ITC has entered a very different phase of its investment story. For years, the company was largely viewed through the lens of its cigarette business, with its strong cash generation helping support investments across FMCG, stationery and other businesses. The latest tax changes have challenged that stability and forced the cigarette business to rethink pricing, products and its approach to consumers.
At the same time, the stock's sharp correction has changed the question for investors. Instead of asking whether higher cigarette taxes are negative for ITC, the more relevant question is whether the market has already absorbed a substantial part of that damage.
Also read: 4 Transformer Stocks With FY27 Guidance: Which Companies Have the Strongest Growth Outlook?
With the company taking pricing and portfolio actions and its non-cigarette businesses continuing to grow, investors now need to assess whether the current correction represents a potential entry point or whether more earnings pressure is still ahead. With a market cap of Rs 3.34 lakh crore, the shares of ITC Ltd are trading at Rs 266 and are trading at a PE of 17 compared to their industry's PE of 40.
A 50% Correction
ITC's share price has undergone a major correction from its September 2024 peak. The stock has fallen from around Rs 498 to Rs 255, representing a decline of approximately 49-50%. The correction has become particularly pronounced in 2026 as investors began factoring in the impact of the new cigarette tax structure and its potential effect on volumes and profitability.
This correction matters because investors are now looking at ITC at a substantially different valuation than before the tax reset. Citi's latest commentary adds weight to this argument. The brokerage said the stock's 34% correction in 2026 alone has already priced in much of the cigarette volume and profitability risk, prompting it to upgrade ITC from Sell to Buy and raise its target to Rs 300 from Rs 270.
The important question, therefore, is whether the market is still pricing ITC for further deterioration or has started looking towards a recovery. A stock falling almost 50% from its peak does not automatically make it cheap, but when the decline is accompanied by substantial earnings downgrades, the potential for a recovery becomes more relevant.
Tax Pressure
There was a significant rise in the incidence of taxation applied to the cigarette business starting February 2026. This development has lead to pressure on price, volume and margin metrics, with risks around consumption patterns migrating to lower-priced products or black-market cigarettes. This dynamic assumes significance for ITC in particular, owing to the fact that the cigarette business continues to represent the largest contributor to its bottomline.
Also read: Why Do We Sell Our Stocks at the Worst Possible Time? | Stock Investing 101
According to Citi, despite this challenging environment, the company’s cigarette business will still see its FY27 results marked by tough headwinds, leading to expectations around EBIT falling 23%. Investors should be careful about extrapolating this to conclude that the earnings headwinds have been fully priced into current stock prices. Nonetheless, according to Citi, cigarette margins will improve quarter-on-quarter for FY27 and will recover for FY28 onwards.
Thus, there exists a divergence between near-term earnings visibility and the long-term investment thesis here, with FY27 possibly seeing difficult numbers due to tax headwinds, yet investors buying the stock currently having views beyond that reset point.
Pricing the Tax
It should be emphasised that the increase in ITC's taxation is more extensive than mere absorption of increased costs. The company has implemented carefully calibrated price increases within its cigarette portfolio while executing portfolio management actions meant to retain consumers. These actions include more than 30 interventions executed segment-wise as well as across different price bands, indicating a level of nuance that goes beyond merely increasing prices.
What makes the 75% number relevant is the fact that the industry's dynamics are now shifting focus from whether ITC absorbs the total tax amount or not to what proportion of the increased realisation is likely to be eventually translated into bottom-line growth. In this regard, the company's estimate indicates that around 75% of the cigarette tax increase is likely to have been realised via price increase. As such, Citi has revised upwards its FY27-FY29 EPS estimates by 3%-11%.
Nevertheless, attention must still be paid to the remaining 25% as well as the effects of pricing decisions on volume performance. While it may sound intuitive that passing through all taxes would be advantageous for ITC, there is the possibility that increasing prices may cause consumers to downtrade.
Financial Reset
From the financial figures available above, one can appreciate why investor sentiment appears to have deteriorated significantly. Sales fell sharply, declining from Rs 21,495 crore in June 2025 to Rs 19,114 crore in June 2026. But more tellingly, operating profits fell sharply, falling from Rs 6,816 crore to Rs 5,181 crore and consequently compressing margins sharply by 32% to 27%.
Also read: IZMO Ltd stock in focus after subsidiary signs MoU with IIT Madras for ₹99.94 Cr project
Net profits fell sharply from Rs 5,343 crore to Rs 4,509 crore, with earnings per share sliding from Rs 4.19 to Rs 3.51. This clearly indicates that any potential impact of taxes has been fully reflected in the current quarter's results and is no longer something that needs to be considered for future quarters.
