ITC Shares Sink 10% as Fresh Excise Duty Rekindles Volume and Margin Concerns
Shares of ITC witnessed a sharp sell-off on January 1, plunging nearly 10 percent and touching a near three-year low, after the government announced a steep increase in excise duty on cigarettes. The move rattled investors across the tobacco space, reviving long-standing concerns around volume contraction, pricing pressure, and the risk of consumers shifting to illicit products.
The sell-off marked ITC’s worst single-day decline since February 2022. Other tobacco stocks were also caught in the downdraft, with Godfrey Phillips India tumbling as much as 18 percent, while VST Industries fell over 5 percent during intraday trade.
Government’s Excise Duty Notification Triggers Sharp Market Reaction
Late on December 31, the finance ministry notified a fresh excise duty on cigarettes, effective February 1. The revised duty ranges from Rs 2,050 to Rs 8,500 per 1,000 sticks, depending on cigarette length. This comes at a time when the compensation cess regime under GST is nearing its sunset, prompting a recalibration of tobacco taxation.
Brokerages were quick to flag the announcement as a negative surprise. Analysts at Jefferies termed the move “a clear negative,” warning that higher taxes would likely dent cigarette volumes and increase the risk of consumers migrating to the illicit market.
“This will be a clear negative as volumes will be impacted and concerns would also re-emerge on risk of losing some volumes to illicit industry,” Jefferies said in a note.
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Cigarette Prices May Rise Sharply to Protect Margins
According to brokerages, the new excise duty could significantly raise the overall tax burden on cigarettes. ICICI Securities estimated that the levy translates into a 22–28 percent increase in total costs for cigarettes in the 75–85 mm category.
In a note accessed by CNBC-Awaaz, a brokerage said ITC may need to raise cigarette prices by at least 15 percent to fully pass on the impact of higher taxes to consumers.
“We also note that the revised GST rate on tobacco was recently raised to 40%, which will also have a cascading impact as ITC takes up cigarette price hikes,” the note said.
“Basis our understanding, ITC may need to take up prices by at least 15% to pass on the overall impact to consumers, if not higher.”
For longer cigarettes, which account for a meaningful share of ITC’s portfolio, the price impact could be even more pronounced.
Brokerages Turn Cautious as Volume Risks Re-Emerge
Analysts highlighted that higher cigarette prices have historically resulted in volume compression, particularly in a price-sensitive market like India. ICICI Securities pointed out that cigarettes longer than 75 mm account for around 16 percent of ITC’s volumes and could see price hikes of Rs 2–3 per stick.
Given the sharp move in the stock, ICICI Securities advised investors to exit long positions in ITC January futures, stating that stop-loss levels had been triggered.
Market experts also cautioned that despite ITC’s diversified business model, cigarettes remain a key earnings driver.
“The current excise duty hike is a substantial near-term deterrent to the cigarette operations of the company,” said Siddharth Maurya, Founder & Managing Director at Vibhavangal Anukulakara Pvt Ltd.
“It is also likely to impact the volumes of sales due to prices being forced further upward. Although the company has a diversified business, the sensitivity of earnings to the tobacco sector means the stock price will remain volatile.”
Tax Structure on Tobacco Set to Become Heavier from February
Currently, tobacco products in India attract a complex tax structure comprising:
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28 percent GST
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Compensation cess at varying rates
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Additional excise duties (effective February 1)
From February 1, the GST rate on tobacco products will rise to 40 percent, in addition to the newly notified excise duty and compensation cess. This represents a material increase in the overall tax burden on cigarettes.
The GST Council had earlier decided that the compensation cess would be phased out after repayment of loans taken by the Centre to compensate states for GST revenue losses during the Covid period. The Rs 2.69 lakh crore loan is scheduled to be fully repaid by January 31, 2026.
Illicit Trade Risks Back in Focus
One of the biggest concerns flagged by analysts is the potential resurgence of the illicit cigarette trade. Historically, sharp tax hikes have widened the price gap between legal and illegal products, encouraging downtrading.
Brokerages warned that sustained price hikes could erode ITC’s legal cigarette volumes over time, even if near-term margins are protected through pricing actions.
Key concerns highlighted by analysts include:
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Volume contraction due to higher retail prices
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Increased competition from illicit and unregulated products
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Earnings volatility driven by regulatory uncertainty
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Limited room for further price hikes without demand destruction
Stock Under Pressure Despite Long-Term Diversification
ITC’s stock has been under pressure amid regulatory overhangs, even though the company has made significant strides in diversifying its revenue base into FMCG, hotels, paperboards, and agribusiness.
However, cigarettes continue to contribute a disproportionate share of profits, making the stock particularly sensitive to policy changes in tobacco taxation.
With the latest excise duty hike coming into force from February, investors are bracing for near-term uncertainty around volumes and pricing strategies.
Outlook: Volatility Likely to Persist
While ITC’s strong balance sheet and diversified portfolio offer some cushion, analysts believe the stock could remain volatile in the near term as the market digests the full impact of higher cigarette taxes.
Much will depend on how effectively the company manages price hikes, the response of consumers, and whether enforcement against illicit trade is strengthened alongside higher taxation.
For now, the sharp sell-off reflects renewed regulatory risk premiums being priced into tobacco stocks, with ITC at the centre of investor focus.
