Cigarette Business in India: Key players, market share, and why ITC is diversifying

Today, we are exploring the theme of Cigarette companies. Companies involved in this industry have gone through many up and down phases, but still, their earnings surprise the investors. How the industry has performed in the past and my expectations for the future.

Why is the cigarette a lucrative business?

• Pricing Power: The addictive nature of nicotine ensures that demand from the core consumer base remains stable despite price increases. So, companies can increase prices in case of an increase in raw material prices or a tax increase by the government. For example, In February 2017, after the Union Budget raised cigarette excise duty by 2.5–6%, ITC increased retail prices of its key brands (Gold Flake, Classic) by 11–13%.
• Resilience to economic cycles: Cigarette is a habit-forming product, so even in recession, cigarette companies fare better than other companies. For example, during Covid, sales of ITC’s cigarette business were down by just around 5% between FY2020 to FY2021.
• Restriction on entry: The government's strict rules have an unexpected side effect, good for the big companies, though. It is almost impossible for a new company to start a cigarette business today because of all the laws, advertising bans, and licenses required.

Major Companies in the Cigarette Market.

• ITC Limited: ITC is a diversified conglomerate; its cigarette business, though a shrinking share of revenue over the long term, remains a high-margin cash generator. Flagship brands like Gold Flake, Classic, etc., span premium and mid-premium tiers. 
• Godfrey Phillips India: Second-largest legal player, licensed manufacturer for Marlboro in India, plus its brands (Four Square, Red & White, etc.). 
• VST Industries: Focused on lower-end/value segment; a significant share of value brands. Brands like Charms, Golden FD, etc., are targeting price-sensitive consumers. 

Market Shares of Major Companies

• ITC: ITC’s cigarette business generated revenue of ₹32,631 crore in FY2024–25, contributing around 44% of the company’s total revenue. The company has a market share of around 75% of the cigarette market in India.
• Godfrey Phillips: Godfrey Phillips' domestic cigarette business generated revenue of ₹4,580 crore, contributing around 68% of the company’s total revenue. The company has a market share of more than 10% of the cigarette market in India.
• VST Industries: VST generated revenue of ₹1,837.50 crore in FY2023–24. The company has a market share of around 9% of the cigarette market in India.

How the government is making cigarettes Unattractive

• Punitive taxes: The government makes cigarettes very expensive on purpose by adding several high taxes. This includes a 28% GST, 5% cess, and other specific duties. This makes legal cigarettes progressively more expensive, directly hitting the consumer's wallet and discouraging consumption.
• Aggressive health warnings: The government forces companies to cover most of the cigarette pack (85% of it) with large, graphic photos of diseases caused by smoking. It makes the product look unattractive and constantly reminds people of the serious health risks every time they see a pack.
• Complete advertising ban: Under the COTPA Act (2003), all forms of advertising, sponsorship, and promotion for tobacco products are illegal. This stops them from making smoking look cool, stylish, or fun, which helps prevent young people from getting interested in the first place.

Why is ITC diversifying away from its cigarette business?

• Illicit cigarette: According to Euromonitor estimates, India is the 4th largest illicit cigarette market globally. These illicit cigarettes do not pay taxes and, therefore, are cheaper alternatives. According to the ITC investor presentation, illicit cigarettes account for about 1/3rd of the legal industry.
• Punitive taxes: Cigarettes are considered sin goods, and that’s a good reason for the government to raise taxes to make cigarette consumption unattractive. However, this is not good for companies whose whole revenue depends on cigarettes. So, ITC is diversifying away.
• Using cash cow: Cigarettes are a high-margin business, and ITC knows this, but still, it is volatile. So, ITC uses the cash flow from the cigarette business to build other FMCG brands. This, however, does not stop the growth of ITC’s cigarette business, which has doubled in the last decade.
• The slow growth in the industry: In the US, according to Statista, the tobacco industry is expected to grow at 2.57% between 2025–30. This is not very strong growth. This shows how preferences of modern consumers are shifting. ITC has also had revenue slumps in some of the previous years.

Key Takeaways for Investors

1. Defensive Play: Cigarettes are a habit-forming product, so demand stays stable. ITC’s cigarette segment (₹32,631 crore in FY2024–25, ~44% of revenue, ~75% market share) generates strong cash flow for the company.
2. Regulatory & Taxation Risk: High taxes (GST, cess, duties) and strict packaging/health warnings can pressure both volumes and margins. Budget announcements and policy changes may raise taxes or tighten rules further.
3. Growth Outlook: Domestic volume growth is likely to stay in single digits; revenue growth will depend on price hikes. Expect slow, steady growth in this segment.
4. Competitive Landscape: ITC dominates around 75%, with Godfrey Phillips more than 10%, and VST ~9% in niche/value segments. Entry barriers remain high. 
5. Macro & Consumer Trends: Health awareness and anti-tobacco campaigns may gradually reduce usage. While economic cycles have a limited impact, high tax hikes or downturns can shift demand to illicit products or reduce consumption.

Conclusion

The cigarette is one of the most defensive businesses because it sells a habit-forming product. This is evident from the very high market share of ITC. However, there is a shift in consumer preference, as shown by the US forecasted growth and diversification of the ITC cigarette business into other FMCG products. Cigarettes, being a sin good, are always on the radar of the government.