CHENNAI: ITC Ltd shares slid to their lowest level in nearly three years on Friday (January 2) as a wave of brokerage downgrades and sharp target price cuts followed the government’s announcement of a steep increase in excise duty on cigarettes, triggering a reassessment of the company’s earnings outlook and valuation. The stock extended losses from the previous session, underperforming the broader market as investors reacted to what analysts described as one of the most disruptive tax changes for the tobacco industry in recent years.
After a steep fall in morning trade, the shares steadied near ₹349 apiece, down 4.04% as of 1:21 PM.
The immediate trigger for the sell-off was the notification of a higher and more rigid cigarette excise duty structure, which significantly raises the overall tax burden on cigarette manufacturers.
The Centre notified on Thursday that from February 1, pan masala, cigarettes, tobacco and similar products will attract a Goods and Services Tax (GST) rate of 40%, while bidis will attract 18% GST.
For ITC, whose cigarette business remains its largest profit contributor despite diversification into FMCG, hotels and agri-business, the excise hike has direct implications for margins, volumes and cash flows. Analysts estimate that the company will need to raise cigarette prices sharply over the coming months to offset the higher taxes, with some projections pointing to cumulative price hikes of 20 percent or more across segments.
This expected price increase has heightened concerns about demand elasticity in a category that has already seen volumes remain subdued in recent years. Brokerages warned that higher retail prices could accelerate downtrading to cheaper alternatives or push consumers towards illicit and unregulated products, which would further erode legal cigarette volumes. The possibility of a renewed volume decline has forced analysts to cut earnings estimates for the next two to three financial years, reversing the more stable outlook that had prevailed for ITC until recently.
Following the tax announcement, several domestic and global brokerages downgraded the stock and lowered their target prices, citing a less favourable risk-reward profile in the near to medium term. The downgrades were driven by expectations of slower earnings growth, pressure on return ratios and the likelihood that the market will assign a lower valuation multiple to the cigarette business due to increased regulatory and tax uncertainty. Some analysts also flagged that the visibility on pricing power has diminished, as aggressive price hikes could have unintended consequences for volumes and market share.
The market reaction was swift, with heavy institutional selling pushing ITC shares to levels last seen nearly three years ago. The decline also weighed on the broader FMCG space, given ITC’s significant weight in key indices, and dragged down sentiment across tobacco-related stocks. Investors who had held the stock for its steady dividends and defensive characteristics appeared to reassess their positions as the outlook for cash generation from cigarettes came under question.
While ITC’s non-cigarette businesses continue to show gradual improvement, analysts broadly agreed that these segments are not yet large or profitable enough to fully offset any sustained weakness in the core tobacco business. As a result, the stock’s near-term trajectory is expected to remain closely tied to how effectively the company manages price increases without triggering a sharp fall in volumes, and whether the impact of the tax hike proves to be a one-time adjustment or the start of a more punitive regulatory phase.
Overall, ITC’s fall to a three-year low reflects a decisive shift in market sentiment, driven by policy risk, earnings downgrades and valuation resets. Until there is greater clarity on volume trends and pricing outcomes following the excise hike, analysts expect the stock to remain under pressure despite its strong balance sheet and long-standing reputation as a high-dividend, defensive play.