Shares of FMCG major ITC have delivered little joy to shareholders over the past two years, caught amid by worries over GST uncertainty, the looming sale of British American Tobacco’s stake, and intensifying competition from Marlboro’s rising presence in the Indian market.
However, the GST Council’s impending meeting on September 3–4 may hold the key to usher fresh upside for ITC shares, if the tax changes bring some cheer for the cigarette industry, the biggest growth driver for the conglomerate. The GST Council meeting, which will aim to rationalise tax rates, is likely to keep things steady for the cigarette industry, global brokerage Jefferies believes.
“Based on our industry interactions, we believe the government intends to maintain revenue neutrality. Whatever replaces the compensation cess, the overall tax burden on cigarettes may not change, which would be a relief for ITC,” a latest report by Jefferies stated.
It further added that a stable tax regime remains crucial for keeping illicit cigarette trade in check, while stating that industry volumes have grown steadily in recent years under the current framework.
Cigarettes today are taxed at 28% GST plus a compensation cess, which blends specific duties and ad valorem levies. Depending on length, the specific cess ranges from ₹2.1 to ₹4.2 per stick, while the ad valorem component is 5% for sticks up to 74 mm and 36% for 84 mm. On a weighted average basis, consumer prices break down into 55% taxation, 12% channel margins and 23% Ebit margins for prominent players like ITC.
Given that the compensation cess is due to expire in March 2026, analysts expect the GST council to use this meeting to chart its future. Jefferies pointed out that not just revenue neutrality but also the mix of specific vs ad valorem taxes will be key. Specific taxes are fixed per stick and gives ITC pricing flexibility, while ad valorem duties rise with product prices, increasing the tax burden whenever the company raises rates.
For now, Jefferies remains constructive on ITC’s fundamentals, though it forecasts a largely range-bound move for the stock until tax clarity emerges. Beyond that, the BAT stake overhang and rising competition from Godfrey Phillips India remain investor concerns. That said, at 23x one-year forward PE, valuations are seen as attractive, most analysts believe.
In the June quarter, the company’s cigarette business reported a 7.7% on-year rise in revenue driven by interventions to counter illicit trade, though the margins were hit by high-cost leaf inventory. Analysts at ICICIdirect expect volumes to hold on to mid-single digit growth ahead.
