---
endpoint: analytics
pattern: Consumer
status: done
latency_ms: 158167
conversation_id: 6c5ef505-c09d-424c-bd06-6ca39d108a3f
citations: 10
created: 2026-05-31 21:11:34Z
---

# What is ITC’s core business franchise and the key components of its operating model?

# ITC Limited — Core Business Franchise & Operating Model

ITC is an Indian diversified consumer conglomerate where a dominant, high-margin cigarettes business funds a broader FMCG, agribusiness, paperboards/packaging, hotels and IT-services portfolio. CLSA (22-May-2025, "ITC – O-PF: In-line sales & slightly weak margins") describes the franchise and the operating model as follows.

## 1. The Profit Engine — Cigarettes

The core profit pool is cigarettes. CLSA states the investment thesis directly: **"A major portion of ITC's profits come from its cigarettes business, which has legs to grow on the back of share gains from the illicit sector. We believe a stable tax regime would aid growth in cigarette volumes…"** [1].

The 4QFY25 segment table makes the scale explicit: cigarettes contributed **Rs83.996bn of gross revenue (43% of segment revenue)** but **Rs51.179bn of EBIT (86% of total segment EBIT)** at a **60.9% EBIT margin** vs. 30.0% for the group [3]. In short, cigarettes is a low-share-of-sales, super-high-share-of-profit segment — every other business runs at a small fraction of cigarettes' profitability.

Within CLSA's SOTP, cigarettes are valued at **20× Mar'27CL P/E, contributing Rs284.7/share** — roughly 58% of the Rs493 SOTP fair value [4].

## 2. The Operating Segments — Five Pillars + Infotech

CLSA's segment-level disclosure (4QFY25) [3] and SOTP build [4] show the franchise as a five-segment listed entity plus an unlisted IT-services subsidiary:

| Segment | 4QFY25 Gross Rev (Rsm) | 4QFY25 EBIT (Rsm) | EBIT margin | Valuation method | SOTP contribution (Rs/sh) |
|---|---|---|---|---|---|
| Cigarettes | 83,996 | 51,179 | 60.9% | 20× P/E | 284.7 |
| Other FMCG | 54,946 | 3,449 | 6.3% | 6× EV/Sales | 128.7 |
| Agri-business | 36,492 | 2,551 | 7.0% | 8× EV/EBITDA | 15.5 |
| Paperboards, Paper & Packaging | 21,876 | 2,022 | 9.2% | 12× EV/EBITDA | 21.7 |
| **Total core (4 segments)** | **197,310** | **59,200** | **30.0%** | — | — |
| Hotels (to be demerged) | — | — | — | 25× EV/EBITDA | 19.8 |
| ITC Infotech | — | — | — | 25× P/E | 1.9 |
| Net cash | — | — | — | 1× | 21.0 |

Sources: [3] [4].

### Segment narratives (from the 4QFY25 commentary [6])

- **Cigarettes** — 4QFY25 grew **~6% YoY, "largely volume led with some mix improvement"** and flattish pricing [6]. Growth is structurally underpinned by share gain from illicit/contraband cigarettes [1].
- **Agribusiness** — grew **+18% YoY**, driven by leaf tobacco and value-added agricultural products. ITC also "commenced exports of nicotine and related products which we believe augurs well for the agricultural business starting from FY26" — i.e., the agri arm is partly vertically integrated upstream of the cigarettes business and is now being extended into international nicotine [6].
- **Other FMCG (foods, personal care, stationery, etc.)** — grew **+3.7% YoY (5.4% ex-notebooks)**, missing estimates [6]. This is the segment expected to take ITC's next leg of growth, but 4QFY25 saw **EBIT margin contract 273bps YoY** and absolute FMCG profit fall 27% YoY on input-cost inflation, competitive intensity and trade/marketing spend [5].
- **Paperboards, Paper & Packaging** — grew **+6% YoY** but margins **contracted 491bps YoY** because of (a) a surge in domestic wood costs and (b) low-priced Chinese supply pressuring realisations [6] [5].
- **Hotels** — being demerged into a separate listed entity. CLSA notes "the de-merger of its hotels business also assures investors that the company is increasingly looking at capital allocation and unlocking value" [1].
- **ITC Infotech** — small wholly-owned IT-services subsidiary; valued separately at 25× P/E and a possible future listing is flagged as a catalyst [2] [4].

## 3. Key Components of the Operating Model

Stitching the segment behaviour with the financials [8] and the strategic commentary [1] [2], the operating model has six load-bearing components:

1. **Cigarettes-funded conglomerate**: One ~60% EBIT-margin business generates ~85%+ of segment EBIT, and that cash is recycled into lower-margin FMCG, agri, paper, and hotels. The model is structurally a cash-cow + growth-options shape, not a multi-engine consumer staples portfolio.

2. **Vertical integration around tobacco**: The Agri-business is not unrelated diversification — it sources, processes and exports leaf tobacco and value-added agri products, and is now expanding into nicotine exports [6]. Leaf-tobacco cost is also the swing factor in cigarettes margins; CLSA flags that **cigarette EBIT margin contracted 120bps YoY in 4QFY25 from higher leaf tobacco costs** [5]. This is the most important cost linkage inside the group.

