Indian tobacco stocks tank as government levies new tax on cigarettes

• The new cess will increase overall costs by 22%-28% for 75-85mm cigarettes and applies in addition to the existing 40% GST, potentially adding 2-3 rupees per cigarette stick
• Jefferies analysts called the move 'a clear negative' that would revive market share concerns, while ITC became the biggest loser on the Nifty 50 index
• Cigarettes longer than 75mm account for approximately 16% of ITC's volumes and face the steepest tax burden under the government's health-focused consumption curbs

Indian tobacco stocks plummeted after the government announced a new tax on cigarettes effective February 1. ITC, the market leader and maker of Gold Flake, dropped 9.2%, while Godfrey Phillips India, Marlboro's distributor in India, crashed 14.1%. ITC emerged as the biggest loser on the Nifty 50 index, dragging the FMCG index down 3.2%.

The Finance Ministry imposed a levy ranging from 2,050 to 8,500 rupees ($22.82-$94.60) per 1,000 sticks, varying by cigarette length. This new tax will be applied on top of the existing 40% Goods and Services Tax. Jefferies analysts labeled the move "a clear negative," warning it would damage sales volumes and revive market share concerns.

According to ICICI Securities, the duty represents a 22-28% increase in overall costs for 75-85mm cigarettes. Cigarettes exceeding 75mm length, which comprise approximately 16% of ITC's volumes, are expected to see price increases of 2-3 rupees per stick. Analysts anticipate companies will likely raise retail prices to offset the higher tax burden, potentially dampening consumer demand.

The government's latest measure aligns with ongoing efforts to curb smoking in India, where health issues related to tobacco consumption are considered a significant drain on national resources. Previous initiatives have included larger warning labels and periodic tax adjustments. While the government hasn't specified the exact impact on retail prices, the market reaction suggests investors expect meaningful pressure on tobacco companies' profitability and volumes going forward.