Shares of ITC came under intense pressure after the government notified higher taxes on tobacco products, with sell-side analysts flagging the development as worse than initially feared, citing both the sharp tax increase and an unfavourable product mix shift.

Why analysts say the setback is worse than expected

According to Redbox India, the sell-side commentary suggested that the newly notified tax framework represents a material negative surprise for cigarette manufacturers. While the market had been bracing for a transition from the GST compensation cess to excise duty, the effective tax incidence has turned out to be higher than earlier assumptions.

Analysts noted that the clarity on 40% GST plus additional excise duty from February 1 removes ambiguity, forcing an immediate reassessment of earnings expectations for ITC.

Product mix shift adds to the pressure

Beyond the tax hike, analysts flagged an unfavourable shift in product mix toward Kings over DSFT, which is expected to weigh further on margins. Kings cigarettes typically carry lower margin flexibility compared with DSFT, making it harder for companies to fully pass on higher taxes through pricing.

This combination of higher taxation and adverse mix has made the outlook prima facie negative, according to analysts tracking the sector.

Why ITC is more exposed

ITC derives a significant share of its profitability from the cigarette business, making it particularly sensitive to changes in tobacco taxation. Analysts believe the latest framework could:

  • Compress near-term margins

  • Limit pricing headroom

  • Increase volume risk amid demand sensitivity

As a result, ITC has seen a sharper reaction compared with diversified FMCG peers.

From expectation to disappointment

Earlier, the market had expected a largely revenue-neutral restructuring of tobacco taxes once the GST compensation cess ended. However, the notification confirmed that the government has retained strong fiscal headroom, shifting the burden meaningfully onto manufacturers.

This gap between expectations and reality is what analysts describe as the key driver behind the sharp sell-off.

Bottom line

Sell-side analysts see the latest tobacco tax notification as a clear setback for ITC, with the outcome turning out even worse than feared initially. The sharp increase in tax incidence, combined with an unfavourable product mix shift toward Kings over DSFT, has made the near-term outlook prima facie negative, keeping ITC under pressure.

Disclaimer: The information provided is for informational purposes only and should not be considered financial or investment advice. Stock market investments are subject to market risks. Always conduct your own research or consult a financial advisor before making investment decisions. Author or Business Upturn is not liable for any losses arising from the use of this information.

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