Motilal Oswal Financial Services has downgraded ITC to neutral from buy and reduced its target price to ₹400 per share, citing an unprecedented hike in cigarette taxes that is likely to reset valuation multiples and weigh on near-term earnings visibility.
According to Motilal Oswal, the government’s recent notification has sharply increased taxes on cigarettes effective 1 February 2026, resulting in an estimated ~50% increase in cigarette taxes (assuming NCCD continues). The brokerage noted that this scale of increase is unusual and has come as a surprise, particularly given the relatively stable tax regime seen over the past few years. Historically, ITC benefited significantly during this period, with cigarette volumes growing at a 4–5% CAGR over the last five years and the stock delivering returns of over 50%.
Motilal Oswal highlighted that the magnitude of the tax hike will force meaningful price increases of at least 25% at the portfolio level, just to maintain current per-stick realisations. Such a sharp adjustment is expected to impact volume elasticity and could lead to a contraction in the legal cigarette market, similar to what was observed during the 2012–2020 phase, when repeated tax hikes resulted in a prolonged period of weak volume growth and range-bound stock performance.
The brokerage cautioned that higher cigarette taxes could also widen the price gap between legal and illicit products, increasing the risk of downtrading and volume leakage into the illegal market. While ITC has historically benefited from strong brand equity and premiumisation, Motilal Oswal believes the ability to sustain product mix improvement will be tested under the new tax regime.
Motilal Oswal noted that ITC has been very active on new product launches in cigarettes during periods of tax stability, which supported positive mix and margins. However, with the sharp price hike requirement, the mix benefit is expected to weaken. The brokerage added that ITC’s pricing strategy will now be critical — whether the company opts for immediate full pass-through or gradual price increases to manage volume sensitivity.
From a financial standpoint, Motilal Oswal expects EBITDA contraction in FY27, driven by pressure on cigarette volumes. As a result, the brokerage has cut EPS estimates by around 12% for FY27 and FY28. While near-term relief could come from softer tobacco leaf prices and a recovery in the FMCG and paper segments, earnings pressure in the core cigarette business is expected to outweigh these positives in the short term.
Motilal Oswal also highlighted that ITC’s cigarette business is now valued at around 14x Dec’27E EV/EBITDA, compared with 17x during the previous high-tax cycle, indicating a likely reset in valuation multiples. The brokerage believes further re-rating will require greater clarity on the trajectory of cigarette taxation going forward.
Following these developments, Motilal Oswal downgraded ITC from buy to neutral and revised its SOTP-based target price to ₹400.
Disclaimer: The views and recommendations above are those of Motilal Oswal Financial Services. Business Upturn does not endorse them. Please consult a financial advisor before making investment decisions.
