Shares of FMCG-to-cigarette major ITC are expected to remain in focus 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 two sessions, following the government's announcement of additional excise duty on tobacco products effective February 1, 2026.

Government Announces Steep Tax Increases

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. The combined impact of these measures is expected to push the overall tax burden on cigarettes up by 40-50%, marking the steepest hike in nearly two decades. This unprecedented increase has triggered a wave of downgrades across brokerages, with most domestic analysts turning cautious or bearish on ITC.

Brokerage Downgrades and Target Price Revisions

Major brokerages have responded swiftly to the tax announcement with significant downgrades and target price cuts:

Motilal Oswal's Analysis

Motilal Oswal has downgraded ITC from 'Buy' to 'Neutral' and revised its target price to ₹400. 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%.

The brokerage 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. Motilal now values the cigarette business at 14x Dec'27E EV/EBITDA, down from its previous multiple of 17x.

Nomura Takes Bearish Stance

Nomura has adopted the most bearish position, downgrading ITC from 'Buy' to 'Reduce' with a sharply lower target price of ₹340, down from ₹540. The brokerage 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 brokerage described the tax increase as "unprecedented" and highlighted that such a steep hike is expected to exert pressure on margins and legal cigarette volumes, especially given high raw material costs and competition.

Nuvama's Cautious Outlook

Nuvama Institutional Equities 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. Abneesh Roy of Nuvama stated, "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."

The brokerage expects both cigarette volumes and cigarette EBITDA to decline in FY27 after nearly 6% volume growth in FY26, drawing parallels with the FY13-17 period of "harsh" duty increases. Nuvama cut its 12-month target price to ₹415 and reduced its tobacco valuation multiple to 17 times one-year forward earnings from 23 times earlier, alongside EPS cuts of about 6.70-6.80% for FY27 and FY28.

Market Impact and Outlook

Analysts across brokerages are concerned that the steep tax increases will lead to higher cigarette prices and could dampen demand significantly. The consensus view suggests that while ITC may attempt to mitigate the impact through staggered price increases, the structural negative impact on volumes and margins appears unavoidable in the near term.

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.