Shares of ITC Ltd., India's largest cigarette manufacturer, experienced their steepest decline in almost six years following the Indian government's decision to increase taxes on tobacco products. The move triggered concerns about the potential impact on ITC's profitability and market position.

The government notification, released late Wednesday, stipulated that excise duties on cigarettes would range from 2,050 to 8,500 rupees per 1,000 sticks, effective February 1st. Analysts at Jefferies Financial Group Inc. estimated that, if the National Calamity Contingent Duty (NCCD) remains in place, these higher charges translate to a tax hike exceeding 30%. The NCCD is a surcharge levied on goods deemed harmful, often referred to as "sin goods."

The immediate market reaction was significant. ITC's stock price plummeted, reflecting investor apprehension about the company's ability to maintain sales volumes and profit margins in the face of increased taxation. The tobacco industry in India is particularly sensitive to tax changes, as higher prices can lead consumers to switch to cheaper, often unregulated, alternatives like bidis or smuggled cigarettes. This can negatively impact the organized sector, where ITC holds a dominant share.

ITC, a diversified conglomerate with interests spanning from cigarettes and consumer goods to hotels and agribusiness, has historically relied heavily on its cigarette business for revenue and profit generation. The company has been working to diversify its revenue streams, but cigarettes still constitute a significant portion of its earnings.

Looking ahead, the increased tobacco tax presents a challenge for ITC. The company will likely need to consider strategies such as price adjustments, cost optimization, and further diversification to mitigate the impact on its financial performance. The effectiveness of these strategies will determine ITC's ability to navigate the evolving regulatory landscape and maintain its leadership position in the Indian cigarette market.