ITC shares in focus as stock hits 3-year low, brokerages downgrade after steep excise duty hike on cigarettes

Shares of FMCG-to-cigarette major ITC are expected to remain in the spotlight when markets open on Monday, January 5, after closing at a three-year low on Friday. The stock has come under sustained selling pressure, falling 24% in just 2 sessions, following the government’s announcement of an additional excise duty on tobacco products, effective February 1, 2026, a move that has triggered a wave of downgrades across brokerages.

Most domestic brokerages have turned cautious or bearish on ITC, citing concerns that the hike in taxes will lead to higher cigarette prices and could dampen demand.

The government has announced a sharp increase in excise duty, alongside a revision in GST rates under GST 2.0, from 28% to 40%, also effective from February 1. Analysts expect this to push the overall tax burden on cigarettes up by as much as 40–50%, marking the steepest hike in nearly two decades.

Motilal Oswal lowers target; flags steep price hikes

Motilal Oswal has downgraded ITC from ‘Buy’ to ‘Neutral’ and revised its target price to Rs 400, citing the unexpected tax increase as a key headwind. The brokerage estimates that ITC will need to hike prices by at least 25% at a portfolio level just to maintain current margins. Assuming the continuation of the National Calamity Contingent Duty (NCCD), the new tax regime is expected to increase the effective incidence by around 50%.

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Motilal further noted that this tax hike comes after several years of stability in cigarette taxation, which had helped legal volumes grow at around 5% CAGR and supported a 50% rally in the stock. The abrupt shift could lead to downtrading, accelerate the illicit market, and compress volumes. The brokerage now values the cigarette business at 14x Dec’27E EV/EBITDA, down from its previous multiple of 17x.

Nomura downgrades to ‘Reduce’, slashes target to Rs 340

Nomura has taken a more bearish stance, downgrading ITC from ‘Buy’ to ‘Reduce’ with a sharply lower target price of Rs 340, down from Rs 540. The brokerage has flagged that the more-than-40% increase in cigarette tax incidence could force ITC to raise prices by over 30%, triggering a 15% year-on-year decline in sales volumes and EBIT for FY27. Nomura has also cut its valuation for the cigarette segment to 16x P/E, down from 25x.

The note describes the tax increase as “unprecedented” and highlights that such a steep hike is expected to exert pressure on margins and legal cigarette volumes, especially given high raw material costs and competition. Nomura believes the impact could be partially mitigated through staggered price increases, but still sees this as a significant structural negative.

Nuvama downgrades to hold

Nuvama Institutional Equities also downgraded ITC to Hold from Buy, arguing that the magnitude of the tax hike marks a clear break from the relatively benign regime that had supported a recovery in legal cigarette volumes. “While we expected a sharp tax hike on cigarettes, the magnitude seems higher than anticipated, likely prompting consensus downgrades to ITC’s cigarette volume and EBITDA estimates as well as multiples,” said Abneesh Roy of Nuvama.

“After nearly 6% volume growth in FY26, we now expect both cigarette volumes and cigarette EBITDA to decline in FY27,” the brokerage said, drawing parallels with the FY13–17 period of “harsh” duty increases. Nuvama cut its 12-month target price to Rs 415 and reduced its tobacco valuation multiple to 17 times one-year forward earnings from 23 times earlier, alongside EPS cuts of about 6.7–6.8% for FY27 and FY28.

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