ITC stock downgraded as excise duty hike raises margin, volume growth risks

ITC earnings estimates for FY27-28 have been cut after a sharp excise duty hike on cigarettes. Brokerages have downgrade the stock, citing margin and volume risks

Analysts have sharply cut cigarette maker ITC's earnings estimates over the next two years, fearing a significant dent in the company's profitability and margins. This is owing to a steep hike in excise duty on tobacco by the government.

 

Besides a downward revision in earnings estimates, brokerages have also slashed ITC stock rating and share price targets. This comes as they see the imposition of higher duties as a major shift in the benign-duty-structure stance of the government. 

While lower taxes on tobacco products over the past few years resulted in volumes shifting to organised players, analysts believe the latest development is “detrimental to the interests of the industry and its growth prospects” in the coming years.

 

According to analysts at PL Capital, the government's decision to revive and expand the central excise duty regime for cigarettes and other tobacco products will possibly widen the price gap between tax-paid cigarettes and illicit products, which can be sold at steep discounts. 

“The risk is most acute in the mid-price segments that account for a large part of ITC’s volumes. Here, consumers are more price-elastic and likely to downgrade to smuggled or counterfeit sticks rather than exit consumption,” the brokerage said.

 

For Motilal Oswal Financial Services (MOFSL), ITC had been very active on new product launches in cigarettes given the stability in taxes recently, supporting a positive product mix.

 

“However, given the sharp price hike requirement, the mix will be weaker, going forward,” it said.   

ITC share price declined 5.1 per cent (₹345.35) intraday, before closing 3.7 per cent down at ₹350.15. The stock has fallen 13.11 per cent in two days. 

 

By comparison, the BSE Sensex index ended 0.67 per cent higher.

 

'Excise duty hike opens pandora's box'

 

On January 1, 2026, the finance ministry notified that the rate for non-filter length ≤65 mm will be ₹2,050 per 1,000 sticks, and >65–70 mm will be ₹3,600 per 1,000.

 

For filter segments, the rate for 65 mm and >65–70 mm will be ₹2,100 and ₹4,000 per 1,000 sticks, respectively.

 

 “Other” cigarettes will be priced at ₹8,500 per 1,000 sticks. 

Notably, the government had announced double-digit tax hikes for the tobacco industry over FY13-18. It, however, kept taxes stable over FY19-26, with only one double-digit increase in FY21. 

Analysts believe the tax hike on cigarettes suggests the Centre's intent to align taxation with World Health Organization (WHO) norms, which allow it to levy taxes at 75 per cent on maximum retail price (MRP).

 

The current move, PL Capital noted, takes the overall taxation on cigarettes from 50 per cent to 61 per cent, which is still significantly lower than the WHO recommended rate.

 

“Further, as new rates imposed are 29-43 per cent lower than peak rates mentioned in Central Excise (Amendment) Act, 2025, this opens a pandora's box for future increase in excise duty,” it said.

 

Analysts say 'reduce' ITC

  Nomura, PL Capital, and Emkay Global Financial Services have downgraded ITC stock to 'reduce'. MOFSL and JPMorgan have cut the ratings to 'neutral'; Jefferies and Nuvama Institutional Equities have cut to 'hold'; and Morgan Stanley to 'equalweight'.

Those at MOFSL said that though the tobacco lobby is opposing this tax increase, no change in the notified taxes will significantly impact the legal cigarette market.

 

"It will be a huge task for the company to protect its profitability. Its price hike strategy will be critical to gauge the volume/earnings before interest and taxes (Ebit) sensitivity. We model 6 per cent Ebit contraction in FY27 and will monitor the price hike process,” it said.

Earnings pressure on cigarettes, it added, would take away the near-term catalysts (soft tobacco prices, recovery in FMCG and paper) and comfort on valuation. It has cut the target price to ₹400.

 

PL Capital, meanwhile, estimates a 23-50 per cent hike in prices of various cigarettes, leading to a 12.5 per cent decline in cigarette volumes in FY27 and 2.5 per cent growth in FY28 (4.7 per cent and 4.5 per cent growth estimated earlier). It has cut EPS estimates by 11.2 per cent and 11.9 per cent for FY27 and FY28.

 

That said, Religare Broking noted that while the duty hike may weigh on margins and volumes in the near-term, ITC may offset the impact over time due to price inelasticity of cigarettes in India.

 

"Calibrated price hikes, product mix optimisation, cost efficiencies, and scale benefits, along with growing contribution from non-cigarette FMCG, hotels, and agri-business, may aid earnings in the long-term," it said. 

 

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