ITC Loses Analyst Backing After Tobacco Tax Shock

(MENAFN- The Arabian Post) Shares of ITC Ltd. have come under sustained pressure after a sharp shift in analyst sentiment, with about a third of brokerage houses cutting their buy recommendations following higher taxes on cigarettes that have altered earnings expectations for the diversified consumer goods group.

The change in outlook has been swift. Until the latest tax measures, ITC had ranked among the most favoured large-cap stocks on domestic brokerage lists, supported by steady cash flows from cigarettes and growing contributions from fast-moving consumer goods, hotels and paperboards. That balance has been questioned after the government raised duties on tobacco products, squeezing margins in the company's most profitable segment.

ITC hit by analyst downgrades after tax move has become a defining theme in market commentary as earnings models are recalibrated. Analysts who turned cautious point to limited scope for further price hikes in cigarettes without risking volume erosion, at a time when consumption growth has already been uneven.

Cigarettes contribute a majority of ITC's operating profit despite accounting for a smaller share of revenue, making tax changes particularly sensitive. The latest duty increase, structured through a combination of higher specific excise and cess components, has raised the effective tax burden across key cigarette categories. Brokerages estimate that, unless offset by price increases or cost efficiencies, operating margins in the segment could compress by 150 to 250 basis points over the coming quarters.

Some analysts expect ITC to pass on part of the tax through selective price increases, a strategy the company has used in earlier cycles. However, several broker notes highlight a more competitive environment, with illicit trade and regional players limiting pricing power. Volume growth assumptions for the cigarette business have been trimmed, with some forecasts now factoring in flat to marginally negative growth.

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The reassessment has translated into rating cuts from buy to hold or equivalent neutral stances. Target prices have also been lowered, reflecting reduced earnings visibility and a narrower valuation premium for the cigarette franchise. A few brokerages have flagged that ITC's valuation multiple had already priced in regulatory stability, leaving little cushion for adverse policy surprises.

Not all analysts are bearish. A significant portion of coverage has retained positive recommendations, arguing that the market reaction may be overdone. Supporters note ITC's strong balance sheet, consistent dividend payouts and diversified portfolio as buffers against near-term volatility. The company remains debt-free and continues to generate robust free cash flow, providing flexibility to absorb tax shocks.

Attention has also turned to ITC's non-cigarette businesses, which management has been positioning as long-term growth drivers. The FMCG segment, covering packaged foods, personal care and agri-branded products, has delivered double-digit revenue growth in several quarters, albeit with thinner margins. Analysts broadly agree that sustained investment is required before this segment can materially offset any slowdown in cigarettes.

The hotels business, demerged earlier into a separate listed entity, has been another focal point. While the demerger unlocked value and allowed sharper capital allocation, it also removed a stable earnings contributor from ITC's consolidated results. Some analysts argue that the timing has amplified the perceived impact of the tobacco tax, as investors now view ITC more squarely through the lens of its cigarette exposure and FMCG transition.

Market participants are also weighing the broader regulatory backdrop. Tobacco taxation remains a policy lever tied to public health objectives and revenue needs, creating an element of unpredictability. Analysts caution that while steep tax hikes may not be annual, periodic adjustments are likely, keeping long-term risk premiums elevated for cigarette makers.

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ITC's management has yet to signal any immediate strategic shift in response to the tax increase. Past commentary has emphasised disciplined pricing, supply chain efficiencies and portfolio premiumisation to protect margins. The company has also highlighted investments in agri-sourcing and digital distribution to strengthen competitiveness across categories.

For investors, the debate has narrowed to whether the stock's recent underperformance adequately reflects these risks. Some analysts see value emerging if earnings downgrades stabilise and FMCG margins continue to improve. Others maintain that sentiment will remain cautious until clearer evidence emerges that cigarette profitability can be sustained without sacrificing volumes.

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