It has not been a happy New Year for ITC shareholders. The cigarettes-to-FMCG conglomerate has seen its stock tumble 14% in two days to its lowest level in three years, hurt by the government's announcement of a steep hike in the excise duty on tobacco products. This has resulted in the overall wealth evaporation of nearly ₹72,300 crore for ITC shareholders.
Given Life Insurance Corporation of India (LIC) is a major shareholder in the company, holding 1,98,58,07,233 shares or a 15.86% stake as of the September quarter, the ITC share price crash has resulted in a steep over ₹11,460 crore loss for India's biggest domestic institutional investor (DII) in two days.
ITC's stock price recorded its worst one-day fall in nearly six years as it crashed 10% on Thursday. The blue-chip stock further saw a 5% decline in trade today to a fresh 52-week low of ₹345.25 on the NSE.
Tax hike hurts ITC stock
The finance ministry on Wednesday night announced an excise duty of ₹2,050-8,500 per 1,000 sticks based on cigarette length, effective February 1. This levy will be over and above the higher 40% goods and services tax (GST) rate applicable from the same date next month onwards.
Market experts believe that to offset some of the impact of the tax hike, cigarette producers will have to raise prices, potentially weighing on demand and sales volume.
A Reuters report, quoting analysts at Morgan Stanley, said that cigarette prices may need to rise by as much as 40% to pass on the full impact of the higher levies to the customers.
Historically, after such a sharp hike, volumes decrease by 3–9%, said an analysis by Nuvama Institutional Equities. FY11 logged a 3% volume decrease YoY after an ~18% price hike versus a strong FY10 (7% volume growth), shows data shown by the brokerage.
"A double-digit tax hike could push consumers towards smuggled cigarettes. As the effective date is Feb 1, we estimate January sales and production to sharply expand and therefore report a lower impact in Q4FY26," it added.
A rollback looks difficult and can take time, as the industry will have to discuss with the government and back it up with supporting data.
ITC shares downgraded!
Following the government order, at least 11 brokerages, including Goldman Sachs Group Inc., JPMorgan Chase & Co. and Morgan Stanley, downgraded the stock, suggested the Reuters report.
Domestic brokerage Nuvama Institutional Equities said it is cutting the EBITDA by 7% each for FY27E/28E and downgrading ITC stock to ‘HOLD’ from ‘BUY’, with a target price of ₹415.
Meanwhile, Motilal Oswal Financial Services (MOSL) said that earnings pressure on cigarettes would take away the near-term catalysts (soft tobacco prices, recovery in FMCG and Paper) and comfort on valuation.
It now values the cigarette business at 14x Dec’27E EV/EBITDA as against the earlier valuation multiple of 17x. It also downgraded the rating from 'BUY' to 'Neutral' with a revised SoTP-based target price of ₹400.
Disclaimer: This story is for educational purposes only. The views and recommendations expressed are those of individual analysts or broking firms, not Mint. We advise investors to consult with certified experts before making any investment decisions, as market conditions can change rapidly and circumstances may vary.