Tobacco stocks struggle as costs rise, tax jitters grow

The tobacco industry is feeling the heat. Rising tobacco leaf prices have squeezed cigarette makers' margins over the past year, and experts anticipate little relief in the fourth quarter of FY25.

- Abhinaba Saha

"Tobacco prices have gone up 20% in the last seven months and competition has intensified in the industry lately. So, cigarette prices won't rise drastically either and margins will remain subdued in Q4 (for ITC)," said Devarsh Vakil, head of prime research at HDFC Securities.

ITC, India's largest cigarette maker, reported a 211 basispoint year-on-year decline in its cigarette Ebitda margin in Q3FY25, largely due to a 25-30% increase in tobacco leaf prices.

Since the company has already addressed most pricing and portfolio gaps through new product launches, there is little room for further margin expansion, according to an HDFC Securities report.

Not surprisingly, as broader market sentiment sours, tobacco stocks have taken more of a beating than the fastmoving consumer goods (FMCG) sector, which has been grappling with demand and profitability pressures for the past three quarters (see charts).

But even as profitability remains under stress, cigarette makers have sustained volume growth over the past few quarters, clawing back market share from the illicit segment. Contraband cigarettes-including smuggled imports and taxevading domestic production-account for nearly 25% of the market, a Nuvama Institutional Equities report said.