In approximately a month, ITC shareholders have experienced a loss of nearly Rs 1 lakh crore in the company's market value, as the stock dropped nearly 20% due to a significant increase in cigarette taxes announced in late December. This unexpected decline has transformed one of India's most popular defensive stocks into a major topic of discussion for Budget 2026, with investors keenly observing for any updates on future tax policies.
The shift has been swift and largely driven by policy changes. Cigarettes remain the primary profit generator for ITC, and the government's extensive overhaul of tobacco taxes has significantly altered short-term earnings projections.
Market Shock Induced by Tax Reform
The new policy, effective February 1, 2026, implements excise duties between Rs 2,050 and Rs 8,500 per 1,000 cigarette sticks, in addition to a 40% GST. This significantly heightens the total tax load on cigarettes, sparking worries about demand elasticity, margin pressure, and the possible rise in illegal trade.
Experts generally concur that the drop in the stock is due to an abrupt policy change rather than any weakening in ITC's core business fundamentals.
Vincent KA from Geojit Investments mentioned that the adjustment is due to the significant excise duty increase, noting that ITC is expected to raise prices, as it has previously, to maintain its profit margins. Nonetheless, he warned that the increased prices might negatively impact sales volumes in the short term.
Abhishek Jain, who leads the Research department at Arihant Capital Markets, described the situation as a 'double whammy,' emphasizing that the existing 28% GST combined with higher excise duties has effectively pushed cigarettes into nearly a 40% tax category.
Attention on the Dangers of Illegal Trade
Analysts caution that heavy taxation might hasten demand reduction in a market as price-sensitive as India and could foster the expansion of the illegal cigarette trade. The Tobacco Institute of India has also voiced these worries, opposing the tax increase due to possible losses for farmers and other participants in the supply chain.
Anticipations for the 2026 Budget
The majority of brokerage firms do not anticipate an immediate tax increase in the forthcoming Budget. According to Motilal Oswal, it is crucial to monitor the continuation of the non-compensatory cess and any additional duty modifications. Any simplification or reduction would be a definite advantage for ITC and the wider cigarette sector.
The main business continues to be strong
New insights support the view that ITC's main business remains steady. During the December quarter, the company saw a 6.2% rise in revenue from the previous year, driven by strong results in the FMCG-Others division and steady growth in the cigarette market.
The cigarette sector experienced an 8% increase in revenue, driven by a 7% rise in volume. Nonetheless, margins fell to a multi-quarter low of 59.9%, decreasing by 163 basis points compared to the previous year, due to expensive leaf inventory. Management has noted that leaf procurement costs have eased in the current crop cycle, potentially aiding margins in the future.