ITC Stock Plummets 14%: Excise Duty Hike Wipes Out ₹72,000 Crore

Introduction

Shares of ITC Ltd. experienced a significant decline, falling over 14% in the first two trading days of 2026. The sharp sell-off was triggered by a government announcement of a new excise duty on cigarettes, ending a period of stable taxation for the industry. This sudden move erased approximately ₹72,000 crore from the company's market capitalisation and resulted in substantial notional losses for its major public shareholders, including state-owned insurance companies.

The Catalyst for the Decline

The primary driver behind the stock's plunge was the government's decision to impose a new Additional Excise Duty and cess on cigarettes and tobacco products, effective from February 1, 2026. This development surprised the market, as such announcements are typically made during the Union Budget. The cigarette business is ITC's largest revenue contributor, accounting for a significant portion of its total income. The news of a higher tax burden prompted immediate and intense selling pressure from investors, leading to the stock hitting a fresh 52-week low.

Market Reaction and Stock Performance

On January 2, ITC shares plunged 5% to a 52-week low of ₹345.25 before recovering slightly to close at ₹350.10, down around 4%. Over the two-day period, the stock fell more than 14%. This sharp correction wiped off ₹72,000 crore from the company's market capitalisation, which now stands at approximately ₹4,38,639 crore. The sell-off also weighed on the Nifty FMCG index, which was the only sectoral index trading in the red, slipping over 1% primarily due to ITC's performance.

Impact on Major Institutional Investors

The decline had a significant impact on state-run insurers, which are among the largest public shareholders in ITC. As of the September 2025 quarter, Life Insurance Corporation of India (LIC) held a 15.86% stake in the company. The two-day fall resulted in a notional loss of over ₹11,468 crore for LIC, with the value of its holding dropping from ₹80,028 crore to ₹68,560 crore.

Other state-owned insurers also faced substantial notional losses. General Insurance Corporation of India (GIC), holding a 1.73% stake, saw a notional loss of around ₹1,254 crore. The New India Assurance Company Limited, with a 1.4% stake, incurred a notional loss of ₹1,018 crore. In total, these three state-run insurers saw their portfolios diminish by a combined ₹13,740 crore. It is important to note that these are notional losses and will only be realised if the insurers sell their shares at these lower prices.

Financial Implications and Future Outlook

Market experts and brokerage firms have warned that the new tax structure could force cigarette manufacturers to implement significant price hikes, potentially between 20% and 40%, to protect their margins. Such a move carries two primary risks: a potential decline in sales volume as consumers react to higher prices, and an increase in the illicit cigarette trade, which could undermine both company revenue and government tax collections. Analysts suggest that if companies choose not to pass on the tax burden, their EBIT (Earnings Before Interest and Taxes) could be impacted by over 40%.

Brokerage Views and Recommendations

The sudden tax hike prompted a flurry of downgrades from brokerage houses. Motilal Oswal downgraded ITC to a 'Neutral' rating with a target price of ₹400. Prabhudas Lilladher recommended a 'Reduce' rating with a target of ₹348. Nuvama also downgraded the stock to 'Hold' and cut its target price to ₹415, citing concerns over volume pressure and a potential hit to EBITDA from FY27 onwards. However, some analysts, like Jefferies, maintained a 'Buy' rating, arguing that while the move is a near-term negative, ITC's strong cash flows and high dividend payouts could cushion the impact for long-term investors.

Technical Analysis and Investor Strategy

From a technical standpoint, the stock is at a critical juncture. Analysts point to ₹350 as a crucial support level. If the stock holds above this level, a gradual recovery could be possible. On the upside, ₹375 is seen as a major resistance level, and a decisive break above it would be necessary for a sustained recovery. For existing investors, experts advise patience and avoiding panic selling. For new investors looking to enter, a staggered approach of buying in small quantities is recommended until there is more clarity on the full impact of the tax changes and market sentiment stabilises.

Conclusion

The government's new excise duty on cigarettes has introduced significant uncertainty for ITC and the broader tobacco industry. The immediate market reaction has been severe, reflecting concerns over future profitability and sales volumes. The company's ability to navigate the price hikes without significantly impacting demand will be crucial. Investors will be closely watching for the fine print of the new tax regime and the company's strategic response in the coming months.