Global brokerage Nomura has downgraded ITC Limited to ‘Reduce’ from ‘Buy’ as it factored in the impact of the cigarette excise hike on volumes and profit margin. The brokerage also cut ITC share price target to ₹340 from ₹540. The current target price implies a downside of 6.6 per cent from Friday’s close level.
The Government has hiked the excise duty by 40 per cent on cigarettes, which is much higher than Nomura’s expectation. The new excise duty will take effect from February 1. The excise duty has been the highest in the past two decades. Meanwhile, compensation cess and ad-valorem cess will be zero for cigarettes.
The brokerage was expecting tax neutrality for cigarettes.
In this backdrop, ITC will probably hike the prices by 35 per cent to maintain margins, Nomura said. “This could lead to some margin pressure initially, which has never happened in the past except in the financial year 2026 (FY26) due to high raw material prices and competitive intensity.”
The price hike will affect the volumes and lead to a 15 per cent Y-o-Y sales decline in the financial year 2027 (FY27), the brokerage said.
However, Nomura expects that the price hikes could be staggered across brands over the year to minimise the volume impact.
Moreover, high taxes usually support growth in illegal cigarette sales, which will further pressure ITC’s sales, according to Nomura.
The Goods and Services Tax (GST) will also increase to 40 per cent from 28 per cent, which was notified earlier. Now, the indirect tax will be applicable on retail prices compared to the invoice price previously. This move will likely affect companies that offer high margins to retailers versus others, because they will lower effective realisations and pressure margins, thus reducing the ability to reinvest in business, the brokerage said.
Apart from downgrading the stock rating and reducing the target price, Nomura has also cut earnings-per-share estimates for the financial years 2027 and 2028 (FY27, FY28) by 18 per cent each.
Nomura has also reduced the price-to-earnings (PE) ratio to 16 times from 25 times the December 2027 estimated value at the lower end of its valuation band. The brokerage expects the price hike will have a significant impact on volumes, pressure margins, increase illicit trade, stifle growth and the company’s ability to recruit consumers.
For ITC, Nomura has forecasted a flat earnings-per-share (EPS) compound annual growth rate (CAGR).
The key upside risks will be strong volume growth, according to the brokerage.
