ITC Shares Fall 13% in Two Days After Cigarette Tax Hike: Buy or Avoid?

Shares of ITC remained under heavy selling pressure for a second consecutive session on Thursday, deepening investor concerns after a sharp revision in cigarette taxation. The stock fell over 4% during intraday trade to around Rs 349 on the Bombay Stock Exchange, extending the previous session’s near-10% plunge and taking the cumulative two-day decline to nearly 13%.

The steep correction followed an announcement by the Finance Ministry of India, which revised the taxation structure for cigarettes, effective February 1, 2026. Under the new regime, the base Goods and Services Tax (GST) rate on cigarettes has been raised to 40% from 28%. In addition, a new basic excise duty per 1,000 cigarette sticks has been introduced, replacing the earlier structure that combined a fixed cess with an ad valorem component. The National Calamity Contingent Duty (NCCD) remains unchanged.

Brokerage JM Financial described the revised excise framework as materially higher than the existing regime and said it ran counter to expectations of a tax-neutral transition under GST. On a blended basis, the brokerage estimates a 40–50% jump in basic excise duty and overall tax incidence per cigarette stick for ITC. To offset this impact, the company may be compelled to raise maximum retail prices by 20–40% or more, with the blended increase potentially around 35%.

JM Financial noted that the impact is uneven across segments. While the duty increase is relatively flat for the DSFT segment (below 65 mm), which accounts for roughly 30% of ITC’s cigarette volumes, tax rates have risen sharply for the RSFT segment, which contributes about 50% of volumes, as well as for Longs and KSFT categories. This uneven structure increases the risk of consumer downtrading, deterioration in product mix, and a renewed threat from illicit cigarette trade.

The brokerage also flagged a cascading effect, as GST at 40% will now be levied on the maximum retail price rather than the net sales value. This change compounds the burden created by higher excise duties and could significantly pressure margins. If implemented as notified, JM Financial warned of volume contraction, a meaningful hit to cigarette EBIT, and a delay in near-term earnings catalysts.

Other brokerages struck a more balanced tone. Religare Broking said the revised excise regime could weigh on near-term profitability and investor sentiment. However, it added that ITC’s strong pricing power and diversified business portfolio may provide medium- to long-term earnings resilience.

Meanwhile, Motilal Oswal downgraded ITC to a Neutral rating, calling the tax hike “unprecedented.” The brokerage lowered valuation multiples for the cigarette business and set a target price of Rs 400, implying around 10% upside from current levels. It cautioned that steep price increases could push consumers toward illicit brands, weaken the product mix, and pressure near-term earnings. Motilal Oswal has factored in a 6% contraction in cigarette EBIT for FY27 and trimmed EPS estimates for FY27 and FY28.

With uncertainty still surrounding the final implementation and any potential revisions, analysts said ITC’s pricing strategy over the coming months will be a decisive factor in determining the extent of the impact on volumes, margins, and overall earnings trajectory.