Brokerages Turn Bearish on ITC: Excise Duty Shock Slams Cigarette Giant

Brokerages Turn Bearish on ITC: Excise Duty Shock Slams Cigarette Giant

ITC shares plunged to a 52-week low amid a sharp cigarette excise duty hike, prompting multiple brokerages to downgrade ratings and slash target prices by up to 34%. The government's new levy, effective February 1, 2026, adds Rs 2,050–8,500 per 1,000 sticks on top of 40% GST, raising costs by 22-28% for key segments.

Stock Price Plunge

Shares dropped 5% on January 2, 2026, to Rs 345.25, erasing Rs 72,000 crore in market cap over two days. This extends a 13% loss in five days and 28% yearly decline, hitting a three-year low. Recent trading shows prices around Rs 349-363, with high volumes signaling panic selling.

Excise Duty Details

Parliament's Central Excise (Amendment) Bill, 2025, replaces temporary levies with the new duty structure. Longer cigarettes (over 75mm, 16% of ITC volumes) face 2-3 Rs per stick hikes, per ICICI Securities. Combined with GST rising to 40%, ITC needs 25-40% price increases to maintain realizations, risking downtrading and illicit sales.

Future Outlook

Brokerages foresee 2-3% cigarette EBIT growth baked in, with uncertainty over NCCD and tobacco lobby pushback. Consensus points to EBITDA downgrades and limited upside in 6-9 months. Investors watch for price hikes, volume shifts, and potential duty revisions.

The new cigarette excise duty, effective February 1, 2026, raises costs by Rs 2,050–8,500 per 1,000 sticks (depending on length) atop 40% GST, forcing ITC to hike prices 25-40% to preserve net realizations per stick. Failure to fully pass on costs squeezes margins, while aggressive hikes trigger downtrading to cheaper variants and boost illicit cigarette demand, hitting volumes and cigarette EBIT growth.

Cost and Price Dynamics

Duty adds 22-28% to overall costs for 75-85mm cigarettes (core segment) and 2-3 Rs per stick for longer ones (16% volumes). Brokerages like JPMorgan project 25% weighted average hikes (35% if NCCD persists), but king-size filters face higher risks. Motilal Oswal notes unprecedented sharpness after stable taxes, widening legal-illicit price gaps.

Earnings Impact Breakdown

Volume Pressure: Price elasticity leads to downtrading/mix deterioration; consensus cuts cigarette volumes and EBITDA by 7% for FY27/28 (Nuvama).

EBIT Hit: Sharp hikes negatively affect cigarette EBIT; JM Financial flags re-emerging illicit concerns.

Growth Outlook: Caps EBIT at 2-3% sustainably (UBS); restricts multiples/upside for 6-9 months (JPMorgan).

Jefferies estimates 40% hikes needed, echoing peers on prolonged earnings drag absent duty revisions.