCCD rate hike could be notified as early as May 1, which would trigger a fresh round of analyst downgrades.

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