CCI shareholders saw nearly Rs 1 lakh crore erased from the company’s market value in just about a month, as the stock corrected by almost 20% following a sharp increase in cigarette tax announced in late December. The selloff made one of India’s most widely held defensive stocks a key topic of budget discussion, with investors is now eyeing the budget for clarity on the tax regime.
Last month’s correction was rapid and largely politically driven. Cigarettes remain the largest contributor to ITC’s profits, and the government’s decision to restructure tobacco taxation has significantly changed earnings expectations in the near term.
The new framework introduced excise duties of Rs 2,050 to Rs 8,500 per 1,000 sticks of cigarettes, along with a GST rate of 40%, effective February 1, 2026. This has effectively increased the overall tax burden on cigarettes significantly, raising concerns about demand, margins and the risk of illegal trade.
Analysts largely agree that the stock’s decline reflects this sudden policy reset rather than any deterioration in the fundamentals of ITC’s core business. Vincent KA of Geojit Investments said the recent correction was due to a sharp increase in excise duty on cigarettes, adding that the ITC would likely respond with price hikes, as it has done historically, to protect margins, although this could weigh on volumes in the short term.
Investors fear that high taxation will accelerate demand destruction, especially in a price-sensitive market like India. Abhishek Jain, head of research at Arihant Capital Markets, described the ITC situation as a “double whammy”, pointing out that the existing 28% GST combined with higher excise duty has effectively moved cigarettes to a 40% tax regime.
According to him, such high taxation increases the risk of growth of the illicit tobacco market, which could harm legal volumes and profitability. This concern was also flagged by the Tobacco Institute of India, which opposed the recent tax hike, warning of potential losses for farmers and other players in the value chain, as well as an increase in illegal cigarette trade.
What to expect from the budget
Motilal Oswal said clarity on continuation of non-compensatory taxes and any other changes in duty structure remains a key element to watch for the stock. Any rationalization or relaxation of tariffs would clearly be positive for the ITC and other cigarette manufacturers, he added.
Most brokerages do not expect another immediate tax hike in the next budget. Nuvama said cigarette taxes have already been increased and she does not expect further hikes in the 2026 budget. This view is echoed by several analysts who believe the government has already met tobacco revenue needs through the recent restructuring, leaving limited room for additional measures in the budget.
Bonanza’s Nitant Darekar said the December 31 tax overhaul was a blanket exercise following the expiration of the compensation tax, suggesting limited room for new tobacco-related measures in the budget.
While he expects near-term pressure on volumes and margins as ITC faces price hikes, he also pointed out that the company’s diversified presence in FMCG, hotels, cartons and agribusinesses provides a profit cushion. He added that ITC’s debt-free balance sheet and stable dividend history remain key structural strengths.
A stable core business
Recent financial performance supports the idea that the core business remains intact. In the December quarter, ITC reported 6.2% year-on-year revenue growth, driven by double-digit growth in FMCG-Others and continued momentum in the cigarettes sector.
The cigarette business recorded revenue growth of 8%, supported by volume growth of 7%. However, segment margins fell to a multi-quarter low of 59.9%, down 163 basis points year-over-year, largely due to the use of high-cost sheet inventory. Management indicated that leaf purchase prices have moderated during the current crop cycle, which could support margins in the coming quarters.
Axis Securities, in its post-results note, said ITC’s long-term growth trajectory remains intact, although cigarette volumes could be affected in the medium term due to higher taxes. He highlighted continued progress in non-cigarette businesses and noted that policy measures, outlet expansion, localization and premiumization could support growth in FY27.
Yet sentiment around the stock remains fragile as the budget approaches. Prashanth Tapse of Mehta Equities said the market was pricing in near-term margin pressure and possible moderation in volumes. Although ITC’s pricing power provides some comfort on the downside, he warned that lingering political risk around “sin goods” is likely to limit any sharp revaluation unless earnings visibility improves.
From a technical perspective, Tapse said the stock remains in a short-term downtrend with the Rs 300-310 zone acting as a key level to watch.
Valuations, meanwhile, have become more attractive after the correction, but not all brokerages are convinced that this is the right time to intervene aggressively. Centrum Broking said it remains neutral on the stock, citing the lack of a short-to-medium term trigger for improved trading momentum.
It expects cigarette volumes and profitability to remain under pressure in FY27 and has set a target price of Rs 355, implying a cautious stance despite the recent decline.
(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of Economic Times)
