There was a huge fall in the shares of cigarette companies after the increase in excise duty and GST in the beginning of the year. But now a rapid recovery is being seen in the sector. It is reported that companies are increasing prices by 2040% to pass the tax burden on customers.
After falling 20% in January, ITC Limited shares have jumped nearly 7% from the February low. Whereas Godfrey Phillips India has shown a rise of 25% from the February low. VST Industries has also grown by more than 5% this month.
There was a stir due to tax increase
Under the new rules effective from February 1, 2026, the excise duty on cigarettes has been increased from Rs 2,050 to Rs 8,500 per 1,000 sticks. There will be higher tax on long cigarettes. Apart from this, GST on tobacco products was increased from 28% to 40%. Initially investors feared that this would affect the profits (margins) of companies. But now companies have adopted the strategy of reducing the pressure by increasing prices.
Margin pressure reduced due to price increase
According to reports, the entire increase in premium cigarette prices has been passed-on. For example, the price of 84 mm cigarettes of ITC Limited has been increased from Rs 17 to Rs 24 per stick. Analysts believe that there may be a slight decline in demand, but the demand for cigarettes in India is generally not much affected. With this, companies can save their EBITDA margin up to 3040%.
What strategy for investors?
Experts say that valuations look attractive after the recent fall. Due to strong brand, cash flow and price appreciation potential, these shares can be a defensive option for long-term investors. However, it will be important to keep an eye on the risk of shift to cheaper or illegal products, changes in regulations and ESG related issues. Overall, this sector is considered more suitable for those looking for stable dividends and safe investment rather than fast growth.