Indian tobacco and cigarette manufacturing companies like ITC, Godfrey Phillips India, and VST Industries faced a significant pressure in the first quarter as the higher tax burden squeezed margins and affected profitability.
According to analysts, with companies now having more time to implement price increases and pass on higher taxes to consumers, some sequential improvement in margins in Q2 FY27 is expected.
Indian tobacco companies have been dealing with a major structural change in taxation. The earlier framework of 28% GST plus variable Compensation Cess has been replaced by a uniform 40% GST slab, along with higher length-based Additional Excise Duties ranging from ₹2,050 to ₹8,500 per 1,000 sticks. NCCD continues to apply, while the valuation framework has also shifted to mandatory MRP-based calculations.
What happened during Q1 FY27?
According to Seema Srivastava, Senior Research Analyst at SMC Global Securities, reviewing Q1FY27 financial performances reveals that while gross top-line numbers appeared large due to statutory tax adjustments, net revenues and operating margins for cigarette makers suffered significant contraction.
ITC posted a double-digit drop in net profit as higher tax burdens and compressed EBITDA margins weighed heavily on its core cigarette segment, though robust double-digit growth in its non-cigarette FMCG and paperboards divisions provided essential diversification buffers.
Similarly, VST Industries reported sharp declines in net profit during Q1FY27, weighed down by higher levies and growing competitive pressures.
Tobacco sector Q2 results FY27 preview
Avinash Gorakshakar, Founder & Head Research at Avinash Mentor Research, expects higher cigarette prices to support a sequential improvement in margins after the heavy taxation impact seen in Q1 FY27.
“Higher cigarette prices should support a sequential recovery in margins after the sharp impact of taxation in Q1 FY27. However, we remain cautious on cigarette stocks at the current juncture, as there are no clear near-term triggers for a meaningful re-rating,” Gorakshakar said.
He added that investors should wait for management commentary around pricing, volumes and the margin trajectory before taking a more constructive view on the segment.
Meanwhile, Srivastava said that heading toward Q2, these companies continue grappling with elevated tax realities and rising input costs, making sequential price pass-throughs critical for earnings stabilization.
Which cigarette stock to buy ahead of Q2 results FY27?
Gorakshakar said that investors should remain cautious on cigarette stocks at the current juncture, as there are no clear near-term triggers for a meaningful re-rating.
On the other hand, Srivastava said that among these choices, ITC emerges as the preferred stock to buy for long-term investors.
She added that while near-term regulatory headwinds and tax adjustments create short-term earnings volatility, ITC’s multi-layered business model—anchored by a recovering paperboards segment, expanding non-cigarette FMCG brands, and strong operational scale—gives it superior structural resilience compared to pure-play peers like VST or Godfrey Phillips.
“Accumulating ITC on post-tax correction phases allows investors to harness a high dividend yield and steady margin recovery as pricing adjustments gradually take full effect,” she said.
Disclaimer: This story is for educational purposes only. The views and recommendations above are those of individual analysts or broking companies, not Mint. We advise investors to check with certified experts before making any investment decisions.
