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ITC - expensive smoke to affect volumes and dent earnings in FY27

ICICIdirect Research 09 Jan 2026 DISCLAIMER

Government has announced significant increase in the tax rate on cigarettes in the range of 20-55% (depending on various sizes) after a brief period of stable tax environment over FY22-25.
Revised Excise duty on the cigarette stands in the range of Rs 2,100/1000 sticks to Rs 8,500/1000 sticks depending on the size of the cigarettes. This will be over and above the GST rate hike to 40% from 28% on cigarettes.
Considering the portfolio mix, ITC will see weighted average increase of ~25% in the tax rate on its cigarette portfolio. The company has to take price increase of 25% in its portfolio to fully mitigate the tax hike impact.
As per historical evidences, ITC’s cigarette business will witness 5.5% decline in the sales volume considering 18-19% price hike in the portfolio in FY27. It takes around 2-3 quarters for price hikes to get absorb in the market.
Further, we expect some of shift happening from kings/longs to regular in the near term. This will have impact on the margins of the ITC’s cigarette business, which constitutes 80%+ to the overall EBIDTA of ITC’s standalone entity.
Hence, we expect overall EBIDTA margins to decline by 128bps YoY to 33.6% in FY27 (PAT to grow by ~4%).  
View: We have reduced our earnings estimates by 7.4% and 5.7% in FY27E and FY28E respectively. The stock has corrected by 16% in last nine days. We expect it to remain at current levels unless there is clarity on exact price hike the company would taking and its impact on the volumes. We have downgraded it to Hold with a revised price target of Rs385.
Upside risk to our view: Government decides to remove National calamity contingent duty (NCCD), it will lead to tax saving of Rs. 0.5 to 1 per stick. If ITC manages to increase prices in-line with tax hike and able to maintain margins on yoy basis, then earnings growth will be better than expected for FY27. This might act as a upside risk for the stock.

View our research recommendation on ITC Ltd Also explore more on Research page

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