Nuvama also sharply cut its tobacco valuation multiple, arguing that the latest government move marks a clear break from the relatively benign tax regime that had supported a steady recovery in legal industry volumes in recent years.
ITC shares fell around 10% to hit a 52-week low on Thursday after the government notified a sharp rise in excise duty on cigarettes late Wednesday.
“While we expected a sharp tax hike on cigarettes, the magnitude appears higher than anticipated, likely prompting consensus downgrades to ITC’s cigarette volume and EBITDA estimates as well as valuation multiples,” said Abneesh Roy of Nuvama in a report.
“After nearly 6% volume growth in FY26, we now expect both cigarette volumes and cigarette EBITDA to decline in FY27,” the brokerage said, drawing parallels with the FY13-17 period when “harsh” duty increases resulted in weak tax buoyancy.
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Nuvama noted that between FY13 and FY17, cigarette duties rose at a 15.7% CAGR, while revenues increased just 4.7%. It warned that a similar squeeze could once again push consumption towards illicit and smuggled products, undermining the government’s revenue objectives while hurting ITC’s legal franchise. The brokerage also expects temporary “front-loading” of volumes and production in January 2026 ahead of the February 1 implementation, but stressed that this would not alter the broader bearish volume outlook for FY27.
Reflecting the changed landscape, Nuvama cut its 12-month target price on ITC to Rs 415, valuing the tobacco business at 17x one-year forward earnings versus 23x earlier. “We have lowered our FY27E/FY28E revenue estimates by 4.9% and 8.3%, respectively, and EBITDA by 7% each, leading to a 6.7–6.8% cut in EPS,” the report said, adding that “the magnitude of the tax increase warrants a de-rating of the cigarettes business.”However, the brokerage stopped short of a reduce or sell call, citing ITC’s relatively attractive cash returns and the growing contribution from its non-tobacco businesses.
“We retain a positive view on ITC’s capital allocation and dividend policy,” Nuvama said, highlighting an “around 85% payout” and a dividend yield of about 4%, which it believes will “support the stock” amid near-term earnings downgrades. The note added that tobacco leaf costs are expected to turn “favourable” in FY27, cushioning cigarette margins to some extent even as volumes take a hit.
On diversification, Nuvama remained constructive on ITC’s FMCG and paperboard portfolios. The report said GST rate cuts in select food categories are “a tailwind” for ITC’s large foods business and reiterated that the FMCG-Others division is on track to deliver an “EBIT margin of 9.5% by FY27–28,” supported by scale benefits and an improving product mix.
In paperboards, packaging and specialty papers, including the Century acquisition, Nuvama expects margins to bottom out by FY27, with a recovery in demand and easing input costs helping offset some of the pressure from the core cigarettes business.