Shares of ITC slid nearly 10% on Thursday to Rs 363.95, their lowest level since April 2023, after the finance ministry late on Wednesday notified a revised excise duty structure for cigarettes effective February 1, 2026. The stock’s steep fall has forced analysts to reassess near-term volumes, margins and multiples for the cigarettes business, which remains ITC’s largest profit engine.
Downgrades and EPS cuts dominate
Motilal Oswal Financial Services downgraded ITC to Neutral from Buy and cut its target price to Rs 400, citing what it called an “unprecedented tax hike” that is likely to reset valuation multiples. The brokerage said the new rates would raise cigarette taxes by about 50%, assuming the National Calamity Contingent Duty continues, forcing ITC to take price hikes of at least 25% at a portfolio level merely to maintain current net realisations.“Such a sharp tax increase is unprecedented and has surprised us given the backdrop of stable taxes over the last few years,” Motilal Oswal said, warning that the widened price gap between legal and illicit cigarettes could trigger down-trading and a loss of volumes for organised players. The brokerage now models a 6% EBIT contraction in FY27 and has cut its FY27 and FY28 earnings estimates by about 12%.
Nuvama Institutional Equities also downgraded ITC to Hold from Buy, arguing that the magnitude of the tax hike marks a clear break from the relatively benign regime that had supported a recovery in legal cigarette volumes. “While we expected a sharp tax hike on cigarettes, the magnitude seems higher than anticipated, likely prompting consensus downgrades to ITC’s cigarette volume and EBITDA estimates as well as multiples,” said Abneesh Roy of Nuvama.
“After nearly 6% volume growth in FY26, we now expect both cigarette volumes and cigarette EBITDA to decline in FY27,” the brokerage said, drawing parallels with the FY13–17 period of “harsh” duty increases. Nuvama cut its 12-month target price to Rs 415 and reduced its tobacco valuation multiple to 17 times one-year forward earnings from 23 times earlier, alongside EPS cuts of about 6.7–6.8% for FY27 and FY28.
Centrum and MOSL are now both neutral on the stock, with target prices of Rs 390 and Rs 400, respectively. PL went further, cutting its rating to Reduce from Buy and slashing EPS estimates by 3.2% for FY26 and by more than 11% for FY27 and FY28.
Jefferies stays bullish, flags near-term pain
Against this cautious domestic chorus, Jefferies has retained its Buy rating on ITC, even as it described the excise hike as “clearly negative” in the near term. The brokerage called the move “a meaningful negative surprise for the legal cigarette industry,” estimating that the effective tax incidence could rise well over 20%.
To protect profitability, ITC will likely need “double-digit price increases” across key brands, Jefferies said, cautioning that “such steep price increases are likely to impact legal industry volumes and may accelerate down-trading and illicit trade.” Despite the near-term earnings risk, the brokerage kept its target price at Rs 535, valuing the cigarette business at 23 times December 2027 earnings, and continues to project “at least 15% total shareholder return over the next 12 months.”
Tax shock reshapes sentiment
The revised duty ranges from Rs 2,050 to Rs 8,500 per 1,000 sticks depending on cigarette length and comes on top of a 40% Goods and Services Tax. Analysts at ICICI Securities estimate the change translates into a 22%–28% increase in costs for 75–85 mm cigarettes, which account for about 16% of ITC’s volumes, implying price hikes of Rs 2–3 per stick.
While some brokerages argue that cigarette demand in India has historically been inelastic and that ITC’s diversification into FMCG, paperboards and hotels offers a cushion, most agree that the excise shock has removed near-term catalysts and forced a reset in expectations. For investors, the debate now hinges on whether ITC’s pricing power and cash returns can offset a tougher tax regime that has once again put the cigarettes business under pressure.
(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of The Economic Times)