The Indian government's unexpected and sharp increase in excise duties on cigarettes has sent shockwaves through the markets, severely rattling the investment thesis for FMCG major ITC Limited. The move has triggered a cascade of brokerage downgrades, deep cuts to earnings estimates, and a fundamental reset of the company's valuation, as analysts brace for significant pressure on cigarette volumes, profit margins, and long-term profitability.
Market Rout and Brokerage Reaction
ITC's shares witnessed a brutal sell-off, plunging to a three-year low of Rs 345.35 on Friday. This extended a two-day rout that erased nearly 14% of the company's market value. The crash was a direct response to the Finance Ministry's notification, issued late Wednesday, of a revised cigarette excise duty structure set to take effect from February 1, 2026. Given that the cigarettes division is ITC's primary profit engine, this tax shock has severely clouded the near-term earnings outlook.
Leading brokerages were swift and unanimous in their negative reassessment. Motilal Oswal Financial Services downgraded ITC to 'Neutral' from 'Buy', slashing its target price to Rs 400. It termed the hike "unprecedented" and warned it could lead to a lasting de-rating of valuation multiples, while forecasting a 6% EBIT contraction in FY27.
Nuvama Institutional Equities also moved to a 'Hold' rating, noting the hike marks a clear break from a previously stable tax regime. Analyst Abneesh Roy stated that both cigarette volumes and EBITDA are now expected to decline in FY27. Nuvama cut its target to Rs 415.
Jefferies downgraded ITC to 'Hold', estimating the notified changes imply a near 50% tax increase. The brokerage warned this would force retail price hikes of around 40%, severely impacting demand. It cut earnings per share (EPS) estimates by about 15%.
JP Morgan echoed the sentiment, downgrading to 'Neutral' and flagging "unprecedented taxation blues." It sharply reduced its target price to Rs 375 from Rs 475, anticipating pressure on volumes and stock multiples over the next 6-9 months.
Valuation Reset and Earnings Impact
The consensus among analysts is that the cigarette business, once a steady cash cow, is facing a severe valuation reset. Emkay Global Financial Services, which downgraded ITC to 'Reduce', estimates the tax payout per cigarette stick will surge by over 50% in key segments, necessitating price increases of about 32%. It noted the cigarette segment's valuation multiple has crashed to 13 times earnings from 17 times previously.
The financial implications are stark. ICICI Securities estimates the new duty will translate into a 22–28% cost increase for popular 75–85 mm cigarettes, likely meaning price hikes of Rs 2–3 per stick. The government has mandated a new excise duty range of Rs 2,050 to Rs 8,500 for every 1,000 sticks, based on length, which will be in addition to the existing 40% GST.
The Bigger Picture on Tobacco Taxation
This aggressive move aligns with global public health goals but disrupts a long-standing equilibrium for listed players like ITC. Currently, taxes constitute about 53% of the retail price of cigarettes in India, which is still notably lower than the World Health Organization's recommended benchmark of 75% for curbing consumption.
While some market observers point to ITC's diversified portfolio in FMCG, paperboards, and hotels as a buffer, most agree the tax shock has eliminated any near-term positive catalysts for the stock. The dramatic reaction from the analyst community underscores the profound uncertainty now surrounding ITC's most profitable business line, leaving investors to recalibrate their expectations for one of India's market bellwethers.
