Tax shock: ITC shares hits 3-year low after cigarette duty hike; what brokers fear next

ITC shares slid to a three-year low of Rs 345.35 on Friday, extending a sharp two-day selloff that has erased about 14% of the stock’s value after the finance ministry announced a steep increase in cigarette taxes, triggering widespread analyst downgrades and renewed concerns over volumes and profitability.The Nifty heavyweight fell another 5% on Friday, after plunging 10% on New Year’s Day, as at least six brokerages rushed to reassess the impact of what they described as an unprecedented tax shock on the company’s core cigarette business, according to ET.Effective February 1, cigarette taxes will rise by about 50%, forcing ITC to implement portfolio-level price hikes of at least 25% just to maintain current net realisation per stick, according to Motilal Oswal. The brokerage downgraded ITC from Buy to Neutral and cut its target price to Rs 400.“The magnitude of the tax increase is staggering,” analysts said, noting that to fully offset the levy, ITC may need to raise prices by as much as 40%, assuming no change in product mix.Jefferies, which downgraded the stock from Buy to Hold, warned that if the company passes on the full impact through price hikes, the effective tax burden could rise to nearly 70%, pushing tobacco taxes per stick from about 55% to 65% of the maximum retail price.“To offset the tax burden, ITC will need to implement substantial price increases. Assuming no mix change, ITC requires a 40% price hike just to pass on the impact,” Jefferies said, ET quoted.Motilal Oswal described the move as a surprise after several years of tax stability. “Such a sharp tax increase is unprecedented and has surprised us given the backdrop of stable taxes over the last few years,” the brokerage said, cutting its cigarette business valuation multiple to 14x December 2027 EV/EBITDA from 17x earlier.Brokerages also flagged historical parallels. Jefferies pointed out that during FY15–16, when ITC implemented mid-teen price hikes amid aggressive tax increases, cumulative cigarette volumes fell by over 15%. The ad valorem tax structure could worsen the impact, as higher prices feed back into higher taxes, analysts said.In recent years, stable taxation had supported cigarette volume growth of around 5% CAGR over five years, while the illicit cigarette market’s share declined by roughly 150 basis points, according to Motilal Oswal. Analysts now fear that this trend could reverse.“For ITC, which was seeing resilient cigarette volume growth in past few quarters, this levy has the effect of pushing possible catalysts (volume resilience and uptick in EBIT growth from 2HFY26E) further out,” JM Financial said, adding that concerns over illicit trade are likely to re-emerge.Some brokerages, however, see partial downside protection at current levels. Nuvama’s Abneesh Roy, who downgraded the stock from Buy to Hold, said he stopped short of a Reduce call, citing the company’s roughly 4% dividend yield with an 85% payout ratio.Roy also pointed to potential medium-term support from easing tobacco raw material costs in FY27, expected benefits to ITC’s foods portfolio from GST cuts, and a possible margin bottom-out in the paper business following the Century Paper acquisition.Even so, sentiment remains cautious. “Near-to-medium term upside now looks capped,” Jefferies said, warning that ITC shares could remain under pressure as the market digests the full impact of the tax increase.(Disclaimer: Recommendations and views on the stock market, other asset classes or personal finance management tips given by experts are their own. These opinions do not represent the views of The Times of India)