3. **FMCG as the volume-growth optionality**: Other-FMCG is run as a margin-expansion story — historically the engine of multiple re-rating — but is currently in a margin-compression phase from commodity inflation and competitive intensity, which CLSA flags as the key margin recovery watchpoint [5] [9]. Restructuring of this segment is called out as a potential catalyst [2].

4. **Active capital allocation / portfolio simplification**: After decades as a static conglomerate, ITC is now demerging Hotels and is openly considering an ITC Infotech listing — both are flagged as the company "increasingly looking at capital allocation and unlocking value" [1] [2] [9].

5. **Asset-light, net-cash, high-return balance sheet**: FY25A revenue Rs685.5bn, net profit Rs195.6bn (margin ~28.5%), EBITDA margin 33.9%, **ROE 27.9%, ROIC 50.4%, net debt/equity –38% (i.e., large net cash)**, with capex/sales at only 2.7% [8]. The model produces ~Rs149bn of FY25 FCF on Rs168bn of operating cashflow, supporting a Rs175bn dividend payout [8]. This is the underpinning that lets the group fund FMCG investment and demergers without leverage.

6. **Long-runway India consumption exposure**: CLSA's DCF runs 25 years of explicit forecasts at 11.9% WACC and 4% terminal growth, reflecting low penetration, rising incomes and a young demographic — i.e., ITC is modelled as a duration asset on the Indian consumption thesis, not just a near-term tobacco cash flow [9].

## 4. Key Risks to the Operating Model

CLSA identifies four risks that structurally threaten the franchise: **(i) rise in illicit cigarettes; (ii) anti-smoking regulations; (iii) sharp GST/cess hikes on cigarettes; and (iv) aggressive diversification in the healthcare sector** [7]. The first three all hit the profit engine directly; the fourth is a capital-allocation risk — a reminder that the conglomerate model is only value-accretive if cigarette cash is deployed disciplined­ly.

---

**Sources**
[1] ITC – O-PF (In-line sales & slightly weak margins) — CLSA (22-May-2025) — Investment thesis — 607960308LinqAlpha.PDF
[2] ITC – O-PF — CLSA (22-May-2025) — Catalysts: Infotech listing, FMCG restructuring, cigarette volume — 607960308LinqAlpha.PDF
[3] ITC – O-PF — CLSA (22-May-2025) — 4QFY25 segment revenue / EBIT / margin table — 607960308LinqAlpha.PDF
[4] ITC – O-PF — CLSA (22-May-2025) — New SOTP valuation table (Cigarettes, FMCG, Agri, Paper, Infotech, Hotels) — 607960308LinqAlpha.PDF
[5] ITC – O-PF — CLSA (22-May-2025) — Segment margin commentary: cigarette –120bps, FMCG –273bps, paper –491bps — 607960308LinqAlpha.PDF
[6] ITC – O-PF — CLSA (22-May-2025) — Segment revenue narrative: cigarettes volume-led, agri +18% with nicotine exports, FMCG ex-notebook +5.4%, paperboards under Chinese supply pressure — 607960308LinqAlpha.PDF
[7] ITC – O-PF — CLSA (22-May-2025) — Investment risks — 607960308LinqAlpha.PDF
[8] ITC – O-PF — CLSA (22-May-2025) — Financials-at-a-glance (FY24A–FY28CL P&L, balance sheet, ratios) — 607960308LinqAlpha.PDF
[9] ITC – O-PF — CLSA (22-May-2025) — Hotel demerger adjustment & DCF/SOTP methodology — 607960308LinqAlpha.PDF
[10] ITC – O-PF — CLSA (22-May-2025) — Outperform rationale and target-price adjustment — 607960308LinqAlpha.PDF

## Citations

- [1] **607960308LinqAlpha.PDF** · clsa — <s3://ext-linq-rms-clsa/2025/05/607960308LinqAlpha.PDF>
- [2] **607960308LinqAlpha.PDF** · clsa — <s3://ext-linq-rms-clsa/2025/05/607960308LinqAlpha.PDF>
- [3] **607960308LinqAlpha.PDF** · clsa — <s3://ext-linq-rms-clsa/2025/05/607960308LinqAlpha.PDF>
- [4] **607960308LinqAlpha.PDF** · clsa — <s3://ext-linq-rms-clsa/2025/05/607960308LinqAlpha.PDF>
- [5] **607960308LinqAlpha.PDF** · clsa — <s3://ext-linq-rms-clsa/2025/05/607960308LinqAlpha.PDF>
- [6] **607960308LinqAlpha.PDF** · clsa — <s3://ext-linq-rms-clsa/2025/05/607960308LinqAlpha.PDF>
- [7] **607960308LinqAlpha.PDF** · clsa — <s3://ext-linq-rms-clsa/2025/05/607960308LinqAlpha.PDF>
- [8] **607960308LinqAlpha.PDF** · clsa — <s3://ext-linq-rms-clsa/2025/05/607960308LinqAlpha.PDF>
- [9] **607960308LinqAlpha.PDF** · clsa — <s3://ext-linq-rms-clsa/2025/05/607960308LinqAlpha.PDF>
- [10] **607960308LinqAlpha.PDF** · clsa — <s3://ext-linq-rms-clsa/2025/05/607960308LinqAlpha.PDF>

