Why Godfrey Phillips Could Emerge Stronger Than ITC After the Cigarette Tax Shock

Synopsis: A sharp tax hike has shaken India’s cigarette industry, but Godfrey Phillips may be better placed than ITC to manage the impact. Its compact Marlboro strategy, strong mid-priced portfolio, urban focus, and export cushion could help retain consumers and protect market share in a more price-sensitive environment.

A sudden tax shock has shaken India’s cigarette industry, triggering sharp stock market reactions and forcing investors to rethink long-held assumptions about market leadership. While higher duties are expected to pressure volumes and margins across the board, history shows that such disruptions often reshape competitive dynamics in unexpected ways. In a market where pricing power, brand loyalty, and portfolio depth matter more than ever, could this policy change quietly tilt the balance in favor of Godfrey Phillips over ITC?

The King Size Shock

Parliament has passed the Central Excise (Amendment) Bill, 2025, which sharply raises taxes on tobacco products. Once the GST compensation cess ends, cigarettes will attract a flat 40 percent GST along with higher excise duty. The government has also increased taxes on other tobacco products, chewing tobacco from 25 percent to 100 percent, hookah or gudaka tobacco from 25 percent to 40 percent, and smoking mixtures for pipes or cigarettes from 60 percent to 325 percent. This marks a major jump in the overall tax burden on legal tobacco products.

The Ministry of Finance has introduced a new excise duty system that depends on whether a cigarette is filtered or non-filtered and its length. The duty will range between Rs. 2,050 and Rs. 8,500 per 1,000 cigarettes. Longer and premium cigarettes will face the highest taxes, while shorter cigarettes will see relatively smaller increases. According to Finance Minister Nirmala Sitharaman, this new excise duty replaces the earlier GST compensation cess, and 41 percent of the revenue collected will be shared with the States.

When converted into per-stick costs, short non-filter cigarettes up to 65 millimeters will see an extra duty of about Rs. 2.05 per cigarette, while short filter cigarettes of the same length will attract around Rs. 2.10. Medium-length cigarettes between 65 and 70 millimeters will incur a duty of roughly Rs. 3.60 to Rs. 4 per stick. Longer premium cigarettes between 70 and 75 millimeters will face an increase of about Rs. 5.40 per stick. There is also a special category with a much higher duty of Rs. 8,500 per 1,000 sticks, but most mainstream brands do not fall under this category.

For a cigarette currently priced at Rs. 18, the 40 percent GST would first push its price to around Rs. 19.70. After adding excise duty of about Rs. 1 to Rs. 2 per stick, the final retail price is likely to reach Rs. 21 to Rs. 22. Premium and king-size brands such as Gold Flake Premium, Red & White King Size, Classic, Marlboro, and flavored variants like Ice Burst could see price hikes of Rs. 5 to Rs. 5.50 per stick. On the other hand, shorter cigarettes, mini sticks, and stubby non-filter variants will face much smaller increases, making them more affordable in comparison.

After the tax announcement, tobacco stocks sold off sharply. ITC fell 14 percent in just two days, Godfrey Phillips dropped 21 percent, and VST Industries declined by 4 percent.

Why Godfrey Phillips Could Win Against ITC

Marlboro’s Cushion Versus Classic’s Price Risk

Godfrey Phillips entered the tax shock with a structural advantage. Over the past few years, it strengthened its lower-priced Marlboro strategy by introducing Marlboro Compact and Marlboro Fine Touch well before the latest tax increase. These variants allow smokers to remain within the Marlboro brand while paying less per stick, cushioning the impact of higher taxes. Instead of forcing consumers to switch brands entirely, Godfrey offers them a smaller or more affordable version of the same global label. This preserves brand loyalty without relying heavily on discounting.

This becomes critical in a high-tax environment. If Classic, ITC’s main premium brand, moves from around Rs. 18 to Rs. 23 or Rs. 24 per stick, price sensitivity could increase sharply among regular smokers. ITC does have alternative brands such as Gold Flake, Players, Power, and Capstan across price segments. However, shifting from Classic to these brands involves a visible brand change rather than a format adjustment. A Classic smoker may perceive that move as a downgrade, which increases the risk of experimenting with competitors.

Godfrey’s edge lies in consumer psychology. A smoker trading down from Marlboro Red to Marlboro Compact still feels connected to the same aspirational global brand. That continuity reduces friction and keeps demand within the company’s own portfolio. While ITC has the manufacturing strength and distribution scale to respond, it has been comparatively slower in building a structured pocket-cigarette strategy within its premium portfolio. In a market where affordability pressure is rising, the ability to retain consumers within the same brand family could prove decisive.

