Shares of ITC Limited have faced a considerable downturn, slipping 23% this year, largely due to a substantial increase in cigarette taxation implemented on February 1, 2026. The government has replaced the previous compensation cess structure, elevating the core Goods and Services Tax (GST) on cigarettes from 28% to 40% of the retail price.
Brokerage Projects Significant Price Adjustment
According to analysis by brokerage firm Motilal Oswal, ITC may need to implement a 35% hike in the Maximum Retail Price (MRP) across its cigarette portfolio. This unprecedented price adjustment, based on historical product mix, is deemed necessary for the company to maintain an EBIT (Earnings Before Interest and Taxes) neutral position.
"The revised cigarette taxation structure marks one of the sharpest hikes historically," stated Motilal Oswal. While ITC has historically responded to tax increases with immediate price adjustments to preserve EBIT, the brokerage suggests that "given the quantum of tax increase this time, this approach is unlikely" to fully mitigate the impact without a substantial hike.
Market Outlook and Target Price
Motilal Oswal has assigned a target price of Rs 300 for ITC shares, representing a 7% upside from the current market price of approximately Rs 280. The firm maintains a 'Neutral' rating on the stock, basing its valuation on a Sum of the Parts (SoTP) method, implying an 18x P/E multiple for March 2028 estimated earnings.
The brokerage anticipates a 10% fall in cigarette segment volumes for fiscal year 2027 (FY27E) and expects flat volumes in FY28E. This projected earnings pressure from the cigarette business is likely to overshadow potential near-term positive catalysts from ITC's Fast-Moving Consumer Goods (FMCG) and Paper segments.
Potential Scenarios: Bear vs. Bull Case
Motilal Oswal's report outlines both bear and bull case scenarios for ITC's performance:
- Bear Case: A full pass-through of the steep tax hike could lead to a sharp 20% decline in revenue and a 28% contraction in EBIT. This scenario factors in an accelerated shift by consumers towards illicit cigarettes due to the higher prices.
- Bull Case: This more optimistic outlook assumes better consumer absorption of the price increase and limited downtrading. Under this scenario, revenue decline would be restricted to 8%, with a more moderate 11% decline in cigarette EBIT, supported by price and mix benefits.
While valuations for ITC shares remain "comfortable," the brokerage concludes that "we do not see any near-term positive catalyst" for significant upward movement, given the current tax environment and its anticipated impact on the core cigarette business.
Disclaimer: This article provides market news for informational purposes only and should not be construed as investment advice. Consult a qualified financial advisor before making investment decisions.