ITC slides to three-year low as tobacco excise hike prompts brokerage downgrades

Mumbai: Shares of cigarette-to-consumer goods conglomerate ITC closed at a three-year low on Friday, extending losses to the second straight session after most brokerages downgraded it following the government's announcement of an additional excise duty on tobacco products effective February 1. The stock fell 3.8% to ₹350.1 on Friday, after plunging close to 10% on Thursday. Most brokerages downgraded the stock from bullish calls to cautious or bearish ratings after the excise duty hike, as the move is seen as increasing cigarette prices, which is feared to dampen demand. Nuvama, which downgraded ITC from 'buy' to 'hold', said, "While we expected a sharp tax hike on cigarettes, the magnitude seems higher than anticipated, likely prompting consensus downgrades to ITC's cigarette volume and EBITDA (earnings before interest, tax, depreciation, and amortisation) estimates as well as multiples." The stock's Friday closing is the lowest since February 2023, reflecting concerns over the impact of a squeeze on the company's cigarette unit on overall profitability. ITC's cigarette business, its most profitable segment, contributes over 40% to the overall revenue. "The drastic announcement of a GST hike to 40% and excise duty based on cigarette length could lead to ITC hiking prices by 20-30%," said Sonam Srivastava, founder and CEO of Wright Research. "Since 40% of the company's revenues come from cigarettes and the segment contributes 80% of profits, the impact is expected to be significant." Heavy volumes suggested institutional selling, keeping near-term sentiment cautious.126316231 "While ITC's FMCG, agri, and other businesses continue to grow, they are not yet large enough to fully offset any meaningful impact on cigarette profits," said Mayank Jain, market analyst at Share.Market. He noted the stock may remain volatile, with rallies facing selling pressure until there is clarity on price hikes and volume trends. "Conservative investors should look for a sustained weekly close back above the ₹400 level, which would confirm that the market has fully 'digested' the tax news and that buying conviction has returned," said Jain. He cautioned that until such a reversal emerges, the risk of "catching a falling knife" remains high, and waiting for a stabilised base near the ₹330-₹345 zone may offer a better risk-reward. Srivastava said further slides cannot be ruled out and may present buying opportunities, but investors should avoid the stock for now, given the core business impact. "The price correction has been severe in the last two days, but investors are advised not to buy the stock yet," she said. "Once the news settles and there is further clarity by February, investors can consider buying." Brokerage Motilal Oswal also downgraded ITC to 'neutral' from 'buy', with a target price of ₹400. "Earnings pressure on cigarettes would take away the near-term catalysts (soft tobacco prices, recovery in FMCG and Paper) and comfort on valuation," the brokerage said in a note.