Analysts Expect Sequential Margin Improvement for ITC, Godfrey Phillips, VST in Q2 FY27 After Tax Shock

According to analysts, the impact was evident in Q1FY27 results, where statutory tax adjustments inflated gross top-line figures but net revenues and operating margins contracted sharply for cigarette makers. ITC reported a double-digit decline in net profit, driven by higher tax burdens and compressed EBITDA margins in its core cigarette segment, although strong double-digit growth in its non-cigarette FMCG and paperboards divisions provided diversification support.

Similarly, VST Industries experienced a sharp drop in net profit during Q1FY27, weighed down by increased levies and rising competitive pressures. Godfrey Phillips India also faced margin strain under the new tax regime, though specific figures were not detailed in the source.

Looking ahead to Q2 FY27, analysts anticipate some sequential improvement in margins as companies gain more time to implement price increases and pass on the higher tax burden to consumers. Avinash Gorakshakar of Avinash Mentor Research expects higher cigarette prices to support a margin recovery after the Q1 shock, but remains cautious due to the absence of clear near-term triggers for a meaningful stock re-rating.

Seema Srivastava of SMC Global Securities echoed this view, noting that companies continue to grapple with elevated tax realities and rising input costs, making sequential price pass-throughs essential for earnings stabilization in the upcoming quarter. She highlighted ITC as a preferred long-term pick among cigarette stocks, citing its multi-layered business model.

Srivastava emphasized that ITC’s structural resilience—supported by a recovering paperboards segment, expanding non-cigarette FMCG brands, and strong operational scale—offers advantages over pure-play peers like VST Industries and Godfrey Phillips India. She suggested that accumulating ITC during post-tax correction phases could allow investors to benefit from high dividend yields and steady margin recovery as pricing adjustments take full effect.

Both analysts advised investors to wait for management commentary on pricing trends, volume trends, and margin trajectory before forming a more constructive view on the tobacco segment. The outlook remains dependent on how effectively companies navigate the new tax environment while balancing consumer demand and cost pressures.