India's ITC Loses $7 Billion as Tax Hike Triggers Downgrades

India's Cigarette Tax Hike Sparks Market Reaction

India’s largest cigarette maker ITC Ltd. wiped out about $7 billion in market value after a government tax hike on tobacco products triggered a wave of brokerage downgrades. Shares of the firm fell as much as 5.1% on Friday, touching the lowest level since February 2023 and extending a near 10% slide from the previous session. At least 11 brokerages, including Goldman Sachs Group Inc., JPMorgan Chase & Co. and Morgan Stanley, downgraded the stock after the government hiked excise duty on cigarettes this week.

Cigarettes will face higher excise duties ranging from 2,050 rupees to 8,500 rupees per 1,000 sticks from Feb. 1, according to a government notification issued late Wednesday. Most market participants now expect some price increases to help offset the tax hike, potentially weighing on demand. An industry body warned that higher levies would hurt the tobacco business and fuel illicit cigarette trade. Higher-than-expected tax burden has stoked concerns over profitability of Asia’s second-largest cigarette maker.

The move also roiled shares of other cigarette makers across the country. Shares of Godfrey Phillips India Ltd. declined more than 20% in two sessions to Friday according to market data.

Why Did This Happen?

The Indian government has announced a new excise duty on cigarettes, which will come into effect from February 1, 2026. This excise duty will be charged per 1,000 cigarette sticks and will be over and above the existing GST, which is already close to 40 percent on cigarettes as per the notification. As per the notification, the excise duty ranges from around ₹2,050 to ₹8,500 per 1,000 sticks, depending on the length of the cigarette.

Cigarettes remain ITC’s most profitable segment. Despite diversification into FMCG, hotels, paperboards, and agri business, a large portion of ITC’s operating profit still comes from cigarettes. Higher taxes generally lead to higher cigarette prices. Analysts expect cigarette prices to rise by ₹2 to ₹3 per stick for certain popular variants after the new duty comes into force.

Higher prices can reduce demand over time, especially in price-sensitive segments. If ITC decides not to fully pass on the tax hike to consumers, its profit margins could come under pressure. Both scenarios are seen as negative for near-term earnings, which explains the sharp reaction in the stock.

How Did Markets React?

The Indian market ended Thursday with the Sensex marginally lower and the Nifty slightly higher, as gains in IT stocks offset losses in FMCG counters like ITC following a new cigarette tax. Trading was thin due to global holidays, with attention now on Q3 earnings, budget cues, and global developments shaping 2026 according to market analysis.

The BSE Sensex slipped 32 points, or 0.04%, to close at 85,188.60, while the NSE Nifty 50 edged up 17 points, or 0.06%, to settle at 26,146.55, hovering comfortably above the 26,100 mark.

ITC (Rs 10,590 crore), Vodafone Idea (Rs 2,472 crore), Hindustan Copper (Rs 1,825 crore), Godfrey Phillips (Rs 1,811 crore), RIL (Rs 1,012 crore), Adani Power (Rs 958 crore) and Dixon Technologies (Rs 835 crore) were among the most active stocks on BSE in value terms according to trading data.

The market sentiments were neutral. Out of the 4,335 stocks that traded on the BSE on Thursday, 2,024 stocks witnessed declines, 2,145 saw advances, while 166 stocks remained unchanged.

What Are Analysts Watching Next?

Analysts at Morgan Stanley said cigarette prices may need to rise by as much as 40% to fully pass on the impact of higher levies to consumers, likely leading to a decline in sales volumes. "We believe the share price reaction already reflects the impact, but stock outperformance could return only once the market is convinced that the volume slowdown has bottomed out," the analysts wrote in a note according to market reports.

Jefferies Financial Group Inc.'s analysts, led by Vivek Maheshwari, wrote in a note that the stock could see more pressure in the near term on the "big tax shock".

Investors are mainly concerned about three things: a possible decline in cigarette volumes after price hikes, pressure on margins if costs are absorbed, and increased regulatory uncertainty around tobacco taxation going forward. The tax announcement follows the passage of the Central Excise (Amendment) Bill, 2025, which allows the government to impose fresh excise duties on tobacco products according to policy analysis. This has added to concerns that taxation on cigarettes could remain high or increase further over time according to market sentiment.

Whether this fall turns into a buying opportunity depends on how effectively ITC manages pricing and how consumers respond to higher cigarette prices after February 2026. From a long-term perspective, ITC’s strong cash flows, diversified businesses, and consistent dividend track record remain positives.

What should ITC investors do after today's fall? Track management commentary on how much of the new excise duty will be passed on to consumers and how pricing changes may impact cigarette sales. Watch upcoming quarterly results for signs of volume impact, margin movement, and any change in guidance related to the cigarette business according to analyst recommendations.

Long-term investors should focus on cash flows, dividend sustainability, and balance sheet strength rather than short-term price swings. Avoid reacting only to daily price movement and base decisions on business fundamentals and long-term strategy according to investment advice.

Market participants now expect some price increases to help offset the tax hike, potentially weighing on demand. An industry body warned that higher levies would hurt the tobacco business and fuel illicit cigarette trade.

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