ITC share: Target cuts amid fears of 23-50% hike in cigarette prices; stock still a buy?

ITC Ltd saw a couple of brokerages slashing their target prices by up to 40 per cent, as they fear the cigarette maker needs a price hike of at least 25 per cent at a portfolio level just to maintain the current net realization per cigarette stick. They noted tha the government had revised GST rate on cigarette from 28 per cent to 40 per cent, which will also implement from February 1, thus posing risk to ITC's cigarette volumes.

Analysts largely suggested 'Hold' or 'Reduce' on the stock following the development.  At 9.20 am, the scrip was trading 4.56 per cent lower at Rs 347.35 apiece.

PL Capital said the excise duty will increase the product prices by 23-50 per cent and hit volumes by 12.5 per cent in FY27. The imposition of sharp duty, it said, showed a major shift in benign duty structure stance of GOI which had resulted in industry gaining lost ground from illicit trade in past few years. 

"As new rates imposed are 29-43 per cent lower than peak rates mentioned in excise act, this opens a pandora’s box for future increase in excise duty," PL Capital said.

The current move takes the overall taxation on cigarettes from 50 per cent to 61 per cent, which is still significantly lower than WHO recommended rate of 75 per cent, analysts said.

"Although benefits of lower leaf tobacco prices and some price hikes will improve margins, overall profitability will suffer in medium term. Despite expected uptick in profitability in FMCG and Paperboard, we now expect ITC to post an EPS CAGR of only 4.5 per cent over FY26-28. We cut SOTP based target price to Rs 348 (based on September 27, Rs 528 earlier) and cut the rating to 'Reduce'," PL Capital said.  The target cut stands at 34 per cent.

Emkay Global has cut its rating on ITC to 'Reduce' from 'Add', as it sees the proposed excise duty rates for cigarettes hurting near-to-medium term outlook. This brokerage sugested a target of Rs 350 (Dec-26E) from Rs 475 (Sep-26E), as it cut its earnings estimates to factor in the impact of the tax increases. 

"On the existing MRP, we see the tax payout per stick rising by 50 per cent across KSFT, LSFT, and RSFT, and by 26 per cent for DSFT. We expect the portfolio to witness price hikes of 32 per cent in a staggered manner. Such regulatory actions negate our assumption of a rational taxation stance and are likely to have a bearing on the valuation multiple. Per our SOTP-based valuation, the cigarettes business is at 13 times P/E now vs 17 times earlier," it said.

MOFSL said such a sharp tax increase is unprecedented and has surprised us given the backdrop of stable taxes over the last few years. 

Tax stability had impacted the illicit cigarette market, as its volume share contracted by 150 basis points over the last 4-5 years. ITC enjoyed this period, as its cigarette volume saw 5 per cent CAGR in the last five years, and the stock has run up over 50 per cent, MOFSL said.

"New rates will increase the taxes on cigarettes by 50 per cent (assuming NCCD continues). ITC will need a price hike of atleast 25 per cent at a portfolio level just to maintain the current net realization per cigarette stick," it said. 

Morgan Stanley has reportedly cut its target price on ITC to Rs 366 from Rs 469. JPMorgan has cut its target to Rs 375 from Rs 475, Jefferies to Rs 400 from Rs 535, Nuvama Rs 415 from Rs 534 and Nomura to Rs 340 from Rs 540.