MUMBAI: A recent excise duty hike on cigarettes has rattled tobacco stocks, with investors bracing for margin pressure, potential volume erosion and a possible surge in illicit trade, even as underlying demand remains sticky.
An additional excise duty on cigarettes and other tobacco products, over and above the highest 40% goods and services tax (GST) rate, took effect on 1 February. As a result, cigarette prices have increased by ₹22-25 per pack of 10 sticks.
Shares of ITC Ltd, the country’s largest cigarette maker, have fallen 21% since the excise duty hike was announced on 31 December 2025, while Godfrey Phillips India Ltd is down 22% since the announcement.
The selloff reflects concern that higher prices will squeeze margins and weigh on volumes. While cigarette consumption is widely viewed as habit-driven rather than discretionary, sharp tax increases have historically weighed on volumes and encouraged downtrading, including shifts to loose cigarettes and illicit products.
“Our estimates suggest that the overall tax burden could result in an effective hike of 50% at the portfolio level, assuming no mix change and status quo on the NCCD," Jefferies India had said in a 1 January report. The NCCD is the national calamity contingent duty.
“While tweaks in taxation were expected, the quantum has negatively surprised the Street,” analysts at Centrum Broking Ltd noted. Historical precedent has also unsettled investors. “During FY14-18 when the taxation on cigarettes was increased, ITC delivered a volume decline of 6-7% CAGR while realizations improved by 1-2%,” analysts at Antique Broking said in a report dated 2 January.
Broker sentiment has also weakened since the announcement. While 37 out of the 39 brokerages tracking ITC had a buy or strong buy call at the end of November, only 15 currently maintain a buy rating. Nomura analysts have warned of about a 20% margin hit because of the excise duty hike.
“We believe ITC will have to take a price hike of around 35%+ to maintain margins. This sharp (tax) hike will pressure volumes significantly and lead to a sales decline of 15% year-on-year in FY27 (forecast)," Nomura Financial Advisory and Securities (India) had said in an earlier report.
Buyer behaviour
At the retail level, shopkeepers say customers are adjusting their buying patterns.
Following the 31 December notification, The Tobacco Institute of India (TII) said it had noticed instances of retailers charging above the MRP in anticipation of the hike. Cigarette consumption is generally linked to habit and price increases do not materially reduce demand in the long run, cigaretter retailers say.
Yet, small shopkeepers Mint spoke to in Mumbai, Bangalore and Kochi said customers have increasingly shifted to loose single cigarettes rather than packets because of the price hike.
“Daily wage labourers, drivers, delivery workers etc. have reduced buying cigarettes in the last few days,” said a paan shop owner in Kurla, Mumbai, requesting anonymity. “It is only the salaried people who have continued to buy the same number of cigarettes,” he added.
Some retailers also cited temporary unavailability of products during the transition from the old regime to the new. This has created pricing grey areas, with cigarettes earlier sold at ₹18 per stick as loose items now being sold at ₹20 to ₹25.
Industry response
The industry has warned that sustained price increases could accelerate the shift toward illegal cigarettes.
India is the fourth-largest illicit cigarette market globally according to Euromonitor estimates, said ITC. “It is estimated that illicit cigarette trade causes a loss of approximately ₹23,000 crore per annum to the exchequer and accounting for about 1/3rd of the legal industry,” ITC had said in a statement accompanying its December quarter results.
Estimates of the illicit market’s size vary. A government estimate put the size of the industry at ₹204 crore, as of October 2024, while international tobacco giant Philip Morris estimated it at up to ₹600 crore in FY25.
“In India, the excessive taxation on cigarettes has led to the share of illicit trade in the Indian cigarette market doubling from 12.6% in 2012 to 26.1% in 2024,” Sharad Tandan, director, TII, told Mint. “The increase in taxes on cigarettes would result in a significantly higher share of illicit cigarettes,” he added.
Illegal cigarettes, typically sold at lower prices, pose a competitive threat to legal manufacturers.
In November 2025, the Indian arm of KT&G Corp. sent over 130 legal notices across the Delhi-NCR region over illegal sale of its product ESSE. KT&G officially launched in India only in May 2025, while its ESSE branded items were available in India through illegal routes previously too.
Tandan added that the illicit cigarette trade has an adverse impact on Indian tobacco farmers, as contraband products do not use locally grown tobacco.