Higher tobacco taxes burn cigarette makers' net revenue, volumes, profit in Q1

The government's steep increase in taxes on cigarettes and tobacco products has started weighing on the country's leading cigarette makers, with ITC, Godfrey Phillips India, and VST Industries reporting declines in net revenue, volumes and profitability in the April-June quarter, the first full quarter after the revised tax regime came into effect. The three companies together account for more than 90 per cent of the domestic cigarette market, which, according to some reports, has an estimated annual volume of over 100-120 billion sticks. Earlier in February this year, the government raised the goods and services tax (GST) on cigarettes and tobacco products to a flat 40 per cent. It replaced the compensation cess with a new additional excise duty ranging from Rs 2,100-8,500 per 1,000 sticks, depending on cigarette length. Though reported revenues (from operations) of cigarette companies surged as the higher duty component was reflected in sales, their underlying revenues (net revenue) and profits came under pressure as companies grappled with the impact of the unprecedented tax increase.

In the June quarter of FY27, market leader ITC's revenue from the cigarettes business grew 73.71 per cent to Rs 16,596.67 crore, from Rs 9,553.86 crore a year earlier -- a rise which the company attributed to its "staggered pricing approach amidst unprecedented increase in tax". However, the company's gross revenue (from sale of products and services) in the cigarettes segment, which strips out duty pass-through, actually fell 31.45 per cent to Rs 3,769.11 crore, from Rs 5,498.93 crore in the year-ago quarter -- pointing to a hit on underlying sales volumes. ITC, which controls over three-fourths of the domestic cigarette market, said it had mounted a "strategic and calibrated response by the Cigarettes Business to the unprecedented increase in tax, balancing the interests of all stakeholders". ITC's cigarette brands include India Kings, Insignia and Classic in the premium segment, and Gold Flake, Wills Navy Cut, Scissors, Capstan and Players in the mass-market segment.

Godfrey Phillips India reported a 44.3 per cent decline in consolidated net profit to Rs 198.39 crore for the June quarter. Revenue from operations of the Modi Enterprises firm nearly doubled to Rs 3,819.56 crore, largely on account of Rs 2,614 crore in excise duty paid during the quarter.

Excluding excise, its net revenue fell 18.8 per cent to Rs 1,206 crore, from Rs 1,486 crore in the year-ago period, the company said. Godfrey Phillips sells cigarettes under brands, including Cavanders, Four Square, Red & White, Stellar, North Pole and Tipper, besides Marlboro, which is owned by Philip Morris. VST Industries, which owns the Total, Editions and Charms brands, said its quarterly performance was also weighed down by the sharp tax increase. Its revenue nearly doubled to Rs 881.49 crore in the June quarter, from Rs 424.93 crore a year earlier, but profit after tax fell 24.42 per cent to Rs 42.42 crore, from Rs 56.13 crore in the first quarter of FY26. The company's net revenue declined 13.5 per cent to Rs 256 crore, comprising Rs 216 crore from the cigarette business and Rs 40 crore from unmanufactured tobacco, against Rs 296 crore (Rs 255 crore and Rs 41 crore, respectively) in the corresponding quarter of FY26.

VST Industries' Cigarette Volume (average per month in million) was down 14 per cent to 611 from 714 of the corresponding period a year ago.

The government had, with effect from February 1, revamped the taxation structure for tobacco products by imposing an additional excise duty on cigarettes and other tobacco products and a health cess on pan masala, over and above the highest GST slab of 40 per cent. It had replaced the earlier tax regime of 28 per cent GST plus compensation cess that had been applicable since the rollout of the GST system in July 2017. Under the revised structure, short non-filter cigarettes of up to 65 mm attract an additional duty of about Rs 2.05 per stick, while short filter cigarettes of the same length are subject to an additional duty of around Rs 2.10 per stick. Following the implementation of the new duty structure, cigarette prices were immediately increased by about Rs 22-25 per pack of 10 sticks across several categories, prompting manufacturers to undertake calibrated price hikes and portfolio adjustments at that time.