Whalesbook
Excise Duty Hikes Challenge ITC's Cigarette Business
Prabhudas Lilladher has initiated coverage on ITC with a "Reduce" rating and set a target price of ₹302. The firm points to potential difficulties from recent cigarette excise duty increases. The full effect of these hikes and subsequent price changes on both sales volume and profits is still unfolding, presenting a major hurdle for ITC's typically profitable tobacco division. An effective price rise of almost 60% due to the excise duty announced on December 31, 2025, has raised concerns for the tobacco sector, with warnings of increased illegal trade and financial strain for farmers and retailers.
FMCG and Paperboard Segments Drive Growth
In contrast to the challenges in its cigarette business, ITC's Fast-Moving Consumer Goods (FMCG) and Paperboard divisions are identified as key areas for growth. The FMCG segment is expected to perform well, though some medium-term pressure on profit margins is possible. The Paper and Paperboard business is set for expansion, boosted by measures like Minimum Import Price (MIP) and lower wood costs. Demand for this segment is supported by the e-commerce and pharmaceutical industries. ITC's efforts to expand its non-tobacco offerings are further highlighted by its planned full acquisition of Sproutlife Foods, the parent company of health food brand 'Yoga Bar'.
Valuation and Analyst View
Prabhudas Lilladher forecasts an Earnings Per Share (EPS) Compound Annual Growth Rate (CAGR) of 4.8% for FY26-FY28, excluding Century Paper's performance. The ₹302 target price is based on a Sum-of-the-Parts (SOTP) valuation. The "Reduce" recommendation stems from a cautious outlook, largely due to the ongoing impact of excise duty changes on the cigarette segment, which remains a substantial profit contributor. ITC's current P/E ratio is around 18.8x, reflecting both the stability of its tobacco business and broader market concerns about regulatory risks. This valuation is also below its 10-year average P/E ratio of 22.21, leading some analysts to view it as a potential "Value Trap".
Market Position and Past Trends
ITC's cigarette business, which holds about 77% of the legal cigarette market, faces a tough environment after the excise duty hike. Competitors such as Godfrey Phillips India are also raising prices, with Pocket Marlboro now costing ₹85, up from ₹70. Historically, significant excise duty increases between fiscal years 2014-2016 led to ITC experiencing cumulative volume drops of over 15% following mid-teen price increases. Analysts caution that the current price adjustments could result in similar reductions in volume, particularly as consumers might switch to cheaper or illicit products. Meanwhile, the Indian FMCG sector is projected to grow at a CAGR of 5.62% from 2025 to 2035, driven by increasing urbanization and incomes. However, the tobacco segment's growth is directly affected by specific tax policies.