ITC shares crashed to a three-year low, falling another 4% on Friday after losing 10% on New Year's Day, extending the brutal selloff that saw the stock plummet following the finance ministry's tax bombshell on cigarettes. The cigarette major faced an expanded wave of downgrades following the government's announcement of cigarette taxes jumping approximately 50% effective February 1, 2026. According to reports from Economic Times, the tax shock comes with little precedent, with such sharp increases being unprecedented given the backdrop of stable taxes over recent years. The revised duty ranges from ₹2,050 to ₹8,500 per 1,000 sticks depending on cigarette length and comes on top of a 40% Goods and Services Tax. Broking firms Nomura, Morgan Stanley, JPMorgan, Jefferies, Motilal Oswal, and Nuvama downgraded shares of ITC on Friday, with the stock currently at its lowest point in three years.
The steep tax hike triggered downgrades from at least seven brokerages on Friday, including major firms scrambling to reassess the damage. JPMorgan downgraded ITC to Neutral from Overweight, cutting the target price to ₹375 from ₹475, citing increased risk of consumer down-trading and potential rise in illicit cigarette consumption. Motilal Oswal joined the downgrades, moving to Neutral from Buy with a reduced target of ₹400 from ₹515, noting that ITC requires a 40% price hike just to pass on the tax impact. Nuvama downgraded ITC to Hold from Buy, cutting the target price to ₹415 from ₹534 and reducing its tobacco valuation multiple to 17 times from 23 times earlier. Jefferies downgraded from Buy to Hold, warning that near-to-medium term upside now looks capped and cutting earnings estimates by about 15%. Emkay Global downgraded ITC to Reduce from Add, slashing the target price to ₹350 from ₹475. The brokerage noted that if ITC passes on the full impact through price hikes, the effective tax hike comes to approximately 70%, pushing tobacco taxes per stick from 55% to 65% of MRP. Nomura and Morgan Stanley also joined the downgrades on Friday, according to latest reports.
To offset the tax burden, ITC will need price hikes of at least 25-30% at the portfolio level just to maintain current net realization per stick, according to Motilal Oswal. Assuming no mix change, ITC requires a 40% price hike just to pass on the impact, Jefferies warned. The excise duty on filter cigarettes has been raised to ₹2,100-8,500 per thousand sticks depending on length, representing increases of 20-65% across categories. ICICI Securities estimates 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 ₹2-3 per stick. The concern is amplified by the ad valorem component, where higher prices feed back into tax calculations, creating a vicious cycle. Jefferies pointed out that during FY15-16, when ITC took mid-teen price hikes amid aggressive tax increases, cumulative volumes fell by more than 15%. According to Motilal Oswal, the company needs to take almost a 25-30% price hike to maintain the realisation, and with that kind of price hikes, volume impact is expected.
Brokerages anticipate the tax increases will lead to significant volume declines and consumer down-trading to cheaper variants. DAM Capital expects the adverse volume impact to become visible from Q1FY27, while building in 7% volume de-growth for FY27. PhillipCapital projects cigarette volumes to decline 12.5% in FY27, followed by 2.5% growth in FY28, with product mix deterioration due to down-trading. B&K Securities now factors in a 5% volume decline for FY27 with average price increases of around 25%. Nuvama expects both cigarette volumes and cigarette EBITDA to decline in FY27 after nearly 6% volume growth in FY26, drawing parallels with the FY13-17 period of harsh duty increases. The tax stability of recent years had been a tailwind for ITC, allowing its cigarette volumes to grow at approximately 5% CAGR over the last five years while the illicit cigarette market's volume share contracted by around 150 basis points, according to Motilal Oswal. With now such sharp hike in the taxes, the illicit cigarette market could regain share, as analysts note that in the last four or five years, the illicit cigarette market has lost share because of the stable tax regime.
The tax shock has forced brokerages to slash earnings estimates across the board. Motilal Oswal cut FY27 and FY28 earnings estimates by about 12% and now models a 6% EBIT contraction in FY27. Jefferies cut earnings estimates by about 15%, while Emkay estimates the tax payout per stick will rise by more than 50% across KSFT, LSFT and RSFT segments, necessitating staggered price hikes of about 32%. Nuvama cut EPS estimates by about 6.7-6.8% for FY27 and FY28, while the regulatory action has led to a sharp de-rating of the cigarettes business, now valued at 13 times earnings versus 17 times earlier according to Emkay. According to Motilal Oswal, next year volumes could see a decline after several years, and that could be a big impact on the EBIT numbers. The sharp divergence in views reflects the uncertainty investors now face after the government's move rewired the tax backdrop for India's largest cigarette maker. Analysts believe there could be more downside or the stock could languish at current levels for some more time, with technical analysts expecting targets of around ₹340-330 levels and potentially ₹300 if current levels don't sustain.
