The company lost almost ₹1 lakh crore from its market capitalization because of new cigarette tax increases which were implemented in December. The stock market has decreased by almost 20% which has brought the FMCG company into focus because investors want to understand upcoming tobacco tax changes before the Union Budget 2026.
The severe decline has changed ITC from its normal position as a reliable stock into an essential Budget-related investment which investors watch for signals about official government policies.
Policy-Driven Sell-Off, Not Business Weakness
The recent market correction occurred because new regulations changed existing rules without affecting the fundamental performance of ITC’s business activities. The company generates its highest profits from cigarette sales, which have experienced major changes because of new tobacco tax regulations that impact short-term profit expectations.
The new tax system effective February 1 2026 applies excise taxes between ₹2050 and ₹8500 for every 1000 cigarette sticks. The new policies have increased total tax obligations which has led to worries about decreased demand and reduced profit margins and increased illegal trade activities.
Analyst Views: Margins Under Pressure, Volumes at Risk
Market experts broadly agree that the decline reflects a sudden policy reset. Vincent KA of Geojit Investments said the sharp excise hike triggered the sell-off and noted that ITC may respond with price increases, as seen historically. However, he warned that higher prices could impact volumes in the near term.
Abhishek Jain, Head of Research at Arihant Capital Markets, termed the situation a “double hit,” pointing out that cigarettes are now effectively taxed at nearly 40% when excise duties are combined with GST.
Illicit Trade Concerns Resurface
Analysts caution that excessive taxation could accelerate demand erosion in a price-sensitive market like India. There are also growing concerns that higher prices may fuel illegal cigarette trade. With the increase in taxes, the Tobacco Institute of India has warned that farmers, manufacturers and the entire supply chain will suffer, alongside other negative consequences.
Budget 2026: Will There Be Another Tax Hike?
Most brokerages do not anticipate an additional tobacco tax increase in Budget 2026. Motilal Oswal believes investor focus will remain on whether the non-compensatory cess continues and if any duty rationalisation is announced—both of which could act as positive triggers.
Nuvama expects no further increase, arguing that cigarette taxes have already been raised significantly. Similar views were echoed by Bonanza’s Nitant Darekar, who said the December 31 overhaul followed the expiry of the compensation cess and left limited room for further action in the upcoming Budget.
Diversification Offers Earnings Cushion
Despite near-term headwinds, ITC’s diversified business portfolio provides stability. The company operates across FMCG, hotels, paperboards, packaging, and agri-business, which analysts say could help offset pressure in cigarettes.
In the December quarter, ITC reported a 6.2% year-on-year increase in revenue, driven by strong growth in FMCG-Others and steady cigarette performance. Cigarette revenues increased by 8% because of 7% volume growth which led to lower operating profits that reached 59.9% because of high raw material expenses.
The management team provided information that current leaf tobacco prices have decreased during the present crop cycle which will help improve profitability in upcoming periods.
Valuation Looks Attractive, But Risks Remain
After the recent correction, market sentiments are restored with better valuations, but still awaiting to hear favorable budget announcements. Prashanth Tapse of Mehta Equities said the stock is factoring in near-term margin pressure and volume moderation. He added that continued policy risk around “sin goods” could limit sharp upside.
The ITC stock shows a short-term downtrend which establishes ₹300–₹310 as its main support level.
Centrum Broking maintained a neutral outlook, citing the absence of near-term catalysts and expects cigarette profitability to remain under pressure in FY27. It has set a target price of ₹355, reflecting a measured stance despite the sharp fall.
Disclaimer: The figures cited are the personal opinion of the analysts and don’t reflect any standpoint of the publishers.
