Archive · 5 Oct 2026
Analysts See Q2 Margin Recovery, Urge Caution on Cigarette Stocks
Cigarette companies in India faced higher taxes in the first quarter of FY27.
The tax changes included a 40% GST rate and additional duties based on cigarette length.
These costs hurt company profits and margins.
Analysts think price increases could help companies recover some margins in the second quarter.
But one analyst says investors should be cautious because there are no clear short-term reasons for share prices to rise significantly.
Another analyst prefers ITC for long-term investors because it also has businesses beyond cigarettes.
Those businesses include consumer goods and paperboards.
Analysts say investors should watch what company leaders say about prices, sales volumes and margins.
A shift to 40% GST, higher length-based excise duties and mandatory MRP-based valuation weighed on cigarette makers in Q1 FY27.
ITC and VST Industries reported significant profit pressure; ITC’s non-cigarette FMCG and paperboards businesses provided some diversification support.
Analysts expect cigarette price increases to help margins improve sequentially in Q2 as companies pass on higher taxes.
Avinash Gorakshakar advised caution, citing a lack of clear near-term triggers for a meaningful re-rating and the need to assess management commentary.
Seema Srivastava identified ITC as her preferred long-term pick, citing its diversified businesses, operational scale and potential margin recovery.
- Who
- ITC, Godfrey Phillips India and VST Industries, with views from analysts Seema Srivastava and Avinash Gorakshakar.
- What
- Analysts expect possible sequential cigarette-margin improvement in Q2 FY27 but differ on investment outlook; Srivastava favors ITC for long-term investors, while Gorakshakar urges caution.
- When
- Ahead of Q2 FY27 results, following the first quarter of FY27.
- Where
- India.
- Why
- Higher taxes and rising input costs pressured Q1 profitability; companies are raising prices to pass on some of the tax burden.
Cautious near-term outlook
Long-term preference for ITC
Investment stance
Cautious near-term outlook
Avinash Gorakshakar recommends caution on cigarette stocks because there are no clear near-term triggers for a meaningful re-rating; he says investors should wait for management commentary on pricing, volumes and margins.
Long-term preference for ITC
Seema Srivastava identifies ITC as her preferred choice for long-term investors, citing its diversified businesses and operational scale.
Potential earnings recovery
Cautious near-term outlook
Elevated taxes and rising input costs remain challenges, and a recovery is not assured; investors should assess the margin trajectory.
Long-term preference for ITC
Higher cigarette prices may gradually pass on tax costs and support margin recovery; Srivastava also points to ITC’s non-cigarette FMCG and paperboards businesses as resilience factors.
- New GST rate
- 40%, replacing 28% GST plus variable Compensation Cess.
- Additional Excise Duty
- ₹2,050 to ₹8,500 per 1,000 sticks, based on cigarette length.
- Other tax features
- NCCD continues to apply; valuation has shifted to mandatory MRP-based calculations.
- Expected Q2 trend
- Analysts expect price increases to support sequential margin improvement.
- Gorakshakar’s view
- Cautious on cigarette stocks; sees no clear near-term trigger for meaningful re-rating.
- Srivastava’s preferred stock
- ITC for long-term investors, citing diversification and structural resilience.