For years, ITC has been the “safe haven” for Indian retail investors, prized for its steady dividends and dominant market position. However, a sudden shift in the cigarette taxation scenario has sent the stock reeling, wiping out nearly 15% of its value. In response to this shock tax hike, Nuvama Institutional Equities has downgraded ITC to a ‘Hold’ rating with the 12-month target price slashed to Rs 415, down from Rs 534.
With the government replacing the compensation cess with a massive spike in Basic Excise Duty (BED,), skyrocketing from a Rs 5 to Rs 4,000 per 1,000 sticks for the popular 69mm filter category, the “Dividend King” is in for a stormy ride. Investors are now left wondering if this is a classic “buy the dip” opportunity or the beginning of a long-term structural decline.
What does the Excise levy on ITC mean for investors
The primary catalyst for the recent slide in the stock is the excise levy that is going ti be effective from February 1. By moving the tax burden from a value-based cess to a fixed Basic Excise Duty, the government has created an unprecedented cost floor. Nuvama Research notes that this move, focusing on the volume-driving mid-size segment, pushes the total tax incidence up by more than 30%. Historically, such shifts in the tax landscape trigger significant volume compression and a move toward the illicit market.
Operational Strain for ITC? Why Nuvama forecasts a 20% price hike
To protect margins against this tax spike, Nuvama predicts that ITC will have no choice but to implement a 20% price increase across its flagship portfolio. For premium brands like Classic and Gold Flake Kings, this could translate into a price jump of Rs 2 to Rs 5 per stick. The brokerage warns that while premium smokers are often less price-sensitive, a double-digit hike of this magnitude risks immediate “demand destruction” and a shift in consumer behavior.
The “smuggler’s paradise”: Nuvama Research lists key risks
Nuvama draws a grim parallel to the FY13–17 period. During that era, aggressive tax hikes resulted in stagnant revenue collection for the government because consumers migrated to cheaper, illegal alternatives. With legal cigarettes now taxed near the WHO-recommended 75% threshold, the price gap between a legal stick and a tax-evaded alternative has widened to a record high. Nuvama cautions that this “squeeze” could undermine ITC’s legal franchise while fueling the unorganized market, which already holds a 23% share.
Nuvama on ITC investors’ safety net: Non-tobacco segments
While the tobacco business is under siege, Nuvama identifies several factors that prevent a full-blown “Sell” case:
- FMCG Resilience: The large foods portfolio is expected to benefit from recent GST rationalization in specific categories.
- Paperboards Bottoming: Following the Century acquisition, margins in the paper and packaging segment are expected to hit a cyclical floor by FY27.
- Agri-Business Gains: Favorable tobacco leaf costs in the coming fiscal year may provide a small margin cushion to offset the excise blow.
The dividend support floor
Despite the market cap wipeout, ITC’s identity as a “Dividend King” remains a key defence in the Nuvama analysis. The firm points to a 4% dividend yield and an 85% payout ratio as the ultimate valuation support. While Nuvama has lowered its tobacco valuation multiple to 17x from 23x, they suggest these payouts will likely prevent the stock from falling into a terminal tailspin, even as it maneuvers this “Not a Happy New Year” tax shock.
Disclaimer: This article provides factual analysis only and is not, and should not be construed as, an offer, solicitation, or recommendation to buy or sell securities. Investors must conduct their own independent due diligence and seek advice from a SEBI-registered financial advisor.