ITC Shares In Focus After Macquarie Downgrades On Sharp Cigarette Tax Hike — Check Revised Target Price

Macquarie has downgraded ITC Ltd. to Neutral from Buy and slashed its target price by 34% to Rs 330 from Rs 500, citing the adverse impact of a sharp cigarette tax hike that is likely to weigh heavily on volumes, mix and profitability over the next two years.

The downgrade follows the government’s decision to raise cigarette taxes by 40–50%, a move Macquarie believes will be particularly debilitating for ITC’s core cigarette business. The brokerage estimates that the tax hike would translate into a 30–40% increase in prices for key brands in the Kings and RSFT portfolio (65mm-plus length cigarettes).

While moderation in leaf tobacco input costs does provide some margin headroom, Macquarie cautions that this benefit may be offset by the need to expand the pricing ladder. Higher price gaps between entry-level and premium products could hurt consumer upgrades, adversely impacting cigarette mix and overall profitability.

Macquarie has cut its FY27E and FY28E earnings per share estimates by 18% each to reflect the expected deterioration in volumes, mix and margins following the tax increase, which comes into effect from February 2026.

In addition, the brokerage has lowered its valuation multiples to account for what it describes as an increasingly unfavourable growth environment for the cigarette business.

According to Macquarie, the tax hike is severe enough to potentially drive a year-on-year decline of more than 10% in cigarette EBIT in FY27E, an outcome not witnessed historically. It estimates that maintaining EBIT per stick in the highly profitable Kings portfolio (75mm-plus length cigarettes) would require a price hike of over Rs 5 per stick.

In contrast, shorter cigarettes would require much smaller price increases, with sub-65mm products needing around a 10% hike compared with close to 40% for longer cigarettes. This differential is likely to skew consumer demand towards lower-priced products, further pressuring mix and margins.

The brokerage notes that using historical precedents is difficult, as the industry has not seen such sharp tax hikes alongside heightened competitive intensity in recent years. Competition, particularly from Godfrey Phillips India, adds another layer of uncertainty to the outlook.

That said, Macquarie expects some moderation to the earnings impact from ITC’s non-cigarette businesses. The paperboard and packaging segment could see a recovery in margins following the imposition of anti-dumping duties, while a broader recovery in FMCG demand could support earnings in FY27E.

The brokerage also highlights that ITC’s FY28E dividend yield of around 4% offers some downside support. However, it sees limited near-term catalysts for meaningful upside, given the magnitude of the tax shock and rising competitive pressures.