ITC Ltd., India's largest cigarette manufacturer, has come under intense pressure in the first two days January 2026, with its stock price sinking to levels not seen in nearly three years. The sharp decline follows the government's notification of a significant increase in excise duties on tobacco products, effective February 1, 2026, sparking widespread concerns over potential volume declines, margin compression, and earnings revisions.

The new tax regime, part of the Central Excise (Amendment) Bill, 2025, imposes higher excise duties on cigarettes ranging from Rs 2,050 to Rs 8,500 per thousand sticks (depending on length), alongside a 40% GST slab for tobacco and related "sin goods." This replaces the earlier GST compensation cess structure and is expected to result in substantial price hikes for consumers. Analysts estimate cigarette prices could rise by 20-40% as manufacturers like ITC pass on the increased costs, potentially impacting demand elasticity and boosting illicit trade.

As the stock traded around Rs 349-350 on January 2, 2026 — down sharply from levels above Rs 400 just days earlier — several brokerages issued downgrades and slashed target prices. The lowest target cited in market discussions stands at Rs 340 from Nomura financial services, which double-downgraded the stock to "reduce," reflecting fears of significant income cuts. Other firms, including Motilal Oswal (target Rs 400, neutral), Kotak Institutional Equities (Rs 350, reduce), and Nuvama (Rs 415, hold), have also turned cautious, citing the unprecedented magnitude of the tax hike.

The cigarette business remains ITC's core profit driver, contributing roughly 40-42% to overall revenue (and a much higher share of profits) in recent quarters. With the segment's valuation now expected to compress — potentially dropping its contribution to the company's overall business mix to around 15-17% — analysts anticipate further downward revisions to earnings forecasts. If costs are not fully passed on, margins could suffer; if they are, volumes may face headwinds from price-sensitive consumers.

Despite the near-term challenges in the tobacco segment, ITC's diversified portfolio offers some relief. The FMCG business (excluding cigarettes) is expected for positive volume growth, supported by recent GST rate cuts on other products. The paperboards and packaging division is expected to benefit from the ongoing integration of the Century Paper acquisition, with improvements anticipated from FY27 onward. Additionally, ITC's strong dividend track record — averaging around 4% yield with an 85% payout ratio — is expected to persist, providing a cushion for long-term investors.

The stock's recent tumble has erased billions in market capitalization, with heavy trading volumes reflecting investor repositioning. While the tax changes aim to maintain revenue neutrality and promote public health, they have introduced fresh uncertainty for tobacco-linked stocks. Market participants will closely monitor January's pre-implementation stocking activity and any further clarity on price adjustments in the coming weeks.