Q1 excise duty headwinds test ITC, Godfrey Phillips, others; analysts stay positive on growth

Indian tobacco and cigarette manufacturing companies like ITC, Godfrey Phillips India, and VST Industries were among others which recorded a poor April to June quarter financial performance as the central government imposed excise duty hikes weighed down quarterly earnings.

The Indian central government imposed a revised tax framework under the Central Excise (Amendment) Bill, 2025 for manufactured tobacco products, unmanufactured tobacco and all other tobacco-related products, increasing their charges from 25% to 40% effective from February 1, 2026.

For cigarette makers, this move meant more charges, which were levied on their quarterly earnings, which in turn boosts the overall expenses in the period while squeezing their margins and profits thin.

Experts predict that in the upcoming period, key focus will remain on trade pipeline restocking normalisation, price point settlement, festive quarter support along with stabilisation in volumes and net realisations.

What was the impact of the tax hike?

With the government increasing taxes to 40%, market experts said that move triggered volume contraction, consumers downtraded towards cheaper formats and illicit alternatives, resulting in compressed realisations in the June quarter.

“Q1 FY27 was the first full quarter under the February tax reset, which moved cigarettes to a flat 40% GST and replaced the compensation cess with an additional excise duty of ₹2,100 to ₹8,500 per thousand sticks,” said Harshal Dasani, Business Head of INVAsset PMS.

Dasani also explained that the companies absorbing a certain portion of the price hikes also resulted in the subdued Q1 financial performance of tobacco companies.

Looking ahead over the next three-four quarters, the expert predicts that consumers will absorb the new prices, but the reset has been the steepest in years, and the structural effects of the same are expected to outlast the cyclical recovery.

Key focus will remain on illicit trade of cigarettes and tobacco amid the price hikes, along with stabilising volumes, margin recovery, and diversification into non-tobacco revenue streams in the upcoming period.

Here’s how tobacco companies performed in Q1 results

ITC Limited

Cigarette-maker ITC Limited’s Q1 earnings report showed that the company’s profits dropped 27% YoY in the April to June quarter of the financial year 2026-27, with the excise duty charges weighing down the company's earnings despite healthy revenue growth.

The NSE filings showed that ITC’s excise duty charges surged 73.5% YoY to ₹10,408.93 crore in the June quarter results, in comparison to ₹5,996.80 crore in the same period a year earlier.

Analysts from Nomura predict that the worst seems to be behind for the company, and the cigarette volume declining 5% was better than their estimated volume decline of 10% in the period.

In line with the review, analysts from Jefferies said that the earnings miss was largely driven by gradual price hikes and a series of interventions, and the management should consider further price hikes given the resilient volume trend expectations.

*Note: All data have been collected from ITC Limited’s consolidated financial statements.

Godfrey Phillips India

On July 28, Godfrey Phillips India recorded a 44% YoY decline in net profits due to the company’s massive surge in excise duty charges levied in the period under review after the updated tax norms earlier this year.

Although the cigarette-maker’s revenues surged 111% in the June quarter, the overall expenses rising 144% weighed down the company's margins and profits in the period under review.

NSE filings showed that the tax hike impact resulted in a 700% surge in the company’s overall excise duty charge in the Q1 results, rising to ₹2,614 crore, in comparison to ₹327 crore in the corresponding quarter of the previous year.

This surge also pressured the margin growth in the period as the EBITDA margins contracted to 4.75% in Q1 FY27, from 18.61% in the same period a year earlier, as per the exchange filing.

Details showed that Godfrey Phillips’ revenue comes from the company’s cigarettes, tobacco, and related products business.

The cigarettes, tobacco, and related products business segment revenues surged 112% to ₹3,779.81 crore in the June quarter, from ₹1,781.36 crore a year earlier.

*Note: All data have been collected from Godfrey Phillips’ consolidated financial statements.

VST Industries

VST Industries’ profits declined 24% YoY in the April to June quarter of FY27, due to the overall increase in excise duty charges and margin reduction in the period under review.

The tax hike impact resulted in a 421% surge in the company’s overall excise duty charge in the Q1 results, rising to ₹605.25 crore, in comparison to ₹116.22 crore in the same period a year earlier.

The company’s management said that the firm is adopting a measured pricing approach across our brands to help protect our consumer base given the tax hikes and challenges which impacted the Q1 financial performance.

“We are focused on recovering volumes by strengthening our brand portfolio and disciplined in-market execution. In our unmanufactured tobacco business, ongoing geopolitical instability in the Middle East continues to weigh on growth,” said Piyush Srivastava, Managing Director of VST Industries.

*Note: All data have been collected from VST Industries’ consolidated financial statements.

How have tobacco stocks performed?

*Note: All data have been collected from the NSE and BSE websites.

What’s in store for Q2 results?

Looking ahead towards the second quarter of FY27, Harshal Dasani said that the Q2 earnings are expected to be “sequentially better but optically ugly,” with key focus on a higher price-point settlement, festive quarter support mix, and sequential stabilisation in volumes and net realisations.

Although sequentially the performance is likely to improve with support from volumes, the YoY prints will continue to remain ‘heavily distorted’ in the financial year 2026-27 as investors compare to pre-tax hike levels.

“The stance on the sector stays cautious within the broader consumption caution: inelastic demand makes these businesses durable, but durability at a permanently higher tax base with rising illicit competition is a slower compounding equation than the multiples have historically assumed,” said Dasani.