It has been a tough time for the ITC stock, which has had to sustain repeated drawdowns and is currently down more than 23% on a year-to-date basis. The shares, in fact, have retreated to 2022 lows, as cigarette tax hike continue to weigh on the outlook of the company.
Against this backdrop, Motilal Oswal has put out a note on the FMCG giant, arguing that cigarette price hike cycle may not be over yet. The brokerage suggests in order for ITC to remain earnings-neutral, they will have to increase maximum retail prices of cigarettes by more than 35% across its portfolio.
The impact is already visible on store shelves. A pack of ITC's popular premium cigarettes, which used to retail for Rs. 170 earlier, now costs Rs. 240. This accounts for a jump of over 41%. The Gold Flake King Blue, Gold Flake King Mixpod, and Classic Ice Burst have all been revised to Rs. 25 per stick from Rs. 18.
But Motilal Oswal warns that ITC has not passed on the full tax burdge just yet. Unlike previous tax cycles, where the company immediately raised prices to stay EBIT-neutral, ITC has dropped a phased approach, partly to prevent smokers from switching to cheaper, illegal cigarettes.
The illicit cigarette market in India already holds a share of approximately 26% of total volumes - one of the highest globally. Historically, steep tax hikes have driven that number higher, with the illicit market gaining nearly 1,000 basis points in share between 2012 and 2021.
The more price-sensitive segments are seeing smaller hikes for now. In the 69mm segment, price increases remain in the 15-35% range against the roughly 40% required, while some brands in the 64mm segment have seen no revision at all.
Motilal Oswal expects ITC's cigarette volumes to fall 10% in FY27 and models a 19% decline in cigarette EBIT for the year. The brokerage has maintained a Neutral rating on the stock with a target price of Rs. 300.
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