In February 2026, the Government of India replaced the GST Compensation Cess with a harsher excise duty structure. Cigarettes now attract a flat 40% GST (up from 28%) plus specific excise duty ranging from ₹2,050 to ₹8,500 per 1,000 sticks, along with National Calamity Contingent Duty. Analysts called this a "negative surprise for the industry," effectively increasing total tax incidence by 22-28% for many variants.
This isn't just a line-item change. Under Ind AS 115 accounting rules, GST is netted off from gross revenue, but excise duty is included. Consequently, standalone excise expense exploded to ₹10,036 crore in Q1 FY27 from ₹1,309 crore a year earlier. Gross revenue surged 28%, but that's an accounting mirage. Net revenue, which strips out taxes, is the real measure of business health—and it fell 14.4%.
The first full quarter under the new regime was brutal. Standalone net profit crashed 27.1% to ₹3,579 crore. The cigarette segment, ITC's cash cow, took the hardest hit. Segment results (PBIT) plummeted 35.1% to ₹3,341 crore, while net segment revenue dropped 25%. Investor Presentation
Here's the causal chain: higher taxes forced ITC to make a strategic choice. Pass the full burden to consumers, and you risk severe volume migration to duty-evaded illicit cigarettes. Absorb part of it, and you sacrifice margins.
This protected volumes but crushed profitability in the short term. Investor Presentation
The 8% decline in net sales and volumes cited by HDFC Securities reflects this trade-off. By not raising prices enough to fully offset the tax hike, ITC accepted lower realizations per stick to keep smokers from switching to cheaper, illegal alternatives. India is already the world's fourth-largest illicit cigarette market, costing the exchequer an estimated ₹23,000 crore annually—roughly one-third of the legal industry. Investor Presentation
HDFC Securities estimates Q2 FY27 revenue will grow 7% to ₹20,816 crore, but EBITDA is expected to fall 24% to ₹5,094 crore. The brokerage sees EBITDA margin collapsing 990 basis points to 24.5%, with adjusted PAT down 24% to ₹3,846 crore.
The math is straightforward: excise duty inflates both revenue and expenses, mechanically compressing margins. The cigarette business, which contributes roughly 84% of segment profits despite being only 46% of revenue, is the primary culprit. Even if non-cigarette segments perform well, they're too small to offset the cigarette profit decline. Annual Report +1
Interestingly, Q1 data shows non-cigarette segments holding up. FMCG-Others revenue grew 12% with PBIT up 21%. Paperboards PBIT surged 38% on better realizations and lower wood costs. Agri struggled with a high base and West Asia disruptions, but underlying revenue still rose 9% after adjustments. The claim that weaker non-cigarette margins are compounding the decline isn't supported by Q1 numbers—pressure is overwhelmingly from cigarettes. Investor Presentation +1
The market has been brutal. ITC's stock has delivered zero returns over the past year while sliding over 35%. Year-to-date, it's down more than 25%, and six-month returns are negative 14%. The 52-week range tells the story: ₹253.15 to ₹426.40. At ₹263.50, the stock sits just 4% above its yearly low.
Much of this decline occurred before Q1 results. ITC fell nearly 10% in December 2025 on tax hike expectations and again in February 2026 when the new regime took effect. More recently, on October 8, foreign investor GQG Partners sold 36.51 crore shares worth ₹9,395 crore, triggering a 4% intraday drop to ₹254.70.
Analyst Mahesh M Ojha of KC Securities identifies ₹246 as strong support, with a near-term target of ₹275. That's about 6.6% below current levels—a technical floor rather than a fundamental valuation call. The broader market weakness that day (Sensex down 1,000 points) didn't help, but the core issue is earnings uncertainty.
ITC's strategy is clear: staggered price increases to recover costs gradually while limiting volume loss. Management has implemented over 30 interventions to re-architect the portfolio across price points, with several reaching meaningful scale. This is a long game. Past tax hikes between 2017 and 2020 show a pattern: initial stock corrections, followed by recovery through price hikes and cost optimization, with premium brands showing better volume resilience. Investor Presentation
The trade-off is stark. Absorb tax now, protect volumes, and sacrifice margins. Or raise prices aggressively, recover margins faster, and risk losing customers to illicit trade. ITC is betting on the former, prioritizing long-term brand equity over short-term profit.
When ITC announces Q2 FY27 results on November 2, investors should focus on specific metrics:
The long-term question is whether sustained high taxation structurally alters ITC's profit mix. Cigarettes currently generate the lion's share of profits. If margins settle lower permanently, the company's earnings profile will depend more on FMCG-Others, Paperboards, and Hotels—businesses with lower margins but better growth potential. The diversification is a cushion, not a replacement.
For now, ITC is in transition. The tax shock is real, the profit decline is severe, and the stock reflects that pain. But the company's pricing discipline and diversified portfolio offer a path to recovery—if it can navigate the illicit trade threat without losing its core consumer base.
