Shares of ITC Ltd fell more than 4% in trade after multiple brokerages turned cautious on the stock, citing an unprecedented hike in cigarette taxes that could pressure volumes, earnings visibility and valuation multiples over the near term.
The sell-off came after Motilal Oswal Financial Services downgraded ITC to neutral from buy and cut its target price to ₹400 per share. The brokerage highlighted the government’s notification of a steep increase in cigarette taxes effective 1 February 2026, estimating an overall tax rise of nearly 50%, assuming the National Calamity Contingent Duty (NCCD) continues. According to Motilal Oswal, the scale of this hike is unusual and marks a sharp break from the relatively stable tax regime of recent years, during which ITC benefited from steady volume growth and strong stock performance.
Motilal Oswal believes the tax increase will necessitate portfolio-level price hikes of at least 25% to maintain current per-stick realisations. Such a sharp price adjustment, it warned, could negatively impact demand elasticity and lead to a contraction in legal cigarette volumes, drawing parallels with the 2012–2020 period when repeated tax hikes resulted in weak volume growth and range-bound stock returns. The brokerage also flagged the risk of a wider price gap between legal and illicit cigarettes, which could encourage downtrading and volume leakage.
From a financial perspective, Motilal Oswal expects pressure on cigarette volumes to drive EBITDA contraction in FY27 and has cut its EPS estimates by around 12% for FY27 and FY28. While softer tobacco leaf prices and improvement in FMCG and paperboard segments could offer some relief, the brokerage believes near-term earnings pressure in cigarettes will dominate. It added that ITC’s cigarette business is now valued at about 14x Dec’27E EV/EBITDA, lower than the 17x seen in the previous high-tax cycle, suggesting a reset in valuation multiples.
Global brokerage JPMorgan also downgraded ITC to neutral from overweight and slashed its target price to ₹375 from ₹475. JPMorgan noted that, depending on whether the NCCD is removed or retained, ITC may need to raise prices by more than 25%–35% to protect net realisation per stick. Such steep hikes, the brokerage said, could be difficult to execute in the current consumption environment and may increase the risk of downtrading, particularly in the king-size filter tip segment, while also encouraging illicit consumption.
JPMorgan expects ITC to pass on most of the tax increase over time but cautioned that volume growth and earnings momentum are likely to remain under pressure in the initial quarters after implementation. As a result, the brokerage sees limited upside for the stock over the next 6–9 months, even as non-cigarette businesses continue to provide stability.
In contrast, UBS maintained its buy rating on ITC but reduced its target price to ₹430 from ₹490. UBS acknowledged that the additional excise duty introduces near-term uncertainty around pricing actions, volume response and earnings growth. However, it argued that current market expectations already appear conservative, with the stock pricing in long-term cigarette EBIT growth of just 2–3%.
UBS pointed to ITC’s strong track record of navigating high-tax environments through calibrated price increases, brand strength and cost discipline. While near-term volatility is likely, the brokerage believes ITC’s diversified earnings base across FMCG, paperboards and agri-business, along with strong cash generation and balance sheet strength, should support long-term resilience once the initial disruption from the tax hike settles.
