- CLSA cuts ITC target price to Rs 367, trims earnings estimates by 4-28%
- Sharp indirect tax rise to impact cigarette volumes and margins in FY27, it says
- ITC likely to raise cigarette prices by 33% in two phases to offset taxes
CLSA has lowered its target price on ITC to Rs 367 from Rs 485, trimming earnings estimates by 4-28%, while maintaining an 'Outperform' rating. The brokerage said the recent sharp increase in indirect taxes on cigarettes will weigh on volumes and margins in FY27, before a recovery in FY28.
The note, titled "FY27 smoked by tax but FY28 better," highlights the replacement of the compensation cess with higher GST and excise duties in February 2026. CLSA estimates ITC would need to raise cigarette prices by about 33% to remain Ebit-neutral per stick.
33% Price Hike Likely in Two Phases
According to CLSA, the required price increase may be implemented in two tranches - roughly 23% initially, with the balance in Q3FY27. As a result, cigarette Ebit is expected to decline in FY27 but recover to pre-tax hike levels in FY28, assuming no further tax increases.
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In its base case, CLSA projects a 15% volume decline in FY27, followed by a 5% rebound in FY28. Net realisation per stick is expected to fall 6% in FY27 but rise 10% in FY28 as the second round of price hikes flows through. Net sales could decline 20% in FY27 before growing 15% in FY28.
Ebit margins are forecast to contract by 275-450 basis points in FY26-27, before expanding by around 800 basis points in FY28.
Pricing Strategy to Cushion Impact
The brokerage said ITC may use sharper category segmentation to soften the tax blow. This could include introducing king-size filter brands in the long-size filter segment at lower price points, narrowing the gap between premium and regular offerings, and driving better Ebit per stick despite some cannibalisation.
In a downside scenario, another tax hike in FY28 could lead to an additional 13-20% cut to FY28-FY30 earnings estimates.
Despite the estimate cuts, CLSA believes the recent correction in ITC's stock price is overdone and continues to see upside from current levels, retaining its 'Outperform' stance.
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