Cigarette stocks shed nearly Rs 60,000 crore in market cap as experts flag near-term volume risk after excise hike

Nuvama Institutional Research in its latest ITC report noted, “Historically, after such a sharp hike, volumes decrease 3–9%. For example, FY11 logged a 3% volume drop YoY after an ~18% price increase.”

India’s leading cigarette and tobacco makers ended lower on January 1, with ITC Ltd and Godfrey Phillips India driving most of the decline, as markets reacted to a sharp excise duty hike on cigarettes effective February 1. The sell-off erased nearly Rs 60,000 crore in combined market capitalization across listed players, as analysts caution that in the near term, volumes could face some risks, even though long-term views remain intact, especially for ITC, the largest player in the space.

Experts highlighted the potential for short-term volume disruption for all companies in the space as consumers adjust to higher prices.

ITC in focus

ITC, the largest player in the sector with nearly 75% market share, remains a key focus.

Nuvama Institutional Research in its latest ITC report noted, "Historically, after such a sharp hike, volumes decrease 3–9%. For example, FY11 logged a 3% volume drop YoY after an ~18% price increase." The brokerage added that January sales and production may be elevated as distributors and wholesalers stockpile ahead of the new duty, which could mute the reported impact in Q4 FY26. Analysts at Jefferies estimate that ITC might need to hike prices by at least 15% to pass on the overall impact to consumers, if not higher, they said.

Fisdom’s Nirav Karkera added that the impact on ITC may not be as severe due to its ability to absorb costs and pass on price rises gradually. "While smaller players are more exposed due to thinner margins, ITC’s scale, brand loyalty, and diversified earnings provide a cushion," he said.

In Q2 FY26, ITC reported consolidated revenue of around Rs 21,256 crore, with the company’s cigarette business remaining the largest contributor. The FMCG – Cigarettes segment generated about Rs 9,414 crore, marking a roughly 6–7% year-on-year increase driven by steady demand and a favorable mix of premium products. The FMCG – Others segment (excluding cigarettes) also grew, contributing around Rs 6,059 crore, supported by packaged foods, personal care, staples, and other consumer categories.

Nuvama added, "The excise increase could dent volumes in the short term, particularly in lower price segments, but dominant brands like ITC are likely to see limited long-term impact." Karkera echoed this view, noting that the company’s size and diversified business model provide resilience.

Prabhudas Lilladher (PL) analysts have expressed more concern. In a January 1 report they downgraded ITC to Reduce from Buy, with a target price of Rs 348. They estimate 23–50% price hikes across cigarette segments, a 12.5% drop in volumes in FY27, and modest recovery of 2.5% in FY28. RSFT, Long, and King segments, which together account for ~55% of ITC’s cigarette volumes, are most affected. PL noted that while some cost and price adjustments may protect margins, overall profitability is likely to soften, and the new excise regime leaves room for further hikes in coming years.

Mutual Fund and Brokerage Positions

Institutional investors continue to hold substantial stakes in the segment, particularly ITC. As of the September 2025 quarter, mutual funds held 14.3% of ITC, 3.62% of Godfrey Phillips, and 4.64% of VST Industries. ITC remains a top analyst pick, with 36 “Buy,” 1 “Hold,” and 1 “Sell” recommendation.

According to mutual fund shareholding data, ICICI Prudential Value Fund held over 22 million shares, UTI Nifty 50 Index Fund around 21 million, and ICICI Prudential FMCG Fund about 15 million shares. In November 2025, 214 funds increased exposure to ITC, while 68 trimmed holdings, reflecting confidence in the company’s long-term prospects even as near-term volume risk rises.

Looking Ahead

Karkara expects some volatility to remain over the next few days.  “This remains a developing story, and prices could stay volatile as analysts and investors digest various estimates. In the absence of management commentary or official guidance, there is little concrete information to rely on. The sector will likely remain sensitive to news flows and emerging data, with clarity expected only after either the next quarterly earnings report or some other formal update on volume trends and tax pass-through,” said Karkera.

Analysts say the focus in the coming quarter will be on actual volumes under the new duty, management’s approach to price pass-through, and consumer demand trends.

The stock of ITC, declined 9.7 per cent to close at Rs 364, its biggest single-day fall since March 23, 2020.  Godfrey Phillips India fell 17.09 per cent, NTC Industries fell 2.6 per cent, while VST Industries declined 0.6 per cent. The Finance Ministry on December 31 notified a major revision in excise duty on cigarettes and tobacco products, effective February 1, 2026. According to the notification issued, the government has imposed an additional excise duty on cigarettes in the range of Rs 2,050 to Rs 8,500 per 1,000 sticks, depending on the product's length and type. The duty will be levied over and above the existing 40 per cent Goods and Services Tax (GST) on tobacco and similar products