ITC to Raise Cigarette Prices by 35% Amid Tax Hikes, Motilal Oswal Analysis Suggests

ITC to Undertake Calibrated Price Hikes Amid Tax Hike

The cigarette industry has undergone a significant regulatory reset following the implementation of GST 2.0 from February 1, 2026. According to a report by Motilal Oswal Financial Services, ITC is likely to undertake calibrated price hikes in its cigarette portfolio to offset the impact of higher taxes.

Under the revised taxation framework, cigarette taxes for ITC are estimated to have increased by 60-65 percent, implying a requirement for about a 35 percent increase in maximum retail prices (MRPs) based on the historical product mix. This marks the steepest tax increase witnessed by the industry in recent years and represents a departure from the relatively stable tax regime seen during 2018-25.

The transition was also unusual as there was a one-month gap between the announcement on January 1, 2026, and implementation on February 1, 2026, unlike the immediate or near-immediate execution typically seen in the past. ITC has adopted a phased price increase strategy rather than passing on the entire tax burden at one go. The move is aimed at limiting any shift towards illicit cigarette markets and retaining market share among legal players.

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The report said ITC is gradually implementing price hikes to eventually reach tax-neutral levels. During this period, the company is balancing price increases with market share protection while monitoring consumer response, competitive actions, and illicit trade trends across markets. While the approach could temporarily affect cigarette unit economics and margins, it may help reduce the risk of consumer disruption that could result from a sharp and immediate increase in prices.

Motilal Oswal said the outlook for ITC's cigarette business remains uncertain as MRP revisions are still underway and further earnings downgrades cannot be ruled out. Consumer acceptance of the revised prices will be a key factor to monitor. The brokerage has projected a 15 per cent decline in cigarette business revenue and a 19 percent fall in earnings before interest and tax (EBIT) for FY27.

It said positive factors such as improving performance in the FMCG segment and normalisation of paperboard margins are being offset by earnings pressure in the cigarette business arising from illicit competition, limited pricing flexibility, and the trade-off between volumes and margins. Motilal Oswal has maintained a "Neutral" rating on ITC.

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