ITC and Godfrey Phillips Recover After Tax Shock: What Should Investors Watch Now?

Cigarette stocks have started recovering after the sharp fall triggered by the recent excise duty announcement. ITC share is up around 2 percent from recent levels, while Godfrey Phillips has seen a much sharper rebound and closed 20% higer today. This recovery has raised an important question for investors.

Has the worst already been priced in, or is the real impact still ahead? Since the new excise duty becomes effective from February 1, the full financial impact will reflect only in Q4 results. So far, we have received results only up to Q3. That means the market is still waiting for hard numbers. Here are the key things investors should track from here.

Q4 Results Will Be Crucial

The new excise duty ranges from about ₹2,050 to ₹8,500 per 1,000 sticks, depending on cigarette length. This is over and above the existing GST of nearly 40 percent.

Since the tax becomes effective from February 1, the real impact will start reflecting in Q4 earnings. Investors should closely watch:

• Cigarette segment revenue growth
• Volume growth or decline after price hikes
• EBIT margins in the cigarette business
• Management commentary on demand trends

If margins remain stable and volume decline is limited, the recent stock recovery could sustain. But if volumes fall sharply or margins compress meaningfully, stocks may again face pressure.

How Much Price Increase Was Passed On

After the excise hike was announced, cigarette makers moved quickly to increase prices.

Reports suggest that Price revisions appear to be broad based rather than selective. ITC’s Premium variants have seen hikes of around 40 percent, while mid and value categories have witnessed increases in the range of 19 to 20 percent. In Godfrey's case, per stick pricing has moved from below ₹10 to above ₹11, indicating a meaningful jump in realisations.

Estimates indicate that nearly 50 percent of ITC’s portfolio may see larger than expected price hikes. These increases have reportedly resulted in higher EBIT per stick, helping companies offset the higher excise burden.

Brokerage commentary suggests that while volumes may see some pressure after these steep hikes, the overall profitability impact could be mitigated if higher realisations compensate for lower volumes. This pricing action is a key reason why stocks have bounced back.

Impact on Cigarette Volumes

Cigarettes are a habit forming product. Because of this, demand is relatively less sensitive to price increases compared to many other consumer products.

Historically in India, even after repeated tax hikes, volume decline has been gradual rather than sharp. Companies have managed to grow realisations steadily over time.

This gives cigarette manufacturers strong pricing power, which supports, stable cash flows, high operating margins and Strong return on capital

Still, investors should monitor, Year on year volume growth, Sequential volume trends and Market share movement

If volume decline remains moderate, it reinforces the strong pricing power of the business. If not, it may signal deeper demand stress.

Dependence on Cigarette Profits

Despite diversification into FMCG, hotels, paperboards, and agri business, cigarettes continue to contribute a major share of operating profit for companies like ITC.

That is why any regulatory move on tobacco has a direct impact on stock prices. Investors should also watch:

• Growth in non-cigarette FMCG
• Contribution of other segments to overall profits
• Cash flow generation and dividend sustainability

Stronger performance in non-cigarette businesses can reduce long term risk perception.

Part of the Rally Is Also Value Buying

Before this recovery, cigarette stocks had corrected sharply after the excise duty announcement. ITC had fallen nearly 10 percent in a single session, and sentiment turned cautious across the sector.

Such sharp corrections often attract value buying. Once the immediate fear of margin collapse started easing and companies announced price hikes, some investors and institutional players likely saw the fall as overdone.

This buying at lower levels helped push stocks higher even before Q4 numbers are out.

The Bigger Picture for Investors

The recent rally in ITC and Godfrey Phillips suggests that the market believes the tax impact may be manageable. But the real test lies in Q4 earnings.

From an investor perspective, the focus should now shift from price movement to business performance. The key will be how effectively companies managed pricing, how consumers reacted, and whether margins stayed resilient.

Until Q4 results provide clarity, volatility in cigarette stocks cannot be ruled out. Long term investors should track earnings quality, cash flows, and segment contribution rather than reacting only to short term stock moves.

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