Cigarette Margins Go Up in Smoke Under New Tax — So, Why Are Brokerages Bullish?

Cigarette companies reported a bruising first quarter of FY27, with margins compressed across the sector after a sweeping change to how tobacco is taxed. Yet several brokerages have turned more constructive on the sector's largest player, ITC, even as they acknowledge the pain in the numbers.

ITC's cigarette EBIT fell 35.1% year-on-year, with margins contracting 888 basis points to 62.5%, according to Nomura. Godfrey Phillips and VST Industries saw similarly steep margin erosion, with EBITDA down 46.3% and 35.4% respectively.

The reset stems from a change effective February 1, when the government replaced the GST compensation cess on cigarettes, tobacco and pan masala with a higher 40% GST slab and a new per-stick additional excise duty, alongside a health and national security cess. 

Nomura upgraded ITC to Buy with a target price of Rs 340, arguing that the "worst seems behind" and risk-reward is now favourable. The brokerage said cigarette volume decline of 5% was better than its estimate of a 10% fall, even though the EBIT decline of 35% exceeded expectations. It expects EBIT per stick to recover to pre-tax hike levels by the fourth quarter of FY27.

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Jefferies, which also upgraded ITC to Buy with a target of Rs 350, said it was "positively surprised" by the volume resilience despite the roughly 50% tax hike. The brokerage attributed the earnings miss to gradual price hikes and a series of interventions designed to avoid a sharp, knee-jerk reaction among consumers, and expects the volume trend to give management the confidence to push through further price increases.

Kotak Institutional Equities retained its Buy rating, noting that even as the cigarette EBIT print was weak, ITC has "largely protected volumes" and is "playing the portfolio strategy well." The brokerage expects the EBIT decline to moderate through FY27, supported by calibrated price hikes and downtrading of price-sensitive consumers within the portfolio, from king-size filter tips to longs and from regular filter tips to premium variants.

Not Every Brokerage Is Convinced

Some remain cautious. JPMorgan kept a Neutral rating with a target of Rs 310, pointing to a "significant reset" across ITC's cigarette portfolio as the company navigates the higher tax regime, though it expects EBIT-per-stick neutrality closer to the fourth quarter.

Macquarie cut its target price to Rs 300 from Rs 330, retaining a Neutral rating, and flagged "timing uncertainty" around when cigarette EBIT will normalise. HSBC, which maintained a Hold rating with a target of Rs 320, expects the year-on-year EBIT contraction to narrow to nearly flat by the fourth quarter of FY27.

Why The Bulls Are Holding Firm

Across the more bullish notes, the common thread is that ITC has prioritised defending market share and staving off illicit trade over protecting near-term margins, a strategy brokerages view as the right call given the scale of the tax shock. Staggered price hikes and more than 30 portfolio interventions across brands and price points, spanning new variants and pricing architecture changes, are aimed at cushioning the blow to consumers without triggering downtrading to the illicit market.

The FMCG-Others business also provided support, with revenue up 12% and EBIT up 20.9%, helping offset some of the cigarette segment's weakness.

For brokerages turning positive, the bet is straightforward: volumes have held up better than feared, pricing power remains intact, and margins should claw back toward pre-tax-hike levels as staggered price increases work their way through the portfolio over the coming quarters.

ALSO READ: ITC's Biggest Challenge Isn't Demand; Analysts Say Tax Reset Will Decide FY27

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