ITC’s share price corrected sharply in early January 2026, bringing its dividend yield above 4% and reviving investor interest in what has long been considered a defensive, income-generating stock.
However, this correction was not random. It was triggered by a significant increase in excise duty on cigarettes, ITC’s most profitable business segment. This article examines what changed, how the excise duty alters ITC’s earnings and valuation narrative, and whether a higher dividend yield meaningfully changes the long-term story—without making buy or sell recommendations.
Why Did ITC’s Share Price Fall Sharply in January 2026?
On 7 January 2026, ITC’s share price declined to around ₹341.25, reflecting a sharp correction from recent highs. The primary trigger was the market’s reaction to a steep hike in excise duty on cigarettes announced by the government .
Brokerage reports highlighted that the revised excise structure could:
- Increase the total tax burden on cigarettes materially
- Pressure cigarette volumes due to higher end-consumer prices
- Compress margins if price hikes fail to fully offset the tax impact
As a result, several brokerages turned cautious and cut target prices by as much as 30–34%, citing slower earnings growth visibility for ITC’s core cigarette business .
Why Excise Duty Matters So Much for ITC
Cigarettes are not just another segment for ITC—they are the company’s primary profit and cash-flow engine.
Key characteristics of the cigarette business:
- High operating margins
- Strong pricing power (historically)
- Low capital intensity
- Major contributor to free cash flows and dividends
A sharp increase in excise duty directly impacts:
- Retail pricing (risking volume decline)
- Illicit trade (historically rises after tax hikes)
- Margin stability, if price hikes lag tax increases
This explains why the market reacted swiftly and decisively.
Dividend Yield Explained: Why It Crossed 4%
Dividend yield is calculated as:
Annual dividend per share ÷ share price
In ITC’s case:
- Dividend payouts remained broadly stable
- Share price corrected sharply post excise-duty news
- Result: Dividend yield mechanically rose above 4%
This higher yield has drawn attention from income-focused investors—but yield alone does not determine valuation attractiveness.
How ITC Generates Cash to Pay Dividends
To assess dividend sustainability, it is critical to understand where ITC’s cash flows come from.
ITC’s Key Business Segments
- Cigarettes
- FMCG (Foods, Personal Care, Agarbattis, etc.)
- Paperboards, Paper & Packaging
- Agri Business
Among these, cigarettes remain the dominant contributor to operating profits and cash flows, despite contributing a smaller share of revenues.
📊 ITC Revenue & Profit Mix (FY25)
(Based on FY25 Annual Report disclosures; figures rounded for simplicity)
Segment-wise Revenue & Profit Contribution
| Segment | Share of Revenue | Share of Segment Profit (EBIT) | Key Characteristics |
|---|---|---|---|
| Cigarettes | ~40–45% | ~75–80% | High margins, strong cash flows, low capex |
| FMCG (Non-Cigarettes) | ~25–30% | ~10–12% | Growing, margin expansion phase |
| Paperboards, Paper & Packaging | ~10–12% | ~7–9% | Cyclical, export-linked |
| Agri Business | ~15–18% | ~3–5% | Low margin, volume-driven |
| Others | <5% | <3% | Non-core |
This skewed profit contribution explains why regulatory changes affecting cigarettes have a disproportionate impact on ITC’s earnings and valuation.
While cigarettes contribute less than half of revenues, they generate nearly four-fifths of operating profits, making them the backbone of ITC’s dividend-paying capacity.
Cigarettes: Cash Flows Under Pressure, Not Collapse
As per Q2 FY26 disclosures:
- Cigarette segment revenue grew in mid-single digits YoY
- Margins remained resilient despite inflationary pressures
- Management highlighted calibrated pricing actions and cost controls
However, the new excise duty changes the near-term earnings trajectory, introducing uncertainty around:
- Volume elasticity
- Timing and extent of price hikes
- Risk of downtrading or illicit substitution
The business remains cash generative—but growth visibility has weakened.
FMCG: Growth Engine, But Not a Cash Substitute Yet
ITC’s FMCG (non-cigarette) business continues to grow steadily:
- High-single-digit revenue growth in Q2 FY26
- EBITDA margins around the low double digits
- Continued investments in brands, distribution, and innovation
While FMCG improves ITC’s long-term diversification, it cannot yet replace cigarette cash flows in supporting dividends at scale.
Dividend Sustainability: What the Numbers Suggest
ITC’s dividend-paying capacity rests on:
- Strong historical cash generation
- Low balance-sheet leverage
- Moderate capital expenditure requirements
However, sustained dividend growth now depends on:
- How effectively cigarette price hikes offset excise duty
- Stability of cigarette volumes over the next few quarters
- FMCG margin expansion over time
A high dividend yield improves income visibility, but does not eliminate earnings risk.
Does a Higher Dividend Yield Change the Valuation Story?
A 4%+ dividend yield can:
- Provide downside support during uncertainty
- Attract yield-oriented investors
But valuation still hinges on:
- Long-term cash flow durability
- Regulatory risk in cigarettes
- FMCG profitability trajectory
The excise duty hike explains why ITC continues to trade at a discount to other large FMCG peers, despite superior cash generation.
Key Risks to Track Going Forward
- Further taxation or regulatory action on cigarettes
- Volume elasticity post price hikes
- Growth slowdown in FMCG categories
- Illicit trade resurgence
These factors will determine whether the current valuation reflects opportunity—or sustained uncertainty.
Final Takeaway
ITC’s share price fall to around ₹341 in January 2026 was driven primarily by concerns over higher excise duty on cigarettes, not by a collapse in underlying business fundamentals.
While the resulting 4%+ dividend yield improves income comfort, the valuation story remains tightly linked to how effectively ITC navigates regulatory pressure while scaling its FMCG business.
Dividend yield supports valuation—but execution and policy risk will continue to shape the narrative.