ITC falls to three-year low as tobacco tax hike prompts downgrades in brokers’ credit ratings

Mumbai: Shares of cigarette-to-consumer goods conglomerate ITC closed at a three-year low on Friday, extending losses to a second straight session after most brokerages downgraded the government following the government’s announcement of an additional excise duty on tobacco products with effect from February 1. The stock fell 3.8% to ₹350.1 on Friday after falling almost 10% on Thursday.

Most brokerages have downgraded the stock from bullish calls to cautious or bearish ratings after the excise hike as the move is seen as rising cigarette prices, which is expected to dampen demand.Nuvama, which downgraded ITC from ‘buy’ to ‘hold’, said: “While we expected a sharp tax increase on cigarettes, the magnitude appears larger than expected, likely leading to consensus cuts to ITC’s cigarette volume and EBITDA (earnings before interest, tax, depreciation and amortization) estimates), as well as multiples.”

The stock’s Friday close is the lowest since February 2023, following concerns about the impact of a squeeze on the company’s cigarette division on overall profitability. ITC’s cigarette division, the most profitable segment, contributes over 40% to total revenue.

“The drastic announcement of a GST hike to 40% and excise duty based on the length of cigarettes could lead to ITC increasing prices by 20-30%,” said Sonam Srivastava, founder and CEO of Wright Research. “Given that 40% of the company’s revenue comes from cigarettes and the segment contributes 80% of profits, the impact is expected to be significant.”

High volumes indicated institutional selling, keeping short-term sentiment cautious.

“While ITC’s FMCG, agri and other businesses continue to grow, they are not yet large enough to fully offset any meaningful impact on cigarette earnings,” said Mayank Jain, market analyst at Share.Market. He noted that stocks could remain volatile, with rallies facing selling pressure until there is clarity on price increases and volume trends.

“Conservative investors should look for a sustained weekly close above the ₹400 level, which would confirm that the market has fully ‘digested’ the tax news and buying conviction has returned,” Jain said. He warned that until such a reversal occurs, the risk of “catching a falling knife” remains high, and waiting for a stabilized base near the ₹330-₹345 zone is a can offer better risk reward.

Srivastava said further declines cannot be ruled out and could provide buying opportunities, but investors should avoid the stock for now given the impact on core businesses.

“The price correction has been severe over the past two days, but investors are advised not to buy the shares yet,” she said. “Once the news settles and there is more clarity by February, investors can consider buying.”

Brokerage Motilal Oswal also downgraded ITC to ‘neutral’ from ‘buy’, with a target price of ₹ 400. “Earnings pressure on cigarettes would take away from near-term catalysts (soft tobacco prices, FMCG and paper recovery) and valuation comfort,” the broker said in a note.