ITC stock to stay under fire for now, after cigarette tax shock

The government has notified changes in excise duty rates on cigarettes effective 1 February, replacing the compensation cess. Notably, the increase in the total tax burden this time around is far higher than expected, after also factoring in the goods and services tax (GST) rate hike to 40% from 28% on retail prices.

“Our estimates suggest that the overall tax burden could result in an effective hike of 50% at the portfolio level, assuming no mix change and status quo on the NCCD," noted Jefferies India in a 1 January report. The NCCD is the national calamity contingent duty.

How will ITC cope?

The solution is simple, but the trouble would be in implementation and getting the desired results. ITC will have to increase product prices, which won’t go down well with consumers, so investors can expect the company’s cigarette volumes to drop in FY27. Moreover, higher taxes on cigarettes could boost sales of illicit cigarettes and, as a result, dent ITC’s volumes.

Unsurprisingly, analysts have cut their earnings estimates for FY27, and some have also downgraded their rating on the stock. “We believe ITC will have to take a price hike of around 35%+ to maintain margins. This sharp (tax) hike will pressure volumes significantly and lead to a sales decline of 15% year-on-year in FY27 (forecast)," said a report by Nomura Financial Advisory and Securities (India).

The broking firm has downgraded the rating on ITC stock to ‘Reduce’ from ‘Buy’ and cut FY27F/28F earnings per share (EPS) by 18% each to factor in the impact.

The cigarette segment is crucial to ITC, contributing nearly 42% and a much higher 83% to the company’s standalone total gross segment revenue and Ebit, respectively, for the September quarter (Q2FY26). Ebit is short for earnings before interest and tax.

What of the stock?

ITC’s shares are down over 13% in the past two trading sessions, with the stock hitting a new 52-week low of ₹345.25 on Friday. This follows the stock’s 17% drop in 2025, which, to that extent, had made valuations cheaper. “The 2013-2021 period was a phase of high tax increases, which impacted the price competitiveness as compared to illicit brands," said Motilal Oswal Financial Services, adding, “ITC managed the phase well and protected its market share and delivered positive Ebit growth during that period. However, the stock remained under pressure."

Against this backdrop, the upside in ITC’s shares looks capped from a near-to-medium term perspective, even though the stock has already taken a beating lately. Nomura has reduced its cigarette price-to-earnings multiple to 16x (from 25x) on December 2027 forecasts, valuing the stock at the lower end of its valuation band as the brokerage expects the unprecedented tax hike to have a significant impact on volumes, pressure margins, increase illicit trade, stifle growth and the company’s ability to recruit consumers.