The recent announcement of a substantial excise duty hike on cigarettes has sent ripples through the stock market, particularly impacting shares of major tobacco companies like ITC and Godfrey Phillips. Effective February 1, the Indian government has implemented this new levy on cigarettes, significantly increasing the tax burden on these products. This move has led to sharp declines in the stock prices of these companies, highlighting investor concerns about the near-term outlook for the tobacco sector.

ITC, India’s largest cigarette manufacturer, saw its shares fall by nearly 10% to hit a 52-week low of around Rs 362.70. Similarly, Godfrey Phillips shares plummeted even further, declining by up to 19% during trading sessions. The magnitude of these drops underscores the market’s reaction to the excise tax hike and the anticipated pressure on company earnings and cigarette volumes.

The Central Excise (Amendment) Bill, 2025, passed by the Indian Parliament in December, replaced a temporary levy with a permanent, sharp increase in excise duties on cigarettes and other tobacco products. This tax is imposed in addition to the existing 40% Goods and Services Tax (GST), which compounds the overall tax incidence on cigarettes. Analysts point out that this move results in an effective tax increase of over 20% for the legal cigarette industry.

Financial experts and brokerage firms have weighed in on the impact of the new excise duty. Jefferies, a prominent brokerage, warned that the hike is “clearly negative” for ITC in the short term, projecting a meaningful hit to volumes and earnings. They noted specifically that cigarettes longer than 75 mm, which make up roughly 16% of ITC’s total volume, are likely to see price rises of Rs 2–3 per stick due to the new duty. This price increase could dampen consumer demand and negatively impact sales volumes.

The excise tax hike adds an element of policy uncertainty to the sector, something that brokerage houses and investors typically dislike. Despite this, some analysts maintain a positive long-term outlook on ITC, citing its diversified business model beyond cigarettes. However, in the immediate term, the tax increase poses a significant challenge.

From an investor’s perspective, the sudden fall in share prices reflects concerns about the tobacco companies’ ability to absorb or pass on the increased costs to consumers without hurting demand. Given that cigarettes already come with a considerable tax burden, further hikes could increase the risk of consumers turning to alternate products or illicit sources.

Looking at the stock market behavior, the cigarette sector’s volatility today can be traced back to the tax announcement and the resultant profit margin pressure these companies face. The shares of ITC and Godfrey Phillips are expected to remain under close scrutiny as the market digests the implications of the excise duty hike.

In conclusion, while the government’s decision to increase excise duty aligns with public health objectives by potentially discouraging cigarette consumption, it has undeniably spooked investors in the tobacco sector. ITC and Godfrey Phillips, two leading companies in this industry, are currently navigating a more challenging environment propelled by this new cost structure, with their share prices reflecting the underlying concerns and uncertainties.