ITC investors lose Rs 1 lakh crore after tax shock. Is there more pain in the 2026 budget?

ITC shareholders have seen nearly Rs 1 lakh crore wiped off the company’s market value in about a month, as the stock corrected nearly 20% after a sharp hike in cigarette tax announced in late December. The sell-off has made one of India’s most widely held defensive stocks a major Budget talking point, with investors now looking to Budget for clarity on the tax regime.The correction over the past month has been rapid and largely policy-driven. Cigarettes remain ITC’s largest profit contributor, and the government’s decision to restructure tobacco taxes has materially changed near-term profit expectations.

The new framework introduced excise duty of Rs 2,050-8,500 per 1,000 cigarette sticks, in addition to a GST rate of 40%, with effect from February 1, 2026. This significantly increased the overall tax burden on cigarettes, raising concerns about demand, margins and the risk of illicit trade.Analysts broadly agree that the stock’s decline reflects this sudden policy shift and not any deterioration in ITC’s core business. Vincent KA of Geojit Investments said the recent correction is due to the sharp increase in cigarette taxes. He added that ITC will likely respond with price increases, as it has done in the past, to protect margins, although this could weigh on volumes in the short term.

The fear among investors is that high taxes could accelerate demand destruction, especially in a price-sensitive market like India. Abhishek Jain, head of research at Arihant Capital Markets, described ITC’s situation as a “double whammy”, pointing out that the existing 28% VAT, combined with higher excise duties, has effectively pushed cigarettes to a 40% tax regime.

According to him, such high taxation increases the risk of growth in the illicit tobacco market, which could harm legal volumes and profitability. These concerns have also been raised by the Tobacco Institute of India, which has opposed the recent tax hike and warned of potential losses to farmers and other value chain participants, along with an increase in the illicit cigarette trade.

What you can expect from Budget
Motilal Oswal said clarity on the continuation of the non-compensatory strike right and any further changes in the excise duty structure remains critical for the shares. Any rationalization or relaxation of excise duties would have a clear positive impact on ITC and other cigarette manufacturers, the report said.

Most real estate agents do not expect another immediate tax hike in the upcoming budget. Nuvama has stated that taxes on cigarettes have already been increased and do not expect any further increases in the 2026 budget. This view is shared by several analysts who believe that the government has already met revenue needs from tobacco through the recent restructuring, leaving limited room for additional measures in the budget.

Bonanza’s Nitant Darekar said the December 31 tax review was a comprehensive exercise after the expiry of the compensation rebate, indicating limited scope for further tobacco-related measures in the budget.

While he expects pressure on volumes and margins in the near term if ITC weathers the price hikes, he also pointed out that the company’s diversified presence in FMCG, hotels, cardboard and agri-business provides a profit cushion. He added that ITC’s debt-free balance sheet and stable dividend record remain key structural strengths.

Core activity stable
Recent financial performance supports the view that the core businesses remain intact. In the December quarter, ITC reported 6.2% year-on-year revenue growth, driven by double-digit growth in FMCG-Others and steady growth in cigarettes.

The cigarette sector achieved sales growth of 8%, supported by volume growth of 7%. However, margins in the segment fell to a multi-quarter low of 59.9%, declining 163 basis points year-over-year, largely due to the use of expensive leaf inventory. Management has indicated that leaf purchasing prices have declined in the current harvest cycle, which could support margins in the coming quarters.

Axis Securities said in its post-result note that ITC’s long-term growth trajectory remains intact even though cigarette volumes could be impacted in the medium term due to higher taxes. Highlighting continued progress in the non-cigarette sector, it noted that policy measures, outlet expansion, localization and premiumization could support growth in FY27.

However, sentiment around equities remains fragile in the run-up to the budget. Prashanth Tapse of Mehta Equities said the market is considering near-term margin pressure and possible volume moderation. While ITC’s pricing power provides some downside comfort, he cautioned that persistent policy risk around ‘sin commodities’ is likely to limit a sharp valuation re-rating unless earnings visibility improves.

From a technical perspective, Tapse said the stock is still in a short-term downtrend with the Rs 300-310 zone acting as a key level to watch.

Valuations have become more attractive after the correction, but not all brokers 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 to improve business 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.

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