Indian tobacco and cigarette manufacturing companies including ITC Limited, Godfrey Phillips India, and VST Industries recorded poor April to June quarter financial performance as the central government imposed excise duty hikes. The government replaced the GST compensation cess on cigarettes, tobacco and pan masala with a higher 40% GST slab and a new per-stick additional excise duty, ranging from ₹2,100-8,500 per 1,000 sticks depending on cigarette length, effective February 1. According to reports from INVAsset PMS, the move meant more charges levied on quarterly earnings, which in turn boosted overall expenses while squeezing margins and profits thin. The three companies together account for more than 90% of the domestic cigarette market, which has an estimated annual volume of over 100-120 billion sticks. Though reported revenues surged as the higher duty component was reflected in sales, their underlying revenues and profits came under pressure as companies grappled with the unprecedented tax increase.
ITC Limited reported a 27% YoY decline in net profit to ₹3,579 crore in Q1 FY27, with cigarette EBIT falling 35.1% year-on-year and margins contracting 888 basis points to 62.5%. However, the company's shares rose despite the weak earnings as investors focused on ITC's strategic approach to managing the tax increase. As reported by NSE filings, the company's excise duty charges surged 73.5% YoY to ₹10,408.93 crore in the June quarter, compared to ₹5,996.80 crore in the same period last year. ITC implemented more than 30 interventions within a short period to strengthen its cigarette portfolio, including new products, variants, different cigarette lengths and changes across brands and price points. The company used the width of its portfolio and the strength of brands such as Gold Flake, Classic, Players, Wave, Scissors and Bristol to respond to changing consumer behaviour. This staggered and agile pricing strategy helped protect the consumer franchise and reduce the risk of customers moving towards illicit cigarettes, even though it created a large short-term hit to cigarette profit.
The cigarette business generated ₹3,341 crore out of total segment PBIT of ₹4,392 crore, meaning cigarettes contributed approximately 76% of ITC's total segment profit during the quarter, even after cigarette profit fell 35%. According to NSE filings, the company's gross revenue increased 27.8% year-on-year to ₹29,410 crore, while net revenue declined 11% to ₹18,955 crore. EBITDA declined 24% to ₹5,181 crore, and profit before tax, excluding exceptional items, fell 23.5% to ₹5,455 crore. However, the FMCG-Others business provided strong support with revenue up 15% and segment results growing 22%, while the paperboards segment showed robust growth of 38%. The company recorded an exceptional gain of ₹406 crore during the quarter, with Sproutlife Foods becoming an ITC subsidiary from April 1, 2026. The cigarettes business, which contributes nearly 48% to the total business, remained a key drag on profitability as the company adopted a staggered pricing strategy to minimize consumer downtrading and prevent migration to illicit trade.
Despite the bruising quarter, several brokerages have turned more constructive on the sector's largest player, ITC. Nomura upgraded ITC to Buy with a target price of ₹340, arguing that "the worst seems behind" and risk-reward is now favourable, expecting EBIT per stick to recover to pre-tax hike levels by Q4 FY27. Jefferies upgraded ITC to Buy with a target of ₹350, noting the volume resilience and expecting the volume trend to give management confidence to push through further price increases. Kotak Institutional Equities retained its Buy rating, noting ITC has "largely protected volumes" and is "playing the portfolio strategy well," expecting EBIT decline to moderate through FY27. However, some remain cautious - JPMorgan kept a Neutral rating with a target of ₹310, while Macquarie cut its target to ₹300 from ₹330, flagging "timing uncertainty" around margin recovery. The positive share-price reaction suggests investors viewed ITC's manageable transition strategy rather than a permanent weakening of the cigarette franchise, with the company's strategic and calibrated response demonstrating its ability to protect market position while navigating the unprecedented tax increase.
Analysts have become more cautious about ITC's near-term prospects following the latest quarterly results. Elara Capital has reduced ITC's earnings estimates by 11.7% for FY27 and 4.4% for FY28, while Motilal Oswal Financial Services has cut FY27-28 EPS estimates by 2% as slower-than-expected increase in cigarette prices is likely to weigh on FY27 earnings. The company flagged input cost inflation, weak monsoon progress, lower kharif sowing and continued geopolitical uncertainty as key risks. However, resilient growth in the consumer segment and strong recovery in paperboards and packaging business helped cushion the overall impact. Categories like dairy, snacks, noodles, frozen foods and personal care continued to gain traction, with the FMCG-others segment delivering strong performance led by dairy, snacks, noodles and frozen foods each registering more than 20% growth, alongside mid-teen growth in personal care products.
