---
endpoint: analytics
pattern: Consumer
status: done
latency_ms: 162186
conversation_id: 5f30d5ff-8d9d-4cfc-bf20-f03b7943249c
citations: 15
created: 2026-05-31 21:29:06Z
---

# What is the investment thesis for ITC in the current market environment?

# ITC Ltd Investment Thesis — Current Market Environment

**Rating: Outperform (O-PF) | Target Price: Rs496 (cut from Rs518) | Last Price (22-May-2025): Rs426.10** [11]

*Source: CLSA's most recent ITC coverage (22-May-2025) following 4QFY25 results. Note CLSA corpus recency — the latest internal CLSA note on ITC is dated 22-May-2025, so "current" reflects late-May 2025 vintage rather than literal today.*

---

## 1. Core Investment Thesis

CLSA's bull case rests on three pillars [1]:

1. **Cigarettes engine — the profit core.** A major portion of ITC's profits come from its cigarettes business, which has structural legs to grow on the back of **share gains from the illicit segment**. CLSA believes a **stable tax regime** would aid growth in cigarette volumes [1]. The recent budget left taxation rates on cigarettes unchanged, reinforcing this stability and supporting CLSA's 20x Mar'27CL PE multiple for the cigarettes business [8].

2. **FMCG margin trajectory.** Margins for the other FMCG business "would continue on an upward trajectory" over the medium term — improving FMCG margins have historically been a key driver of ITC's valuation [1][5].

3. **Capital allocation / value unlock.** The **de-merger of the hotels business** assures investors that the company is increasingly focused on capital allocation and unlocking value [1]. This was a key structural catalyst incorporated into the current SOTP.

---

## 2. Latest Quarter (4QFY25) — Thesis Validation Check

ITC's 4QFY25 print was a mixed signal: top-line beat, margins missed [2].

| Metric | Actual | vs. CLSA Est. | vs. Consensus |
|---|---|---|---|
| Revenue YoY | **+9%** | +3% | +4% |
| Cigarettes segment growth | **+6% YoY** (volume-led) | — | — |
| Segmental EBIT margin | **−204 bps YoY** | Miss | Miss |
| EBIT vs. consensus | — | −2% | **−6%** |
| Reported revenue (Rs m) | **170,203** | — | **+4% vs. consensus 163,766** |
| Reported EBITDA (Rs m) | **57,585** | — | **−4% vs. consensus 59,939** |
| EBITDA margin | **33.8%** | — | YoY **−264 bps** [15] |

[2][14][15]

**Segment-by-segment readout:**

- **Cigarettes (+6% YoY)** — Largely volume-led with some mix improvement; pricing flattish [3]. Cigarette margin contracted **120 bps YoY** on higher leaf tobacco costs [4].
- **Agriculture (+18% YoY)** — Strong growth driven by leaf tobacco and value-added products. ITC commenced **nicotine exports**, which CLSA flags as a positive structural tailwind for the agribusiness starting FY26 [3]. Agri margin **expanded 46 bps YoY** — a beneficiary of the same inflation hurting other segments [4].
- **FMCG others (+3.7% YoY)** — Missed estimates by 1%/4%. Ex-notebooks, growth was 5.4% YoY [3]. **FMCG profit declined 27% YoY** — the second consecutive weak quarter [5]. FMCG margin contracted **273 bps YoY** on severe agri-commodity inflation, partially offset by cost savings [4].
- **Paperboards/Paper/Packaging (+6% YoY)** — Hit by **low-priced Chinese supply**; paper margin contracted **491 bps YoY** with a significant surge in domestic wood costs [3][4].

---

## 3. What Changed in the Thesis This Cycle

CLSA cut FY26-27CL EPS estimates by **4%** and reduced the target price from **Rs518 → Rs496** to reflect lower margins, while **maintaining Outperform** [2][6][7].

The reason for the downward revision is narrower than a structural thesis change: it is a margin reset, not a volume reset. CLSA notes "we remain positive on ITC, especially with **cigarette growth picking up**" [6]. The bigger watch-item is **FMCG margin recovery** — CLSA explicitly says it will "watch closely for a recovery in FMCG margins" because that has been a key driver of valuation [5][6].

