Tax shocker makes Nuvama downgrade ITC shares, says cigarette costs can go up 20%

Home brokerage agency Nuvama Institutional Equities has downgraded ITC shares from purchase to carry, warning {that a} very sharp hike in cigarette taxation is more likely to pressure worth will increase of no less than 20% on key manufacturers beginning February.

Nuvama additionally sharply minimize its tobacco valuation a number of, arguing that the newest authorities transfer marks a transparent break from the comparatively benign tax regime that had supported a gentle restoration in authorized business volumes in recent times.

ITC shares fell round 10% to hit a 52-week low on Thursday after the federal government notified a pointy rise in excise obligation on cigarettes late Wednesday.

“Whereas we anticipated a pointy tax hike on cigarettes, the magnitude seems larger than anticipated, probably prompting consensus downgrades to ITC’s cigarette quantity and EBITDA estimates in addition to valuation multiples,” stated Abneesh Roy of Nuvama in a report.

“After almost 6% quantity development in FY26, we now anticipate each cigarette volumes and cigarette EBITDA to say no in FY27,” the brokerage stated, drawing parallels with the FY13-17 interval when “harsh” obligation will increase resulted in weak tax buoyancy.

Nuvama famous that between FY13 and FY17, cigarette duties rose at a 15.7% CAGR, whereas revenues elevated simply 4.7%. It warned {that a} related squeeze may as soon as once more push consumption in direction of illicit and smuggled merchandise, undermining the federal government’s income aims whereas hurting ITC’s authorized franchise. The brokerage additionally expects non permanent “front-loading” of volumes and manufacturing in January 2026 forward of the February 1 implementation, however harassed that this could not alter the broader bearish quantity outlook for FY27.

Reflecting the modified panorama, Nuvama minimize its 12-month goal worth on ITC to Rs 415, valuing the tobacco enterprise at 17x one-year ahead earnings versus 23x earlier. “We now have lowered our FY27E/FY28E income estimates by 4.9% and eight.3%, respectively, and EBITDA by 7% every, resulting in a 6.7–6.8% minimize in EPS,” the report stated, including that “the magnitude of the tax enhance warrants a de-rating of the cigarettes enterprise.”Nevertheless, the brokerage stopped in need of a cut back or promote name, citing ITC’s comparatively enticing money returns and the rising contribution from its non-tobacco companies.

“We retain a constructive view on ITC’s capital allocation and dividend coverage,” Nuvama stated, highlighting an “round 85% payout” and a dividend yield of about 4%, which it believes will “assist the inventory” amid near-term earnings downgrades. The be aware added that tobacco leaf prices are anticipated to show “beneficial” in FY27, cushioning cigarette margins to some extent at the same time as volumes take a success.

On diversification, Nuvama remained constructive on ITC’s FMCG and paperboard portfolios. The report stated GST price cuts in choose meals classes are “a tailwind” for ITC’s giant meals enterprise and reiterated that the FMCG-Others division is on observe to ship an “EBIT margin of 9.5% by FY27–28,” supported by scale advantages and an bettering product combine.

In paperboards, packaging and specialty papers, together with the Century acquisition, Nuvama expects margins to backside out by FY27, with a restoration in demand and easing enter prices serving to offset among the stress from the core cigarettes enterprise.