Tax Shock Causes Nuvama to Cut ITC Shares, Says Cigarette Prices Could Rise 20%

Domestic brokerage firm Nuvama Institutional Equities has downgraded ITC shares from buy to hold, warning that a very sharp hike in cigarette taxes is likely to force price hikes of at least 20% for key brands from February.Nuvama has also sharply downgraded tobacco, arguing that the government’s latest move marks a clear break from the relatively lenient tax regime that had supported a steady recovery in volumes in the legal sector in recent years.

ITC shares fell about 10% to hit a 52-week low on Thursday after the government announced a sharp hike in cigarette taxes late on Wednesday.“While we expected a sharp tax increase on cigarettes, the magnitude appears larger than expected, likely triggering consensus cuts to ITC’s cigarette volume and EBITDA estimates, as well as valuation multiples,” Nuvama’s Abneesh Roy said in a report.

“After volume growth of almost 6% in FY26, we now expect both cigarette volumes and cigarette EBITDA to decline in FY27,” the broker said, drawing parallels with the FY13-17 period, when “harsh” excise duty hikes resulted in a weak tax environment.

Nuvama noted that between FY13 and FY17, cigarette taxes rose at a CAGR of 15.7%, while revenues rose only 4.7%. It warned that similar pressures could once again push consumption towards illegal and smuggled products, undermining the government’s revenue targets while damaging ITC’s legal franchise. The brokerage also expects a temporary “front-loading” of volumes and production in January 2026, ahead of the February 1 implementation, but stressed that this would not change the broader bearish volume outlook for FY27.

Reflecting the changed landscape, Nuvama cut its 12-month target price for ITC to Rs 415, valuing the tobacco sector at 17x one-year forward earnings, compared to 23x earlier. “We have lowered our FY27E/FY28E revenue estimates by 4.9% and 8.3%, respectively, and EBITDA by 7% each, leading to a 6.7-6.8% reduction in earnings per share,” the report said, adding that “the magnitude of the tax increase warrants a downgrade in the cigarette sector rating.” are non-tobacco activities.

“We remain positive on ITC’s capital allocation and dividend policy,” Nuvama said, highlighting a “payout of around 85%” and a dividend yield of around 4%, which the company believes will “support the stock” amid near-term earnings cuts. The note added that tobacco leaf costs are expected to turn “favourable” in FY27, softening cigarette margins to some extent even if volumes take a hit.

On the diversification front, Nuvama remained constructive on ITC’s FMCG and carton portfolios. The report said GST rate cuts in select food categories are “a tailwind” for ITC’s major food businesses and reiterated that its FMCG-Others business is on track to deliver an “EBIT margin of 9.5% in FY27-28”, supported by economies of scale and an improving product mix.

In carton, packaging and specialty paper, including the Century acquisition, Nuvama expects margins to bottom out in FY27, with a recovery in demand and declining input costs offsetting some of the pressure from its core cigarette business.