---

## 4. Valuation Framework

Target price is based on **an equal blend of DCF and SOTP** [8]:

**SOTP multiples:**

| Business | Multiple | Methodology |
|---|---|---|
| Cigarettes | **20x Mar'27CL PE** | Reflects stable tax regime |
| FMCG (other) | **6x EV/sales** | — |
| Agribusiness | **8x EV/EBITDA** | — |
| Hotels (others) | **25x EV/EBITDA** | — |
| Paperboards, Paper & Packaging | **12x EV/EBITDA** | — |
| ITC Infotech | **25x PE** | — |

[8]

**DCF inputs:** 25-year explicit forecast horizon, **WACC 11.9%**, **terminal growth 4%**. The long horizon is rationalized by India's low FMCG penetration, rising incomes, and young demographics offering a "long runway for sales growth" [8].

---

## 5. Catalysts to Watch

CLSA flags two potential positive catalysts [9]:

- **Listing/restructuring of ITC Infotech** or a new structure for the non-FMCG businesses.
- **Sustained cigarette volume growth** as the base normalises.

---

## 6. Risks to the Thesis

[10]

- **Illicit cigarettes** — A rise in illicit volumes directly undercuts the share-gain thesis underpinning cigarette growth.
- **Anti-smoking regulations** — Tightening regulation could disrupt volumes.
- **Sharp GST/cess hikes on cigarettes** — Would invalidate the "stable tax regime" assumption that justifies the 20x cigarette multiple.
- **Aggressive diversification into healthcare** — Capital allocation risk if the company over-invests outside core competence.

Additional near-term risk identified in 4QFY25: **competitive intensity in FMCG** has materially increased, with sustained trade/marketing investment compressing margins — investors will watch this trend closely since improving FMCG margins are a key valuation driver [5].

---

## 7. Sector Context — Where ITC Sits in CLSA's India Consumer Coverage

In CLSA's 5-Jun-2025 India consumer 4Q review ("eroding moat(s)?"), the broader frame is:

- 4Q reaffirmed weak FMCG trends — **HPC** 4% YoY sales growth with slight EBITDA decline; **F&B** 7% sales growth with slight EBITDA growth; **QSR** in high-teens [12].
- CLSA's order of preference: **retail/discretionary > staples; within staples, F&B > HPC** [12].
- Top picks (O-PF) in the consumer space are **Eternal, Swiggy, DMart, Varun Beverages, Britannia, Nestle** [12]. ITC is rated **O-PF** at Rs416.7 (price reference 5-Jun-2025) but is NOT on the top-picks list [13] — implying it is a constructive name within a generally cautious staples view, but not a high-conviction call.

---

## Bottom Line

ITC's investment thesis in CLSA's current frame is a **cigarette-anchored cash-flow story with optionality from FMCG margin recovery and ongoing portfolio simplification**. The cigarette business — supported by an unchanged budget tax regime and share gains from the illicit segment — provides the visible growth engine; FMCG remains the swing factor. The 4QFY25 print validated the **volume** side of the cigarette thesis but flagged a tactical margin reset driven by leaf tobacco and FMCG commodity inflation. CLSA reduced the target to **Rs496 on a 4% EPS cut**, maintained **Outperform**, and continues to view ITC as a positive holding while waiting for an FMCG margin inflection [6][7].

---

**Sources**
[1]–[11] CLSA — "ITC – O-PF (In-line sales & slightly weak margins)" — 22 May 2025 (607960308LinqAlpha.PDF)
[12]–[15] CLSA — "India consumer (4Q review: eroding moat(s))" — 5 June 2025 (607961234LinqAlpha.PDF)

*Note on freshness:* The latest CLSA coverage of ITC available internally is dated 22-May-2025; CLSA's broader India consumer review is dated 5-Jun-2025. No public-data (Manticore TFS / news) cross-check was added — the question is scoped to investment thesis, which is fully covered by CLSA's sell-side research above. Newer data points (e.g., 1QFY26 results, post-Jun-2025 cigarette tax updates, FMCG margin trajectory) would refine — not overturn — this thesis structure.

## 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>
- [11] **607960308LinqAlpha.PDF** · clsa — <s3://ext-linq-rms-clsa/2025/05/607960308LinqAlpha.PDF>
- [12] **607961234LinqAlpha.PDF** · clsa — <s3://ext-linq-rms-clsa/2025/06/607961234LinqAlpha.PDF>
- [13] **607961234LinqAlpha.PDF** · clsa — <s3://ext-linq-rms-clsa/2025/06/607961234LinqAlpha.PDF>
- [14] **607961234LinqAlpha.PDF** · clsa — <s3://ext-linq-rms-clsa/2025/06/607961234LinqAlpha.PDF>
- [15] **607961234LinqAlpha.PDF** · clsa — <s3://ext-linq-rms-clsa/2025/06/607961234LinqAlpha.PDF>

