Shares of cigarette-to-consumer goods conglomerate ITC closed at a three-year low on Friday, extending losses for the second straight session after the government announced additional excise duty on tobacco products effective February 1. The stock fell 3.80% to ₹350.10, following Thursday's nearly 10% plunge, as brokerages issued widespread downgrades citing concerns over demand impact from higher cigarette prices.

LIC Bears Massive Portfolio Losses

India's largest institutional investor, Life Insurance Corporation of India (LIC), has suffered substantial losses of ₹10,445 crore over two trading sessions from its significant ITC investment. With a 15.86% stake comprising 199 crore equity shares as of the September quarter, LIC's exposure to the tobacco giant has resulted in severe portfolio damage as the stock declined 14% over the two-day period.

Government Implements Substantial Tax Structure

The Finance Ministry's notification issued late Wednesday outlined a revised excise duty structure ranging from ₹2,050 to ₹8,500 per 1,000 sticks, depending on cigarette length. The announcement also included a GST hike to 40%, creating a dual impact on the tobacco industry and prompting fears of significant price increases that could dampen consumer demand.

Brokerages Issue Widespread Downgrades

Multiple prominent brokerages downgraded ITC following the tax announcement, with most shifting from bullish to cautious or bearish ratings. Nuvama downgraded the stock from 'buy' to 'hold', stating that while they expected a sharp tax hike, "the magnitude seems higher than anticipated, likely prompting consensus downgrades to ITC's cigarette volume and EBITDA estimates."

Motilal Oswal Financial Services downgraded ITC from 'buy' to 'neutral' with a revised target price of ₹400, calling the tax increase magnitude "staggering." The brokerage noted that cigarette taxes will jump approximately 50%, forcing ITC to implement price hikes of at least 25% at the portfolio level to maintain current net realisation per stick.

Business Impact and Market Outlook

ITC's cigarette business, its most profitable segment contributing over 40% to overall revenue and 80% of profits, faces significant pressure from the new tax structure. Sonam Srivastava, founder and CEO of Wright Research, noted that "since 40% of the company's revenues come from cigarettes and the segment contributes 80% of profits, the impact is expected to be significant."

Analysts remain cautious about near-term prospects, with heavy institutional selling volumes keeping sentiment negative. Market experts advise waiting for clarity on business impact and price hike implementation before considering fresh investments, as the stock may remain volatile until volume trends and consumer response become clearer.

Multiple domestic and international brokerage firms have downgraded ITC shares following the government's sharp increase in cigarette excise duties effective February 1. The downgrades span across major firms including JPMorgan, Nuvama, PhillipCapital, Emkay, and Motilal Oswal, with most significantly reducing their price targets amid warnings of substantial cigarette price increases ranging from 20% to 50%.

Major Brokerage Actions and Revised Targets

JPMorgan led the downgrades by cutting ITC to Neutral from Overweight and slashing the target price to ₹375 from ₹475. The firm estimates a weighted average price hike of over 25% if NCCD is removed, and over 35% if NCCD remains. PhillipCapital delivered the most severe downgrade, cutting the stock to Reduce from Buy with a target price of ₹348 from ₹528, describing the excise hike as opening a "Pandora's box".

Nuvama downgraded the stock from buy to hold, cutting its price target to ₹415 from ₹534, warning that cigarette prices may need to rise by at least 20% on key brands. Emkay described the tax hike as a "fiscal bombshell" and expects portfolio-wide price hikes of around 32% in a staggered manner.

New Excise Duty Structure and Expected Impact

According to the Finance Ministry order, the new excise duty structure ranges between ₹2,050 and ₹8,500 per thousand sticks, depending on product length. This represents a tax increase of 20% to 65%, far exceeding market expectations of 10% to 15%. The tax increase is steepest for longer cigarettes, while cigarettes under 65mm face a relatively modest hike.

DAM Capital expects increased down-trading to lower-priced cigarette categories and builds in a 7% volume de-growth for FY27. PhillipCapital estimates cigarette volumes to decline 12.50% in FY27, followed by 2.50% growth in FY28.

Financial Projections and Valuation Cuts

Brokerages have significantly revised their financial estimates and valuation multiples for ITC. Nuvama cut its FY27 and FY28 EBITDA estimates by 7% each and reduced the valuation multiple for the cigarettes business to 17 times from 23 times. Antique cut FY27-28 EBITDA estimates by 9% to 11%, while DAM Capital reduced EPS estimates by 8% and 9% for FY27 and FY28 respectively.

Motilal Oswal cut the valuation of ITC's cigarette business to 14 times from 17 times, believing that the favourable phase for the legal cigarette industry is over and valuations may revert to historical multiples under a high-tax regime.

Positive Factors Amid Downgrades

Despite the widespread downgrades, several brokerages maintained buy ratings, citing supportive factors. Macquarie maintained an Outperform rating with a ₹500 target, noting that moderating leaf tobacco costs could offer some margin cushion. B&K Securities and Antique retained their Buy ratings, with Antique viewing the tax hike as transient near-term pain.

DAM Capital believes most negatives are already reflected in the stock price and any relief in the Budget, including possible NCCD removal, could act as a positive trigger. The brokerage expects significant trade and retail stocking in January 2026 ahead of implementation.