ITC Shares Fall 10% After New Cigarette Tax Announced

ITC Stock Plummets on New Tax Announcement

Shares of ITC Limited experienced a sharp decline of up to 10% on January 1, 2026, hitting a 21-month low. The significant drop was triggered by the government's announcement of a substantial hike in excise duty on cigarettes and other tobacco products, set to take effect from February 1, 2026. Compounding the market pressure, a large block deal involving over 4 crore shares unsettled investors, leading to a volatile trading session for the diversified conglomerate.

Understanding the New Tax Structure

The Finance Ministry has notified a new tax regime for tobacco products, which includes a 40% Goods and Services Tax (GST). This new structure, effective February 1, 2026, will subsume existing levies like the National Calamity Contingent Duty (NCCD). Additionally, the government has imposed a new excise duty ranging from ₹2,050 to ₹8,500 per thousand cigarette sticks, depending on their length. This move aims to increase revenue and discourage tobacco consumption, bringing the total tax incidence on cigarettes to approximately 53% of the retail price. This is still below the 75% tax rate recommended by the World Health Organisation (WHO) to curb tobacco use.

Market Reacts Sharply to the News

The market's reaction was swift and severe. ITC's stock opened at ₹402.70 but tumbled to a 52-week low of ₹362.70 during the day. This represented the most significant single-day fall for the stock in over eight months. The decline pushed the stock to levels last seen in March 2024, marking its first year of negative returns since 2020, with a 12% decline in 2025. The high trading volume, recorded at over 219 million shares, underscored the intense selling pressure. Other tobacco stocks also faced a downturn, with Godfrey Phillips India plunging nearly 19%.

The Impact of the Large Block Deal

Adding to the negative sentiment was a substantial block deal executed early in the trading session. Over 4 crore shares of ITC, which amounts to roughly 0.3% of the company's total equity, were traded. The transaction was valued at ₹1,614.5 crore, with shares changing hands at an average price of ₹400 each. Such large-scale transactions often signal a shift in institutional investor sentiment and can contribute to short-term price volatility, which was evident in the day's trading pattern.

Financial Implications for ITC's Core Business

The cigarette business remains the financial backbone of ITC, despite its successful diversification into other sectors. For the quarter ending September 2025, the cigarette segment contributed 48% of the company's total revenue, amounting to ₹8,722 crore. The new tax structure poses a direct challenge to this crucial revenue stream. ITC faces a difficult choice: either absorb the increased tax burden, which would compress its profit margins, or pass the cost on to consumers through higher prices, which could lead to a decline in sales volume. The market's steep sell-off indicates that investors are pricing in a challenging period for the company's most profitable division.

Broader Context and Company Strategy

While the tax hike is a significant headwind, ITC has been actively strengthening its non-tobacco businesses. The company is the second-largest FMCG player in India, with popular brands like Aashirvaad, Sunfeast, and Bingo. Its hotels, paperboards, and agribusiness segments also contribute to its diversified portfolio. Recently, ITC successfully demerged its hotels business into a separate entity, ITC Hotels Limited, a strategic move to unlock value. The company has stated its continued focus on portfolio augmentation and structural cost management to navigate near-term challenges. Its investments in digital tools, AI, and sustainability initiatives are part of a long-term strategy to build a resilient and diversified enterprise.

Analyst and Investor Sentiment

Despite the sharp fall, analyst recommendations for ITC remain largely positive. Out of 37 analysts, a majority have maintained 'Strong Buy' or 'Buy' ratings on the stock. Community sentiment also appears optimistic, with 69% of forum participants indicating a 'BUY' call. Some investors view the price correction as a knee-jerk reaction and a potential opportunity to acquire a blue-chip stock at a lower valuation, betting on the inelastic demand for cigarettes and the long-term strength of ITC's diversified business model.

Conclusion and Path Forward

The government's decision to increase taxes on tobacco products has created significant uncertainty for ITC, leading to a sharp correction in its stock price. The immediate challenge for the company will be to manage the impact on its cigarette business without severely affecting its profitability or sales volumes. However, ITC's strong financial position, characterized by being almost debt-free and having a healthy dividend yield, provides a cushion. The performance of its non-cigarette FMCG, hotels, and agri-business segments will be crucial in the coming quarters as the company navigates this new regulatory landscape.