ITC stock at 3-year low: 3 reasons the cigarette giant is under pressure

ITC Share Price Momentum From 2023 to 2026

Source: Trading View

A modest recovery in April, following earnings from VST Industries, has sparked debate: has ITC bottomed out? Technical indicators say so.

Why is ITC sensitive to cigarette prices?

Despite diversification into FMCG, agriculture, packaging, and newer ventures, including the demerged ITC Hotels, cigarettes remain ITC’s financial backbone, contributing 44% of revenue and 80% of profits.

It uses the high margins from the cigarette business to fund other FMCG expansion and pay dividends. Cigarettes in India are heavily taxed under the National Calamity Contingent Duty (NCCD), with excise duty accounting for roughly 53% of the maximum retail price (MRP).

Effective February 1, 2026, the government replaced the GST Compensation Cess with a revised excise duty structure while simultaneously increasing GST on cigarettes from 28% to 40%. The new excise duty ranges between Rs 20.50 and Rs 85 per 10 sticks, depending on the cigarette length.

Old and new taxes for a pack of 10 cigarettes

While the government maintains that overall tax incidence remains around 53% of the maximum retail price (MRP), the structure of taxation has materially changed. Excise duty is now embedded in revenue, unlike GST and cess, which are applied at the point of sale. This difference in the MRP created an arbitrage opportunity for distributors, resulting in an increase in illicit trade. Distributors reportedly stockpiled inventory, selling cigarettes above MRP even before February 1.

The impact of excise duty on revenue

The revised tax regime is expected to boost ITC’s reported cigarette revenue in FY27 due to accounting changes. Before GST was introduced in 2017, excise duty constituted nearly 45-50% of cigarette revenue.

As the GST compensation cess reduced excise duty, ITC’s cigarette revenue declined 33% in FY18. However, the change in tax structure did not affect ITC’s cigarette profits, as GST is paid by the consumer.

Standalone results of ITC’s FMCG cigarettes segment

Annual Legal Cigarette Consumption by Volume

Source: Government of India

Share of illicit cigarettes in total volumes

Source: Euromonitor International, 2025

The successive tax increases between FY13 and FY17 flattened ITC’s stock price. Even the GST reform couldn’t hold up the stock price rally. However, stable tax rates from FY18 onwards disincentivised illicit cigarette sales, helping manufacturers recover lost volumes in legal cigarettes in three to four years. ITC, Godfrey Phillips, and VST Industries saw a surge in share price between 2023 and 2024.

However, ITC’s 2026 dip to its three-year low negates the volume recovery in 2023 and 2024.

ITC’s stock price reaction to cigarette tax

Source: Trading View

Cigarette taxes do not directly erode margins for ITC Limited, but they can weigh on demand. The ultimate impact remains difficult to quantify, as it hinges on consumer response to higher prices. While ITC is typically able to pass on tax increases and preserve per-stick margins, any meaningful decline in volumes could pressure earnings in the near term.

Cigarettes, as a “sin good,” exhibit relatively inelastic demand, with a section of consumers continuing to purchase despite price hikes. This creates an opening for illicit trade. Smuggled cigarettes, which bypass taxes and regulations, can be sold at prices that undercut legal products while still offering attractive margins to illegal operators. As a result, sharp tax increases, without commensurate enforcement and cessation measures, risk shifting consumption and profits from the formal market to the illicit economy.

What analysts have to say

When the taxes were announced on January 1, international brokerages immediately slashed their price target for ITC stock by 20-35% over fears of consumers down-trading to cheaper variants, leading to volume de-growth.

Analysts’ price target for ITC in April 2026

Source: Brokerage Reports

While ITC’s FMCG and agriculture segments show consistent revenue growth, the lack of short-term growth triggers will keep price pressure on the stock. The stock is currently trading at a price-to-earnings ratio (P/E) of 18.6x, lower than its 10-year median of 25.5x. The only instances in which ITC stock’s P/E ratio fell below 20x were during the Covid pandemic, the 2022 Russia-Ukraine war, and the 2008 financial crisis.

ITC’s P/E Ratio and EPS From 2009 to Date

Source: Screener.in

Brokerages have reduced the short-term price target, but its FMCG consumption growth trend through innovation remains intact. After the millet revolution, ITC launched protein-focused products across multiple categories to benefit from fast-growing health segments.

Long-term investors should keep an eye on the FY27 quarterly earnings as the impact of the tax change unfolds. It could present an opportunity to accumulate a high-dividend, cash-generating business.

Note: We have relied on data from http://www.screener.in throughout this article. Only in cases where the data was not available, have we used an alternate, but widely used and accepted source of information.

Puja Tayal is a financial writer with over 17 years of experience in the field of fundamental research.

Disclosure: The writer and his dependents do not hold the stocks discussed in this article.

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