Leading brokerage firms have sharply downgraded ITC Ltd and slashed their target price for the conglomerate's stock by as much as 26%. This decisive action comes in response to the government's proposed significant increase in taxes on tobacco products, which is set to take effect from February 1.
Brokerages React with Downgrades and Price Cuts
The market reaction was swift and severe. Domestic financial services firm Emkay Global described the tax hike as a 'fiscal bombshell' for the cigarettes major. It downgraded the ITC stock from 'add' to 'reduce' and executed a deep cut in its target price by 26%, bringing it down to Rs 350 from the earlier Rs 475. The firm warned that the excise duty increase would hurt industry volumes and disrupt ITC's earnings, signaling a shift in regulatory policy from a rational approach to one actively aimed at curbing consumption.
Global investment bank JP Morgan also joined the chorus, reducing its target price for ITC by 21% to Rs 375 from Rs 475. The brokerage anticipates that ITC will be forced to raise cigarette prices but cautioned about potential negative consequences. It highlighted that a steeper increase for the 'king size filter tip' segment raises the risk of consumers switching to cheaper variants and could also boost the uptake of illicit, smuggled cigarettes in the market.
Market Impact and Anticipated Price Rises
The stock market reflected these grim assessments immediately. On Friday, the ITC stock price fell another 3.8%, adding to a steep 9.8% decline recorded on Thursday. The share closed at Rs 350. Over these two turbulent sessions, the cigarette-maker's market capitalisation eroded by approximately Rs 66,200 crore, settling near Rs 4.4 lakh crore. This plunge took the stock to its lowest level in three years.
Analysts from various brokerages now expect ITC to increase cigarette prices by up to 32% to offset the higher tax burden. Industry sources have indicated that the price hikes will not be uniform. Cigarettes of shorter length are likely to see relatively smaller increases in the range of 5-10%, while longer ones could become costlier by 20-30%. Cigarette companies are expected to finalise their decisions on new prices within the next 7 to 10 days.
Broader Risks and Industry Outlook
Beyond the immediate financial metrics, analysts have flagged significant structural risks for the legal cigarette industry. The primary concern is that a sharp retail price increase will make legally manufactured cigarettes significantly more expensive, potentially driving consumers towards two alternatives:
- Downtrading to cheaper variants within the legal market.
- Increased consumption of smuggled illicit cigarettes, which may flood the Indian market due to the higher price disparity.
This tax move represents a notable hardening of the government's stance on tobacco, moving explicitly towards discouraging use through fiscal measures. The coming weeks will be critical as ITC and other manufacturers announce their pricing strategy, and the market assesses the real impact on sales volumes and the company's future earnings trajectory.