Strong Portfolio of Mass and Semi-Mass Brands

Godfrey Phillips is not a one-brand company. Beyond Marlboro, it owns several widely accepted mass and semi-mass brands including Stellar, Stellar Shift, Focus, Red & White, and Four Square. This gives the company flexibility to cater to different price points and consumer preferences across segments. These brands are generally viewed as credible alternatives within the same portfolio rather than sharp downgrades. As a result, if some consumers step down from premium Marlboro due to higher prices, they are more likely to remain within Godfrey’s range instead of moving to a rival.

ITC also houses a wide portfolio of cigarette brands such as American Club, Players, Gold Flake, Capstan, and others across price segments. However, the challenge lies in brand perception. A Classic smoker trading down to a lower-priced ITC brand may perceive it as a clear downgrade rather than a variation within the same brand family. That psychological gap can increase the risk of consumers experimenting with competing brands instead of staying within ITC’s ecosystem.

Domestic cigarettes account for about 75 percent of Godfrey’s net sales in 9MFY26, indicating that its core business remains strongly rooted in India. Nearly 2 percent of sales come from confectionery and Ferrero products such as Tic-Tac, Kinder Joy, and chewing gums. While relatively small, this segment provides a steady non-tobacco revenue stream that adds minor diversification.

Focused Urban Strategy Versus ITC’s Omnipresence

ITC’s historical strength has been its unmatched distribution reach. Its cigarettes are available in almost every kirana store and pan shop across India, giving it a deep rural and semi-urban footprint that competitors struggle to match. Godfrey Phillips has deliberately chosen a different path. Rather than trying to match ITC store for store, it has concentrated on urban and semi-urban high-growth markets where premium brands perform better and margins are stronger. This allows the company to allocate resources more efficiently.

Between 2024 and 2026, Godfrey expanded Marlboro’s presence in South India and selected Tier-2 cities where ITC previously dominated. In these regions, Marlboro is viewed as a global and aspirational brand, which helps it gain acceptance quickly among the rising middle class. Many young consumers in these cities actively prefer international labels over traditional Indian brands. Over time, this targeted approach could gradually reduce ITC’s dominance in key growth pockets

Export Business as a Strategic Hedge

Nearly a quarter of Godfrey Phillips’ cigarette revenue comes from exports, which is a key structural advantage over ITC. Unlike ITC, whose cigarette business is largely tied to India, Godfrey earns a meaningful share of its sales from overseas markets. This makes the company much less vulnerable to sudden domestic tax hikes, because only part of its business is affected when Indian excise or GST changes.

Godfrey sells brands such as Ultima, Jaisalmer, Originals, and Stellar across around 35 countries in Latin America, the Middle East, Southeast Asia, and Eastern Europe. These markets are not impacted by Indian tax policies, which provides a steady earnings cushion. Because of this global buffer, Godfrey has more room to be aggressive on pricing, promotions, and marketing in India without putting its overall profitability at risk.

Branding Advantage in a Premiumizing Market

India’s cigarette market is slowly moving toward more premium products, especially among young urban smokers. In this trend, Marlboro’s global image gives Godfrey a clear edge. For many youngsters, Marlboro is seen as more than just a cigarette, it is perceived as a lifestyle brand. ITC has a broad brand portfolio, but it lacks a single global aspirational name that matches Marlboro’s stature. Classic has been its strongest premium offering, and ITC successfully attracted younger consumers through Classic Connect, which gained strong acceptance among youth smokers.

However, Classic Connect falls into a longer cigarette category, meaning it will face higher excise duty and a noticeable price increase. As a result, the very product that helped ITC appeal to youngsters may become less affordable after the tax hike. Godfrey, meanwhile, can continue to roll out new Marlboro variants such as compact sizes, smoother blends, or flavored options. This allows the brand to stay relevant while managing price sensitivity. If premium cigarette consumption continues to rise despite higher taxes, Godfrey is likely to benefit more than ITC because Marlboro remains both aspirational and adaptable.

The new tax hike will hurt all cigarette companies. Prices will go up, and many smokers will either smoke less or switch to cheaper options. So this is not a clear win for anyone. Still, Godfrey Phillips may handle this better than ITC. Its cheaper Marlboro versions, strong smaller brands, focus on cities, and export business give it more room to adjust. ITC is still the biggest player and has the widest reach, especially in villages and small towns, which will help it stay strong.

In the end, everything depends on smokers. If they stick to Marlboro but buy cheaper versions, Godfrey could gain market share. If they care more about easy availability and familiar brands, ITC could hold its lead. The tax hike has changed the game, and both companies will have to adapt.

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