Despite significant profit declines for Godfrey Phillips, ITC, and VST Industries due to increased taxes, Godfrey Phillips shares surged over 16% in five sessions. Analysts caution against the sector, citing decelerating volume growth and margin concerns, but see ITC as a more resilient option due to diversification.
Cigarette Sector Under Pressure
Cigarette manufacturers Godfrey Phillips, ITC, and VST Industries reported substantial profit declines for the first quarter of FY27, largely attributed to increased taxation. Godfrey Phillips saw a 44% drop in profit, ITC a 15.6% fall, and VST Industries a 25% net profit slip. This downturn follows a February 1 tax hike, which included new excise duties.
Despite the weak financial results, Godfrey Phillips shares have shown remarkable resilience, climbing over 16% in the past five trading sessions. The stock's recent upward trend is attributed by analysts to potential resolutions in an internal promoter dispute, which has boosted investor confidence. Independent analyst Deepak Jasani noted that a settlement between Samir Modi and his mother has excited investors about the company's future prospects.
Analysts Advise Caution
However, the broader outlook for the cigarette sector remains cautious. Analysts widely recommend an "avoid" stance, pointing to decelerating volume growth and persistent margin concerns. "Margin contraction is one of the key reasons behind the decline in earnings. We see not much comfort in cigarette stocks at the moment," stated Gaurav Sharma, head of research at Equity Globe Capital. He emphasized that subdued volume growth and profitability are unlikely to impress investors, despite the business's cash-generative nature.
While ITC's cigarette business revenue increased 73% year-on-year to ₹16,596.67 crore, this was primarily due to a staggered pricing strategy. Underlying sales volumes, stripping out duty pass-through, actually decreased by 31.45%. Godfrey Phillips' net revenue, excluding excise, fell 18.8% to ₹1,206 crore, and VST Industries' cigarette revenue declined 15% to ₹216 crore.
ITC Seen as Stronger Play
Rajesh Agarwal, head of research at AUM Capital Market, highlighted that Godfrey Phillips and VST Industries, with their single-business focus, are more vulnerable to tax and margin pressures. In contrast, ITC's diversified FMCG business offers a cushion against the weakness in its cigarette segment. Agarwal identified ITC as the stronger investment choice, citing its robust balance sheet, debt-free status, and a dividend yield exceeding 5%.