Shares of India's largest cigarette maker, ITC, suffered their steepest single-day decline since 2020 on Thursday, with shares crashing 10% to hit a 52-week low after the Finance Ministry imposed sharp new taxes on cigarettes. The stock plummeted to ₹362.70, hitting its lowest level since January 30, 2023, making it the biggest Sensex loser during the session as investors scrambled to assess the damage from excise duty rates that could force price increases of at least 20%. According to Bloomberg, this represents the worst single-day fall for ITC stock since 2020, with over ₹50,000 crore wiped out in market capitalisation. Godfrey Phillips India, which sells Marlboro cigarettes in the country, fared even worse, crashing as much as 19% in its steepest fall since November 2016. The carnage followed the finance ministry's late Wednesday notification triggering widespread selling in tobacco stocks as the market assessed the impact of the comprehensive new tax structure on India's tobacco sector.
The Finance Ministry has notified a comprehensive restructuring of tobacco taxation, with cigarettes facing excise duties ranging from ₹2,050 to ₹8,500 per 1,000 cigarette sticks, depending on length, effective February 1. According to ICICI Securities, the duty translates into a 22%-28% increase in overall costs for 75-85 mm cigarettes. According to Jefferies Financial Group Inc., the higher charges imply a tax hike of over 30% if National Calamity Contingent Duty continues, with the effective tax incidence on cigarettes rising well over 20% even under relatively benign assumptions. The levy comes on top of the existing 40% Goods and Services Tax (GST), creating a cascading impact that has analysts warning of volume losses and pricing pressure. According to ETMarkets, the government has also imposed a 40% GST on tobacco, cigarettes, and pan masala, while bidis will be taxed at 18% under the Goods and Services Tax framework, with these new levies replacing the compensation cess currently levied on these products from February 1.
Domestic brokerage firm Nuvama Institutional Equities has downgraded ITC shares from buy to hold, warning that the sharp hike in cigarette taxation is likely to force price increases of at least 20% on key brands starting February. According to Abneesh Roy of Nuvama, "While we expected a sharp tax hike on cigarettes, the magnitude appears higher than anticipated, likely prompting consensus downgrades to ITC's cigarette volume and EBITDA estimates as well as valuation multiples." The brokerage has sharply cut its 12-month target price on ITC to ₹415, valuing the tobacco business at 17x one-year forward earnings versus 23x earlier. Nuvama has significantly revised its financial estimates, cutting FY27E revenue estimates by 4.9% and FY28E revenue estimates by 8.3%, while reducing EBITDA by 7% each for both years, leading to a 6.7–6.8% cut in EPS. After nearly 6% volume growth in FY26, the brokerage now expects both cigarette volumes and cigarette EBITDA to decline in FY27, drawing parallels with the FY13-17 period when harsh duty increases resulted in weak tax buoyancy.
Nuvama noted that between FY13 and FY17, cigarette duties rose at a 15.7% CAGR, while revenues increased just 4.7%, warning that a similar squeeze could once again push consumption towards illicit and smuggled products. The brokerage expects temporary "front-loading" of volumes and production in January 2026 ahead of the February 1 implementation, but stressed that this would not alter the broader bearish volume outlook for FY27. According to Nuvama, "the magnitude of the tax increase warrants a de-rating of the cigarettes business" as the latest government move marks a clear break from the relatively benign tax regime that had supported steady recovery in legal industry volumes in recent years. However, the brokerage stopped short of a reduce or sell call, citing ITC's relatively attractive cash returns and growing contribution from non-tobacco businesses, highlighting an "around 85% payout" and dividend yield of about 4%.
According to Jefferies, higher relative taxation on legal cigarettes tends to incentivise illicit trade, a trend that had moderated in recent years when tax hikes were milder. The brokerage warns that "if confirmed, this will be a clear negative as volumes will be impacted and concerns would also re-emerge on risk of losing some volumes to the illicit industry". If the price gap between tax-paid and smuggled sticks widens again, ITC and other legal players could lose share to the unorganised segment, reviving a key structural risk that investors track closely. This creates a dual headwind of weaker stick sales and potential market-share loss for the organised segment, with ITC, which controls the cigarette market with brands including Gold Flake, Wills Navy Cut and Classic, now facing the unenviable task of balancing price increases with volume retention in a market already battling illicit trade.
Despite the tobacco headwinds, Nuvama remained constructive on ITC's FMCG and paperboard portfolios. The brokerage noted that GST rate cuts in select food categories are "a tailwind" for ITC's large foods business and reiterated that the FMCG-Others division is on track to deliver an "EBIT margin of 9.5% by FY27–28", supported by scale benefits and an improving product mix. In paperboards, packaging and specialty papers, including the Century acquisition, Nuvama expects margins to bottom out by FY27, with a recovery in demand and easing input costs helping offset some pressure from the core cigarettes business. The brokerage retained a positive view on ITC's capital allocation and dividend policy, noting that tobacco leaf costs are expected to turn favourable in FY27, which could cushion cigarette margins. According to Trendlyne data, 23 analysts have 'Strong Buy', 10 analysts have 'Buy', and one analyst each has 'Hold' and 'Sell' ratings on ITC stock, which has slumped 24% in the past year.