The fall in profits has also been acknowledged by ITC itself during its Q1 FY27 earnings release, which indicated a substantial impact on its cigarette division due to changes in tax regulations. Accordingly, consolidated EBITDA and PAT before exceptional items fell 24% and 23%, respectively.
Investors should watch out for the coming quarters carefully since this will provide clarity about revenue realisation, compensating volume pressure and any potential recovery of operating margins above 27%.
FMCG Cushion
What makes the case for ITC post-correction is that ITC now has growth stories other than those associated with cigarettes. Its FMCG-Others portfolio consists of snacks, dairy, noodles, personal-care products, and others.
During Q1 FY27, FMCG-Others' revenues rose by 12% y-o-y, or 16% ex-staples, while PBIT jumped up by 21%. Categories such as dairy, snacks, noodles, and frozen snacks posted gains of above 20%.
Another business line that shows positive signs of recovery is paper, which saw revenues rise by 9% and PBIT jump up by 38% during Q1 FY27. Fresh foods was another high-growth business line for ITC, witnessing GMV growth rates of 90% y-o-y with annualised revenues crossing Rs 300 crore.
While these businesses might not replace cigarettes' contribution to ITC's bottomline anytime soon, what becomes important is the safety cushion that they offer. What appeals to long-term investors here is ITC's strategy to develop multiple growth engines alongside its resetting cigarette business via taxation issues.
The FY28 Bet
What is crucial here is that Citi’s positive stance is independent of any immediate pick-up in cigarette EPS growth next year. Indeed, the broker maintains a forecast of a 23% decline in cigarette EBIT for FY27. However, the key reasoning behind this call is the notion that the market has already seen a significant earnings reset, and at this stage, it may start focusing on the outlook post FY27.
Specifically, Citi observed that market consensus estimates of FY27 EPS and FY28 EPS have fallen by roughly 23% and 21%, respectively, since the start of 2026. In Citi’s opinion, this signals the end of the earnings downgrade cycle. Moreover, Citi has revised its cigarette multiples upward from 11x EPS to 12x EPS, alongside upgrades to FY27-FY29 EPS estimates by 3-11%.
Such reasoning represents a critical change in narrative dynamics within the market. Earlier, the key focus was on estimating the extent of declines in EPS estimates. At present, discussion around the stock begins to gradually move toward the question of whether we may be approaching bottoming out of earnings estimates. If so, the stock could begin to react more positively toward FY28 expectations.
Defensive Valuation
ITC also has certain attributes that make its business interesting as an investment option during any significant price pullback. For instance, its core cigarette franchise is a very cash-generative one, it has a diversified consumer goods mix, a fairly conservative balance sheet structure and a substantial dividend pay-out.
Also read: Gabriel India Signs 50:50 Joint Venture Agreement With FORVIA to Manufacture Car Seats in India
In addition, both its ROE and ROCE ratios stand at about 29% and 39%, respectively. Most importantly, the stock pays out dividends yielding around 5%. Its valuation too seems more attractive. The current P/E ratio for the stock, based on market data estimates, stands at roughly 16-17 times. The latest value research indicates that its trailing P/E ratio is at approximately 16.2 times compared to its five-year trailing median P/E ratio of 24.71 times.
The comparison of valuations within its industry peers must necessarily be made cautiously since multiple database providers categorise ITC into entirely different peer sets. However, the most relevant comparison in such cases would likely be based on historical metrics for the same company itself.
The dividend profile further strengthens ITC’s defensive appeal, with the stock offering a 5.4% dividend yield, providing investors with a meaningful source of regular income even as the stock trades well below its previous highs. Its dividend payout ratio of nearly 88% also highlights the company’s strong commitment to returning cash to shareholders.
That does not mean the stock is automatically cheap. The cigarette earnings decline is real, and the valuation could remain subdued if volumes deteriorate further. But for investors who prefer established, cash-generative companies, such corrections can offer an opportunity to accumulate gradually rather than chase the stock after a recovery has already become visible.
Can Investors Buy?
The evidence suggests that a substantial part of the cigarette tax impact has already been priced into ITC. The stock has fallen nearly 48.4% from its September 2024 peak, while Citi believes the 34% correction in 2026 has already reflected much of the volume and profitability risk. Around 75% of the tax increase has also been passed through via price hikes.
The valuation adds to the case. ITC is trading at around 16–17x earnings, well below its five-year median P/E of 24.71x, while maintaining low leverage, strong returns and a dividend yield of around 5%. Citi also expects cigarette profitability to improve through FY27 and recover from FY28.
Therefore, ITC could offer a buying opportunity for investors willing to look beyond the near-term FY27 earnings pressure. The key monitorables will be cigarette volumes, further price hikes and margin recovery. If pricing starts translating into better profitability without a sharp volume decline, the market could begin valuing ITC on the FY28 recovery rather than the current tax-affected earnings.
