Shares of consumer goods giant ITC Ltd. witnessed a dramatic collapse, plummeting to a three-year low of Rs 345.35 on Friday. This sharp decline extends a brutal two-day selloff that has wiped out approximately 14% of the company's market value. The trigger for this panic selling was the finance ministry's announcement of a steep increase in taxes on cigarettes, sending shockwaves through the market and prompting a wave of analyst downgrades.
Unprecedented Tax Shock Sends Brokerages Scrambling
The Nifty heavyweight fell another 5% on Friday, following a 10% plunge on New Year's Day. At least six brokerages rushed to reassess their outlook on ITC, describing the government's move as an "unprecedented tax shock" to the company's core cigarette business. Effective from February 1, cigarette taxes are set to rise by about 50%.
According to Motilal Oswal, this will force ITC to implement portfolio-level price hikes of at least 25% just to maintain its current net realisation per stick. The brokerage downgraded ITC from 'Buy' to 'Neutral' and slashed its target price to Rs 400. "The magnitude of the tax increase is staggering," analysts noted, adding that to fully offset the levy, ITC may need to raise prices by as much as 40%, assuming no change in its product mix.
Historical Parallels and Fears of Volume Collapse
Jefferies, which downgraded the stock from 'Buy' to 'Hold', issued a stark warning. If the company passes on the full tax impact through price increases, the effective tax burden could soar to nearly 70%. This would push tobacco taxes per stick from about 55% to 65% of the maximum retail price. "To offset the tax burden, ITC will need to implement substantial price increases. Assuming no mix change, ITC requires a 40% price hike just to pass on the impact," Jefferies stated.
Brokerages drew worrying parallels with the past. Jefferies pointed out that during FY15–16, when ITC implemented mid-teen price hikes amid aggressive tax increases, cumulative cigarette volumes fell by over 15%. The current ad valorem tax structure could exacerbate the problem, as higher prices would lead to even higher taxes in a vicious cycle.
Motilal Oswal expressed surprise at the move, citing several years of tax stability that had supported volume growth. "Such a sharp tax increase is unprecedented and has surprised us given the backdrop of stable taxes over the last few years," the brokerage said, cutting its valuation multiple for ITC's cigarette business.
Growth Trends at Risk and Cautious Outlook
Analysts now fear a reversal of the positive trends seen in recent years. Stable taxation had supported cigarette volume growth of around 5% CAGR over five years, while the illicit cigarette market's share declined. JM Financial stated that this new levy pushes potential catalysts, like volume resilience and an EBIT growth uptick, further into the future, adding that concerns over illicit trade are likely to re-emerge.
Despite the overwhelming negativity, some see limited downside from current levels. Nuvama's Abneesh Roy, who downgraded the stock to 'Hold', refrained from a 'Reduce' rating. He cited the company's attractive roughly 4% dividend yield with an 85% payout ratio as a cushion. Roy also pointed to potential medium-term support from easing tobacco raw material costs, benefits to ITC's foods portfolio from GST cuts, and a possible margin recovery in the paper business.
However, the overall sentiment remains deeply cautious. "Near-to-medium term upside now looks capped," warned Jefferies, indicating that ITC shares could remain under pressure as the market fully digests the long-term impact of this significant tax increase on its most profitable segment.
