Whalesbook
### The Shadow of Increased Taxation
The immediate concern for investors in ITC revolves around the significant hike in cigarette taxes, including GST and excise duties, scheduled to take effect on February 1, 2026. This policy shift has been identified by analysts as a primary overhang. Both Motilal Oswal and Nuvama have highlighted that these "unprecedented tax hikes" pose a substantial risk. The increased tax burden could dampen consumer demand for legal cigarettes and, more critically, fuel a surge in the illicit, untaxed cigarette trade. Past experiences in India suggest that aggressive tax increases have historically led to volume declines and a significant expansion of the illegal market. This risk of increased illicit trade is particularly worrying given its already substantial share in the Indian market.
Mixed Performance in Q3FY26
Despite the looming tax changes, ITC's Q3FY26 financial results showcased a steady operational performance across key segments. Consolidated gross cigarette sales saw an increase of 8% year-on-year, with volumes rising by approximately 6.5%. The premium cigarette segment demonstrated continued resilience. However, profitability within this segment faced pressure due to higher leaf tobacco prices. The FMCG sector presented a more robust picture, with consolidated sales growing by 12.6% year-on-year. Operating profits in the FMCG business climbed significantly, benefiting from improved operating leverage and the normalization of GST-related disruptions. The agri business reported moderate 6% sales growth, though margins compressed due to cost pressures. The paper business is showing signs of a gradual recovery, with full benefits anticipated from the fourth quarter onwards.
Brokerage Outlook and Market Sentiment
Major brokerage firms have largely adopted a cautious stance. Motilal Oswal maintained a 'Neutral' rating with a target price of ₹365, suggesting a potential 15% upside. The brokerage warned that earnings pressure on the cigarette segment could diminish near-term catalysts and valuation comfort, while also noting the potential for illicit cigarette trade to gain market share. Similarly, Nuvama retained a 'Hold' rating with an identical target price of ₹365. Nuvama anticipates two to three rounds of cigarette price increases in the coming months, which could weigh on consumption. The firm also reported strong 11% YoY revenue growth and expanding EBITDA margins in its FMCG-Others segment. Analysts are weighing the steady operational performance against these significant tax and regulatory risks. The absence of strong immediate catalysts, combined with these concerns, is tempering optimism regarding the stock's immediate upside potential. ITC's stock price has experienced a notable decline, down over 20% in January leading up to these results, trading near its 52-week low of approximately ₹317.85. The current trading price was around ₹318.60 as of January 30, 2026. The company's market capitalization stood at approximately ₹4.06 trillion, with a reported P/E ratio around 19.71x.