ITC's phased cigarette price hikes: Will the strategy pay off? Share price target

MOFSL on Wednesday said it is cautious on FMCG major ITC Ltd, saying earnings from its cigarette business are under a cloud as the segment faced its most disruptive regulatory reset since the implementation of GST 2.0. The brokerage noted that ITC had adopted a calibrated and phased price hike strategy, rather than passing on the entire tax increase upfront.

According to MOFSL, the approach aimed to limit migration to the illicit cigarette market and help legal players retain market share. It believes the volatility in cigarette volumes and EBIT is likely to moderate after the initial transition phase.

To recall, effective February 1, the revised taxation framework resulted in an estimated 60-65 per cent surge in cigarette taxes for ITC, implying the need for around 35 per cent hike in MRPs. This, MOFSL said, was the steepest hike seen historically and a sharp departure from the largely stable tax regime maintained during 2018-25. 

The transition itself was unusual due to the one-month gap between the announcement on January and the implementation from February 1, compared to the typical immediate or near-immediate execution seen historically.

MOFSL said positive catalysts such as improving FMCG performance and paperboard margin normalisation are overshadowed by the cigarette earnings headwind stemming from illicit competition, constrained pricing flexibility, and the inevitable volume-versus-margin trade-off that defines ITC's near-term trajectory. 

"We maintain our Neutral rating with an SoTP-based target of Rs 300 (18x Mar'28E EPS)," MOFSL said.

Cigarette price hikes: Two phases

MOFSL dividend the prevailing phase in two stages. The first stage represents a transitionary adjustment period wherein ITC is gradually taking price increases to eventually reach tax-neutral levels. 

"During this phase, the company focuses on balancing steady price hikes and market share protection while continuously assessing consumer response, competitive actions, and illicit trade dynamics across markets. Although this strategy may temporarily hurt cigarette unit economics and margins, it reduces the risk of sharp consumer disruption that could emerge from an immediate steep price reset," MOFSL said.

The second phase, MOFSL said, would emerge once the full tax increase is absorbed into retail prices and the competitive equilibrium between legal and illicit trade stabilises. 

By then, the extent of consumer dropouts, particularly among price-sensitive segments, should become clearer, enabling the industry to operate in a more predictable demand environment, MOFLS said.

Will the strategy pay off?  

The broking firm said ITC’s product portfolio, innovation pipeline, and premiumization strategy in the normalised phase  will play a critical role in rebuilding the growth momentum and defending its market positioning. Given the MRP revisions are still underway, the outlook for ITC’s cigarette business remains uncertain, it said.

"We do not rule out any possibility for further earnings cuts. That said, the extent of consumer acceptance for revised prices will be a key monitorable. We model 15 per cent revenue decline and 19 per cent dip in EBIT in the cigarette business in FY27," MOFSL said.

Non-cigarette segment  MOFSL said ITC’s non-cigarette business continued to exhibit structural improvement. FMCG remains a key growth driver, with FY26 revenue implying a 10 per cent CAGR over FY19-26, alongside Ebitda margin expansion of 450 bps to 10 per cent over same period. 

"The portfolio now has four franchises with consumer spends in the INR20-50b range, reflecting increasing scale and diversification. We model a 10 per cent revenue CAGR over FY26-28E for the segment. Meanwhile, Agri and Paperboards are positioned for a gradual recovery," MOFSL said.