The government's decision to increase excise duty on cigarettes and tobacco has triggered a massive sell-off in the stock market. Shares of ITC and Godfrey Phillips plummeted, wiping out nearly ₹60,000 crore in market capitalization from the sector in a single day.
Stock Market: The stock market experienced a significant jolt on the very first trading day of the new year, surprising investors. A government decision led to a substantial sell-off in the tobacco and cigarette sector, erasing approximately ₹60,000 crore in market capitalization within hours. The decline was so sharp that it is being considered one of the largest sectoral setbacks in recent years.
This sharp decline was led by the country's leading companies, ITC and Godfrey Phillips India. As soon as news of the government's new tax decision surfaced, investors began aggressively selling off shares in these companies.
What is the Government's Decision
The Ministry of Finance has issued a notification increasing excise duty on cigarettes and tobacco products. This new rule will come into effect from February 1, 2026.
Under the new decision, an additional excise duty of ₹2050 to ₹8500 per 1000 sticks will be levied on cigarettes based on their length and category. This tax will be imposed on top of the existing 40 percent GST. This clearly means that the tax burden on cigarette companies is set to increase significantly and suddenly. This is why the market reacted so negatively to the decision.
Panic Among Investors as News Breaks
As soon as this information spread in the market, investors began to distance themselves from the tobacco sector. Heavy selling was seen in the shares of cigarette companies.
Investors fear that rising taxes will lead to higher cigarette prices, which will affect demand, or volume. This will directly impact the companies' earnings and profits. This apprehension caused the shares to plummet.
Biggest Impact on ITC
The government's decision had the biggest impact on ITC. ITC is the largest cigarette manufacturing company in the country and is estimated to have a market share of around 75 percent in the Indian market.
ITC's share in the stock market fell by about 9.7 percent. This was the largest intraday decline in ITC's share since March 2020.
ITC's market capitalization fell by thousands of crores of rupees in a single day. ITC has long been considered a defensive and stable stock, but this decision shook investors' confidence.
Sharp Decline in Godfrey Phillips Shares
Apart from ITC, the shares of Godfrey Phillips India also saw a significant decline. The company's share fell by more than 17 percent.
Godfrey Phillips' business is also largely dependent on cigarettes. The impact of the tax hike is considered to be more severe on this company compared to ITC. This is why investors engaged in more aggressive selling here.
Pressure on Other Companies Too
The impact of this decision was not limited to ITC and Godfrey Phillips. Shares of other tobacco companies such as VST Industries and NTC Industries also showed weakness. A negative atmosphere prevailed throughout the sector, and investors preferred to exit these shares to avoid risk.
₹60,000 Crore Wiped Off Market Cap
As a result of the decline in all these companies, a total of about ₹60,000 crore in market capitalization was wiped out from the tobacco and cigarette sector. The disappearance of such a large amount from the market in a single day demonstrates how deeply government decisions can affect the stock market.
Biggest Threat to Volume
Brokerage firms and market experts believe that the biggest impact of the tax hike will be on cigarette sales, or volume. According to Nuva Institutional Research, history shows that whenever there has been such a sharp tax increase on cigarettes, volume has fallen by 3 percent to 9 percent.
Rising prices cause consumers to either reduce consumption or turn to cheaper alternatives. This affects the companies' sales.
Compulsion to Raise Prices
Brokerage firm Jefferies believes that companies like ITC may have to increase prices by at least 15 percent to pass on the tax burden to customers.
If companies do not raise prices, their margins will come under direct pressure. And if prices are raised, there is a risk of sales declining. This dilemma currently faces cigarette companies.
Confidence in ITC's Strength
However, not all experts are completely discouraged. Some experts believe that a large company like ITC has the ability to handle this shock. According to Nirav Karkara of Fisdom, ITC has b brands, better margins, and a diversified business model. The company's FMCG, hotel, and agri-business provide some support.
He believes that ITC can gradually balance the impact of this tax increase. However, the situation may be more difficult for smaller players.
