Business
ITC shares plunge to 3-year low after tax bombshell: Is this a falling knife or hidden value?
The magnitude of the tax increase is staggering. Effective February 1, cigarette taxes will jump approximately 50%, forcing ITC to implement price hikes of at least 25% at the portfolio level just to maintain current net realization per stick, according to Motilal Oswal. The brokerage downgraded ITC from Buy to Neutral with a revised target price of Rs 400.
“To offset the tax burden, ITC will need to implement substantial price increases. Assuming no mix change, ITC requires a 40% price hike just to pass on the impact,” Jefferies warned in its downgrade from Buy to Hold. The firm noted that if ITC passes on the full impact through price hikes, the effective tax hike comes to approximately 70%, pushing tobacco taxes per stick from 55% to 65% of MRP.
The tax shock comes with little precedent. “Such a sharp tax increase is unprecedented and has surprised us given the backdrop of stable taxes over the last few years,” Motilal Oswal analysts wrote. The brokerage slashed its cigarette business valuation to 14x December 2027 EV/EBITDA from 17x previously—a multiple last seen during earlier high-tax cycles.
History suggests painful consequences ahead. Jefferies pointed out that during FY15-16, when ITC took mid-teen price hikes amid aggressive tax increases, cumulative volumes fell by more than 15%. The concern is amplified by the ad valorem component, where higher prices feed back into tax calculations, creating a vicious cycle.
The tax stability of recent years had been a tailwind for ITC, allowing its cigarette volumes to grow at approximately 5% CAGR over the last five years while the illicit cigarette market’s volume share contracted by around 150 basis points, according to Motilal Oswal. That virtuous cycle now faces reversal.
“For ITC, which was seeing resilient cigarette volume growth in past few quarters, this levy has the effect of pushing possible catalysts (volume resilience and uptick in EBIT growth from 2HFY26E) further out,” JM Financial noted, adding that concerns about illicit cigarettes will re-emerge.Yet some analysts see reasons for cautious optimism at current levels. Nuvama’s Abneesh Roy, who downgraded the stock from Buy to Hold, said the firm is not issuing a Reduce call for four key reasons. Chief among them: the approximately 4% dividend yield with around 85% payout ratio provides a cushion.
Roy highlighted additional support factors: tobacco raw materials are likely to turn favorable in FY27 after challenging recent quarters; ITC’s large foods portfolio spanning noodles, biscuits, and snacks will benefit from GST cuts; and the paper business acquisition of Century Paper should see margins bottom out in FY27.
Motilal Oswal acknowledged that “earnings pressure on cigarettes would take away the near-term catalysts (soft tobacco prices, recovery in FMCG and Paper) and comfort on valuation.”
Jefferies remained cautious, stating that “near-to-medium term upside now looks capped” and warning the stock could face more pressure in the near term.
