ITC shareholders have seen nearly Rs 1 lakh crore wiped off the company’s market value in just about a month, as the stock corrected close to 20% following a sharp increase in cigarette taxation announced at the end of December. The sell-off has turned one of India’s most widely held defensive stocks into a key Budget talking point, with investors now eyeing Budget to get clarity on the taxation regime.

The correction over the past month has been swift and largely policy-driven. Cigarettes remain ITC’s biggest profit contributor, and the government’s decision to restructure tobacco taxation has materially altered near-term earnings expectations.

The new framework introduced excise duties of Rs 2,050-8,500 per 1,000 cigarette sticks, alongside a 40% GST rate, effective February 1, 2026. This effectively pushed the overall tax burden on cigarettes sharply higher, triggering concerns around demand, margins and the risk of illegal trade.

Analysts broadly agree that the stock’s decline reflects this sudden policy reset rather than any deterioration in ITC’s core business fundamentals. Vincent KA of Geojit Investments said the recent correction is due to steep hike in cigarette excise duty, adding that ITC is likely to respond with price hikes, as it has done historically, to protect margins, though this could weigh on volumes in the near term.

The fear among investors is that steep taxation could accelerate demand destruction, especially in a price-sensitive market like India. Abhishek Jain, Head of Research at Arihant Capital Markets, described ITC’s situation as a “double whammy,” pointing out that the existing 28% GST combined with higher excise duties has effectively moved cigarettes towards a 40% tax regime.

According to him, such high taxation increases the risk of growth in the illicit tobacco market, which could hurt legal volumes and profitability. That concern has also been flagged by the Tobacco Institute of India, which has opposed the recent tax hike, warning of potential losses for farmers and other participants in the value chain, along with a rise in illegal cigarette trade.

What to expect from Budget
Motilal Oswal said that clarity on the continuation of non-compensatory cess and any further changes in the duty structure remains a key monitorable for the stock. Any rationalisation or easing of duties would be a clear positive for ITC and other cigarette makers, it said.

Most brokerages do not expect another immediate tax hike in the upcoming Budget. Nuvama has stated that cigarette taxes have already been increased and it does not expect further hikes in Budget 2026. This view is echoed by several analysts who believe the government has already addressed revenue needs from tobacco through the recent restructuring, leaving limited room for additional measures in the Budget.

Nitant Darekar of Bonanza said the December 31 taxation overhaul was a comprehensive exercise following the expiry of the compensation cess, suggesting limited scope for further tobacco-related action in the Budget.

While he expects near-term pressure on volumes and margins as ITC navigates price increases, he also pointed out that the company’s diversified presence across FMCG, hotels, paperboards and agri-business provides an earnings cushion. He added that ITC’s debt-free balance sheet and steady dividend record remain key structural strengths.

Core business steady
Recent financial performance supports the view that the core business remains intact. In the December quarter, ITC reported a 6.2% year-on-year growth in revenue, driven by double-digit growth in FMCG-Others and steady momentum in cigarettes.

The cigarette business posted 8% revenue growth, supported by 7% volume growth. However, margins in the segment slipped to a multi-quarter low of 59.9%, contracting 163 basis points YoY, largely due to the use of high-cost leaf inventory. Management has indicated that leaf procurement prices have moderated in the current crop cycle, which could support margins in coming quarters.

Axis Securities, in its post-results note, said ITC’s long-term growth trajectory remains intact, even though cigarette volumes could be impacted in the medium term due to higher taxes. It highlighted continued progress in non-cigarette businesses and noted that policy measures, outlet expansion, localisation and premiumisation could support growth in FY27.

Still, sentiment around the stock remains fragile ahead of the Budget. Prashanth Tapse of Mehta Equities said the market factoring in near-term margin pressure and possible volume moderation. While ITC’s pricing power offers some downside comfort, he cautioned that persistent policy risk around “sin goods” is likely to cap any sharp valuation re-rating unless earnings visibility improves.

From a technical perspective, Tapse said the stock remains in a short-term downtrend, with the Rs 300–310 zone acting as a key level to watch.

Valuations, meanwhile, have turned more attractive after the correction, but not all brokerages are convinced this is the right time to step in aggressively. Centrum Broking said it remains neutral on the stock, citing the lack of a near-to-medium-term trigger for business momentum to improve.

It expects cigarette volumes and profitability to remain under pressure in FY27 and has pegged a target price of Rs 355, implying a cautious stance despite the recent fall.

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