ITC shares bounced back sharply on Monday, August 3, after analysts found some comfort in the company’s better-than-feared cigarette volumes despite a steep hit to earnings from higher taxes. The ITC share price climbed as much as 4% to ₹292.45 on the BSE in early trade, making the stock one of the top gainers on the Sensex.
The rally came even though ITC’s June-quarter results showed a significant decline in profitability. Investors appear to be looking beyond the weak Q1 FY27 numbers and focusing instead on whether the worst of the cigarette tax shock is now behind the company.
That shift in sentiment is important for ITC, which has faced considerable pressure since the government announced higher taxes on cigarettes. The stock had fallen around 30% in calendar 2026 up to July 31 and touched a 52-week low of ₹275 on June 4. Against that backdrop, Monday’s recovery reflects renewed hopes that the company can gradually rebuild cigarette earnings.
The biggest positive from the Q1 results was cigarette volume. ITC’s cigarette volumes declined by around 4-5% during the April-June quarter, according to analysts at ICICI Securities. That was significantly better than the 8-10% decline the Street had expected.
For investors, the volume number matters because it suggests that consumers have not moved away from ITC cigarettes in large numbers despite higher prices. It also indicates that the company’s strategy of raising prices gradually may be helping it protect its market share.
The cigarette business, however, remains under pressure. ITC’s cigarette earnings before interest and tax, or EBIT, declined 35% year-on-year during Q1 FY27. The decline was particularly sharp in April, but profitability improved month-on-month as staggered price increases started taking effect.
ITC has not passed the entire tax burden on to consumers at one time. The overall tax impact on the cigarette business is about 35%, while the company has so far passed on roughly two-thirds of that increase through price hikes.
That leaves ITC with more pricing action ahead. Analysts expect the company to continue raising cigarette prices gradually through the second and third quarters of FY27. While this could put some additional pressure on cigarette volumes in the near term, the strategy is also aimed at protecting demand and limiting the shift towards cheaper or illegal cigarettes.
Nomura has taken a more optimistic view of the recovery. The brokerage expects gradual price hikes to improve ITC’s unit economics while keeping the impact on volumes manageable. It expects ITC to bring cigarette EBIT per stick back towards pre-tax-hike levels by Q4 FY27.
That is a much faster recovery than Nomura had previously anticipated. The brokerage has raised its target price for ITC to ₹340 from ₹300 and upgraded the stock, reflecting what it sees as a more favourable risk-reward balance. Nomura expects cigarette volumes and EBIT to decline 5% and 20%, respectively, in FY27, before recovering in FY28.
ICICI Securities, meanwhile, expects cigarette volumes to face greater pressure in Q2 and Q3 as more of the tax increase is passed on through prices. However, it expects the business to start seeing margin recovery from Q4 FY27 as the higher prices and volumes begin to normalise.
The brokerage also pointed to encouraging trends outside cigarettes. ITC’s FMCG business continues to show strong margin improvement, helped by a better balance between pricing and volumes. The paperboards business is also recovering sequentially, supported by a more favourable input-cost environment.
The strength of ITC’s diversified business is becoming increasingly important for investors. While cigarettes remain the company’s biggest earnings driver, the FMCG portfolio, paperboards and other businesses provide additional support when the cigarette segment faces regulatory or tax pressure.
Still, not all brokerages are convinced that the recovery will be smooth. Motilal Oswal Financial Services retained a Neutral rating with a target price of ₹300. It said ITC’s slower-than-expected cigarette price increases could protect consumer volumes and reduce the shift to illegal cigarettes, but would also keep earnings under pressure in the near term.
The brokerage expects cigarette revenue and EBIT to remain volatile while ITC works through the transition. It also cautioned that pressure on the cigarette business could offset the benefits coming from the recovery in FMCG and paper businesses.
This leaves investors with a fairly clear set of numbers to watch in the coming quarters: cigarette volumes, the pace of price hikes and the recovery in cigarette margins. The immediate earnings picture may remain weak, but the market is increasingly willing to look beyond one difficult quarter.
For ITC, the challenge is now about finding the right balance. Passing on higher cigarette taxes too quickly could hurt volumes and push consumers towards cheaper alternatives. Moving too slowly, on the other hand, would prolong the pressure on margins and profitability.
The real test will come over the next two quarters. If ITC can gradually recover cigarette profitability without losing significant volumes, the current tax-related earnings setback could prove temporary. For now, the market appears to be betting that the worst may have passed and that ITC shares could have room to recover as the company works through the cigarette tax impact.