ITC’s share price fell sharply to a three‑year low after the government announced a massive 50% increase in cigarette taxes, putting pressure on the company’s earnings.
What the tax change means
Starting February 1, the new tax will raise the cost of each cigarette by about half. To keep its profit per stick, ITC will need to raise retail prices by at least 25%, and some analysts say a 40% price hike may be required.
Broker reactions
- Motilal Oswal cut its target price to ₹400 and moved its recommendation from “Buy” to “Neutral”.
- Jefferies downgraded ITC to “Hold”, warning that a full pass‑through of the tax could mean a 70% effective tax increase.
- Other brokers also lowered their outlooks, citing the risk of falling sales volumes.
Potential impact on sales and earnings
Higher prices usually lead to lower consumption. When ITC raised prices by mid‑teens in 2015‑16, its cigarette volumes fell by more than 15%. The new tax could repeat that pattern, especially because the tax is calculated on the final retail price (an ad valorem component).
Until now, stable taxes helped ITC grow cigarette volumes by about 5% a year and shrink the illicit market share. That growth momentum may reverse.
Why some analysts stay cautiously optimistic
- The company offers a dividend yield of roughly 4% with an 85% payout ratio, providing a cash buffer.
- ITC’s non‑cigarette businesses—foods, snacks, and paper—could benefit from lower GST rates and a pending paper business acquisition.
- Raw material costs for tobacco may ease in later fiscal years, offering some relief.
Bottom line for investors
The tax hike creates immediate headwinds for ITC’s core cigarette business, likely limiting short‑term upside. However, the company’s diversified portfolio and dividend payout may soften the blow for long‑term holders.
Remember, this is just analysis, not a prediction. Do your own research and consider your risk tolerance before making any investment decisions.