ITC Stock Downgraded After Shock Excise Duty Hike 2026

Introduction: A Major Setback for ITC

Shares of ITC Ltd. experienced their most significant single-day drop in six years, plummeting nearly 10% on January 1, 2026. The sharp decline, which wiped out over ₹50,000 crore in market capitalization, was triggered by a government notification of a steep and largely unexpected hike in excise duty on cigarettes. This move abruptly ended a period of stable taxation that had benefited the legal cigarette industry. In response, a wave of brokerage firms swiftly downgraded the stock, cut their price targets, and revised their earnings estimates, signaling significant headwinds for the company's primary revenue driver.

The Catalyst: An Unprecedented Tax Hike

The government's notification, effective February 1, 2026, imposes a new excise duty structure on cigarettes, with rates ranging from ₹2,100 to ₹8,500 per thousand sticks, depending on their length. Analysts estimate this translates to an effective tax increase of over 30%, a move described as a "fiscal bombshell." Motilal Oswal noted that such a sharp increase is unprecedented, especially given the stable tax environment of the past few years which had helped curb the illicit cigarette market and allowed ITC's volumes to grow at a 5% CAGR.

Immediate Market Reaction

The market's reaction was immediate and severe. On Thursday, January 1, ITC's stock closed 9.72% lower at ₹363.85 on the NSE, a level not seen since April 2023. The sell-off was driven by concerns that the company would be forced to implement substantial price hikes, which could significantly impact sales volume and profitability. The move created widespread uncertainty among investors about the near-term growth prospects of ITC's cigarette division.

Barrage of Brokerage Downgrades

Following the announcement, leading financial institutions reassessed their outlook on ITC, resulting in multiple downgrades and target price reductions. The consensus among analysts is that the tax hike will pressure earnings and necessitate a de-rating of the cigarette business's valuation multiples.

Core Concerns Driving the Downgrades

Analysts' concerns are centered on several key issues. Firstly, the magnitude of the required price increase is substantial. Motilal Oswal and JPMorgan estimate that ITC may need to hike prices by 25% to 35% just to maintain its current net realization per stick. Such a steep increase is expected to lead to a significant decline in cigarette volumes. PhillipCapital projects a 12.5% volume decline in FY27, while DAM Capital forecasts a 7% de-growth.

Secondly, there is a heightened risk of consumers down-trading to cheaper, shorter cigarettes or, more critically, shifting to the illicit market. A stable tax regime had previously helped the legal industry gain ground against smuggled products. This sharp hike threatens to reverse that trend, potentially undermining both corporate earnings and government tax revenues.

Impact on Financial Projections

The anticipated volume decline has led to significant cuts in earnings forecasts. Nuvama, for instance, has lowered its EBITDA estimates for FY27 and FY28 by 7% each and cut its EPS estimates by nearly 7%. The brokerage also reduced the valuation multiple for ITC's cigarette business from 23 times to 17 times forward earnings, stating that the tax hike warrants a de-rating. Similarly, Motilal Oswal reduced its valuation multiple for the business from 17 times to 14 times.

Mitigating Factors and Long-Term View

Despite the overwhelmingly negative short-term outlook for the cigarette business, several brokerages stopped short of a 'sell' rating. Nuvama cited ITC's strong dividend yield of around 4% (with an 85% payout ratio) as a key support for the stock. Additionally, analysts pointed to positive developments in ITC's other business segments.

Favorable raw tobacco costs are expected in FY27, which could provide some margin cushion. Furthermore, ITC's large foods portfolio stands to benefit from potential GST rate cuts, and its paper business, bolstered by the Century acquisition, is expected to see margins improve. These diversified revenue streams provide a degree of resilience that pure-play tobacco companies lack.

Conclusion: Navigating a New Reality

The government's decision to impose a steep excise duty hike has fundamentally altered the operating landscape for ITC. The era of predictable, stable taxation appears to be over, replaced by a period of uncertainty and margin pressure. While the company's diversified business model and strong cash flows offer some protection, the near-term outlook is dominated by the challenge of managing declining cigarette volumes and protecting profitability. Investors will be closely watching how ITC navigates these headwinds and whether the growth in its non-tobacco segments can offset the pressure on its core business.