ITC Shares Slump by 10% in 2025 Amid Anticipation of Cigarette Tax Hike in Union Budget

Mumbai, January 20 (Alayaran.com) - ITC Limited's shares have taken a hit by 10 per cent in 2025 so far, with investors eagerly awaiting the upcoming Union Budget for any possible hikes in taxes on cigarette and tobacco products.

Nuvama Institutional Equities, a leading brokerage firm, does not see a high probability of a sharp cigarette tax hike in the Budget. However, it points out that a small tax hike could be on the cards, which may impact tax collections negatively.

The brokerage believes that any significant increase in cigarrette duty would undermine growth prospects of ITC's cigarette business, which is already struggling to recover from an urban slowdown.

Despite this, Nuvama retains its "Buy" call on ITC and revises its target price to Rs 571 from Rs 585 earlier. The firm attributes this revised target to the recovery in ITC's agri business, its comfortable valuations, and the demerger of its hotel business.

Tax revenue from cigarettes has historically been a contentious issue in the budget process, with hikes often resulting in low tax revenues due to the decline in legal cigarette sales. In FY21, for instance, the Union Budget increased the National Calamity Contingent Duty on cigarettes, leading to a 9-15 per cent hike in taxes.

Given this trend, Nuvama believes that consumers may turn to more expensive smuggled cigarettes if duty increases above 10%.

The brokerage also notes that duty-paid cigarettes account for over four-fifths of revenue generated from the tobacco sector despite making up less than one-tenth of overall cigarette consumption. This situation suggests a small hike in taxes could be manageable, but still impacts growth prospects.

Nuvama expects ITC's December quarter to report decent volume and margin compression due to raw material inflation. However, overall expectations for Q3FY25 indicate an 8 per cent revenue/ebitda growth, with a decline of profits by 10 per cent YOY.

The brokerage concludes that investors should be cautious when approaching the stock in the near term due to concerns about any upcoming tax hike in the Union Budget.