The finance ministry's notification on sharp rise in excise duty for cigarettes is “clearly negative” for ITC in the near term, Jefferies has warned, flagging a meaningful hit to volumes and earnings even as it keeps its positive stance on the stock.

Jefferies describes the move as “a meaningful negative surprise for the legal cigarette industry,” estimating that the effective tax incidence on cigarettes rises “well over 20%” even under a relatively benign assumption on NCCD treatment. The brokerage notes that this “sharp increase in tax incidence at one go” comes after a period of tax stability, raising uncertainty on the policy trajectory for legal cigarette manufacturers such as ITC.

India's finance ‌ministry late ‍on Wednesday notified an excise duty of Rs 2,050–8,500 per 1,000 sticks, depending on cigarette length, effective February 1. Following the announcement, shares of ITC, maker of Gold Flake and the market leader, fell 9.2%, while ‌Godfrey Phillips ‌India, the distributor of Marlboro in the country, tanked 14.1%.

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ITC shares are now at their lowest level since April 2023 and on track for their worst day in nearly six years. Godfrey Phillips was set for its steepest fall since November 2016.

The duty translates ⁠into a 22%-28% increase in overall costs for 75-85 mm cigarettes, analysts at ICICI Securities said. "Cigarettes longer than 75 mm account for roughly 16% of ITC's volumes and are likely to see price increases of 2–3 rupees per stick as a result of the levy," they said.

To protect profitability, ITC will likely have to undertake “double‑digit price increases” across key cigarette brands, Jefferies said. However, it cautioned that “such steep price increases are likely to impact legal industry volumes and may accelerate down‑trading and illicit trade,” creating a dual headwind of weaker stick sales and potential market‑share loss for the organised segment.

The report underlines that higher relative taxation on legal cigarettes “tends to incentivise illicit trade,” a trend that had moderated in recent years when tax hikes were milder. If the price gap between tax‑paid and smuggled sticks widens again, “ITC and other legal players could lose share to the unorganised segment,” Jefferies warned, reviving a key structural risk that investors track closely.

Despite terming the development “clearly negative” and highlighting “downside risk to near‑term earnings and volume growth,” Jefferies has retained its Buy rating on ITC. The brokerage has a target price of ₹535, valuing the cigarette business at 23 times December 2027 earnings in a sum‑of‑the‑parts framework, and continues to project “at least 15% total shareholder return over the next 12 months.”