ITC Cigarette Price Hikes Trigger Margin Alerts: Nomura Warns of Squeeze

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AuthorAarav Shah|Published at:
ITC Cigarette Price Hikes Trigger Margin Alerts: Nomura Warns of Squeeze
Overview

ITC is increasing prices on premium cigarette brands like Gold Flake and Classic following the February 1, 2026 GST hike. Brokerage Nomura notes the hikes are smaller than anticipated, potentially impacting Earnings Before Interest and Tax (EBIT) growth by 20%. Nomura maintains a 'Reduce' rating, citing margin pressure unless further pricing action is taken. ITC's 'shrinkflation' strategy, introducing smaller pack sizes at similar price points, aims to defend volumes and margins.

ITC's Pricing Gambit Amidst Tax Hikes

International Tobacco Company (ITC) has begun implementing price increases across its premium cigarette brands, including Gold Flake and Classic, following the additional Goods and Services Tax (GST) that took effect on February 1, 2026. The hikes, averaging around 30% across most subsegments, fall short of Nomura's initial expectation of 35-40%.

Nomura's Margin and Volume Concerns

Nomura analysts are flagging potential headwinds for ITC's profitability. They estimate that without additional pricing adjustments later this year, cigarette Earnings Before Interest and Tax (EBIT) growth could see a steeper-than-expected 20% decline, a revision from their prior 15% forecast. The brokerage believes ITC is staggering price increases to mitigate the immediate impact on sales volumes, but warns that current levels will weigh heavily on EBIT margins unless more aggressive action is taken. Consequently, Nomura has reiterated its 'Reduce' rating and a target price of ₹318, forecasting a flat earnings per share (EPS) Compound Annual Growth Rate (CAGR) through fiscal year 2028.

'Shrinkflation' Strategy Deployed

To counteract the anticipated slump in sales volumes, ITC is leveraging its diverse portfolio through a 'shrinkflation' strategy. This involves introducing smaller product variants, such as a 64mm Gold Flake Deluxe priced at ₹94 for 10 sticks, mirroring the price of the larger 69mm regular version. This tactic aims to retain consumers who might down-trade to smaller sizes while attempting to protect overall profit margins. In another move, a 69mm Gold Flake variant has seen a 32% price increase, now retailing at ₹125 for 10 sticks, up from ₹95.

Competitive Pressure and Illicit Trade

The competitive environment remains intense. Competitor Godfrey Phillips India has enacted more substantial price hikes, with its Stellar Shift brand in the Kings-Slims segment now priced at ₹19 per stick, a 90% increase. Nomura cautioned that illicit and imported brands continue to pose a significant threat, selling at ₹10-₹15 per stick and significantly undercutting legal premium offerings. Following price adjustments, Godfrey Phillips' Stellar Shift will now contend directly with ITC's Classic Connect, which saw a more modest 30% price increase to ₹19.5 per stick.

ITC shares were trading 0.39% lower at ₹321.3 on Tuesday afternoon, while Godfrey Phillips India shares rose 0.62% to ₹2196.85, against a broadly flat benchmark Sensex.

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