Why Did Godfrey Phillips and ITC Shares Fall by Up to 6% Today? Check the Reason

Synopsis: Shares of ITC and Godfrey Philips India fell up to 6% as markets reacted to the cigarette excise duty hike effective February 1, triggering sharp price increases, demand concerns, and fears of rising illicit trade.

Cigarette stocks were under pressure as investors reassessed the sector following the implementation of higher excise duties from February 1. While the Union Budget had hinted at increased taxation, the visible jump in retail cigarette prices over the weekend led to renewed worries around demand elasticity, near-term volume slowdown, and potential growth in illicit trade. The sell-off reflects a policy-driven sentiment reset rather than company-specific weakness.

Share price and more 

With the market cap of Rs 29,640 crore, the shares of Godfrey Phillips India Ltd have fallen 6% and reached a low at Rs 1884.30, compared to their previous day’s closing price of Rs 1994.60. The shares are trading at a PE of 22.9, whereas its industry PE is at 20.5.

With the market cap of Rs 3,80,825 crore, the shares of ITC Ltd have fallen 2% and reached a low at Rs 303, compared to their previous day’s closing price of Rs 309.60. The shares are trading at a PE of 18.4, whereas its industry PE is at 43.4.

Policy shock, not weak fundamentals

The sudden decline in cigarette stocks such as ITC and Godfrey Philips India is a result of a late market response to the revised taxation structure for cigarettes announced by the government and not a company-specific negative trigger. Although the Union Budget had already indicated an increase in taxes, the actual excise duty came into effect on February 1, causing investors to re-evaluate the short-term outlook for the sector when markets reopened.

One of the major reasons for the decline is the sudden spurt in the prices of cigarettes across all categories due to the implementation of taxes. Retail prices have reportedly gone up by Rs 22-25 per pack of 10 sticks, significantly increasing costs. With excise duties now ranging between Rs 2,050 and ₹8,500 per 1,000 sticks, in addition to a substantial GST burden, the overall tax incidence on cigarettes has significantly increased, affecting the entire legal cigarette industry.

Investors are worried about demand elasticity in the price-sensitive Indian market. Although the cigarette sector has traditionally enjoyed strong pricing power and has passed on tax increases to offset them, the severity of the current price increase could potentially lead to a decline in volumes in the short term.

Another structural concern affecting the stock market is the possible increase in the number of illicit sales. As a result of the increase in the price of legal cigarettes, the difference between the two types of cigarettes has increased, which may lead to an increase in the number of people buying illegal or unregulated cigarettes.

It is worth noting that market analysts have observed that the correction in the market is policy-driven rather than fundamental. The companies with the strongest market presence in the cigarette industry have healthy businesses, with strong cash flows and diversified business models. However, the sudden execution of tax increases and the visibility of price increases at the retail level caused a sudden shift in market sentiment, resulting in a market-wide sell-off in the shares of tobacco companies.

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