The government’s surprise hike in cigarette excise duties has rattled the investment case for ITC, prompting a wave of brokerage downgrades, earnings cuts and valuation resets as analysts brace for pressure on volumes, margins and long-term profitability.ITC shares tumbled to a three-year low of Rs 345.35 on Friday, extending a two-day rout that has wiped out nearly 14% of its market value. The fall followed the finance ministry’s notification late Wednesday of a revised cigarette excise duty structure, effective February 1, 2026. The cigarettes business remains ITC’s biggest profit driver, making the tax shock particularly disruptive for near-term earnings visibility.
Brokerages downgrade, cut targets
Motilal Oswal Financial Services downgraded ITC to Neutral from Buy, cutting its target price to Rs 400. It described the move as an “unprecedented tax hike” that could reset valuation multiples, ET reported.“Such a sharp tax increase is unprecedented and has surprised us given the backdrop of stable taxes over the last few years,” Motilal Oswal said, warning that a wider gap between legal and illicit cigarettes could hurt organised players’ volumes. The brokerage now expects a 6% EBIT contraction in FY27 and cut FY27–FY28 earnings estimates by about 12%.Nuvama Institutional Equities also downgraded the stock to Hold from Buy, saying the magnitude of the hike marks a clear break from the earlier benign tax regime.“While we expected a sharp tax hike on cigarettes, the magnitude seems higher than anticipated,” Abneesh Roy of Nuvama, said, adding that both cigarette volumes and EBITDA are now expected to decline in FY27. Nuvama cut its target price to Rs 415 and reduced its tobacco valuation multiple to 17 times forward earnings.
Earnings risks, price hikes loom
Jefferies downgraded ITC to Hold from Buy, cutting earnings estimates by about 15%. It said the notified changes imply a tax increase of nearly 50%, forcing price hikes of around 40% to pass on costs, a move likely to hurt volumes.“We cut EPS by c15% and expect stock to stay under pressure,” Jefferies said, noting that industry bodies have sought a review of the decision.JP Morgan also downgraded ITC to Neutral, flagging “unprecedented taxation blues.” It said ITC may need weighted average price hikes of over 25% or more than 35% if the National Calamity Contingent Duty stays to protect net realisations. JP Morgan has cut its target price sharply to Rs 375 from Rs 475, warning of pressure on volumes and stock multiples over the next 6–9 months, ET reported.
Valuation reset across the board
Emkay Global Financial Services downgraded ITC to Reduce from Add, cutting its target price to Rs 350. It estimates the tax payout per cigarette stick will rise by over 50% in key segments, requiring staggered price hikes of about 32%. Emkay said the cigarette business has seen a sharp de-rating, now valued at 13 times earnings, down from 17 times earlier. Centrum and MOSL are now neutral on the stock, with target prices of Rs 390 and Rs 400, respectively.
What the new tax means
The finance ministry notified excise duty of Rs 2,050-8,500 for every 1,000 sticks, depending on the length of the cigarette, which will be over and above 40% GST. The government has also put in place an elaborate system to check evasion, mandating that manufacturers of chewing tobacco, gutkha and similar products. ICICI Securities estimates this translates into a 22–28% cost increase for 75–85 mm cigarettes, implying price hikes of Rs 2–3 per stick, ET reported.At present, taxes make up about 53% of the retail price of cigarettes in India, including a 28% GST and a value-based levy linked to cigarette length. This is significantly lower than the World Health Organization’s recommended benchmark of 75%, aimed at curbing tobacco consumption.While some analysts argue cigarette demand has historically been inelastic and that ITC’s diversified FMCG, paperboards and hotels businesses offer support, most agree the tax shock has removed near-term catalysts.