What tax hike on cigarettes means for 37 lakh ITC shareholders? Jefferies explains

The Finance Ministry’s announcement on the sharp increase in cigarette duties is “clearly negative” for ITC in the short term, Jefferies warned. This signals a significant hit to volumes and profits, even as the company remains positive on the stock.Jefferies describes this move as “a meaningful negative surprise for the legal cigarette industry,” estimating that the effective tax rate on cigarettes would increase by “well over 20%” even assuming a relatively favorable NCCD treatment. The brokerage notes that this “sharp increase in tax burden all at once” comes after a period of tax stability, increasing uncertainty about the policy path for legal cigarette makers like ITC.

India’s finance ministry late on Wednesday announced an excise duty of Rs 2,050-8,500 per 1,000 sticks, depending on the length of the cigarettes, with effect from February 1. Following the announcement, shares of ITC, maker of Gold Flake and market leader, fell 9.2%, while Godfrey Phillips India, Marlboro’s distributor in the country, plunged. 14.1%.

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ITC stock is now at its lowest level since April 2023 and on track for its worst day in almost six years. Godfrey Phillips would suffer the steepest decline since November 2016.

The excise duty translates into a 22% to 28% increase in the total cost of 75-85mm cigarettes, ICICI Securities analysts said. “Cigarettes longer than 75mm account for roughly 16% of ITC volumes and are likely to see price hikes of Rs 2-3 per stick due to the levy,” they said.

To protect profitability, ITC will likely have to implement “double-digit price increases” on key cigarette brands, Jefferies said. However, the report warned that “such steep price increases are likely to impact legal sector volumes and could accelerate downward trade and illicit trade,” creating a double headwind of weaker stick sales and potential market share loss for the organized segment. The report underlines that higher relative taxes on legal cigarettes “tend to boost illicit trade,” a trend that had weakened in recent years when tax increases were milder. If the price gap between tax-paid and smuggled sticks widens again, “ITC and other legal players could lose market share to the unorganized segment,” Jefferies warned, re-emerging a key structural risk that investors are closely watching.

Despite calling the development ‘clearly negative’ and emphasizing the ‘downside risk to near-term profit and volume growth’, Jefferies has maintained its buy rating on ITC. The brokerage has a target price of ₹535, valuing the cigarette sector at 23 times December 2027 earnings in a sum of parts framework, and continues to forecast a “total shareholder return of at least 15% over the next twelve months.”