---
endpoint: analytics
pattern: Consumer
status: done
latency_ms: 174201
conversation_id: d5e557e9-9bdb-43b2-b804-a7d80d72cb30
citations: 0
created: 2026-05-31 19:25:59Z
---

# What’s the bull case bear case for ITC?

# ITC Ltd (ITC IB) — Bull Case / Bear Case

**Internal coverage source:** CLSA, lead analyst Aditya Soman. Latest dedicated note: *"ITC – O-PF (In-line sales & slightly weak margins)"*, 22-May-2025. Sector context from *"India consumer (4Q review: eroding moat(s))"*, 5-Jun-2025. CLSA's CY2025 corpus does not contain a single "bull/bear scenario" page for ITC, so the cases below are synthesized from CLSA's stated thesis, valuation framework, listed investment risks, and the 4QFY25 datapoints in the same notes.

## Snapshot (CLSA, priced 22-May-2025)

| Metric | Value |
|---|---|
| Rating | **O-PF (Outperform)** [1][2] |
| 12M target price | **Rs 496** (cut from Rs 518) [1] |
| Implied upside | **+16%** [8] |
| Methodology | 50% SOTP / 50% DCF (25-yr explicit DCF, WACC 11.9%, TG 4%) [3] |
| Market cap | US$62bn; BAT holds 29.4% [8] |
| FY26CL P/E / Div yield / ROE | **24.6x / 5.2% / 32.3%** [9] |
| FY26CL EV/EBITDA / EPS CAGR FY24–27 | **18.4x / 7%** [13] |
| 12M forward P/E vs LT avg | **23.8x vs 22.5x (+5.4% premium)** [14] |

---

## Bull Case

1. **Cigarettes growth is re-accelerating with a stable tax regime.** 4QFY25 cigarette revenue grew ~6% YoY, "largely volume led with some mix improvement"; CLSA estimates **5% volume growth in 4QFY25** [5] and CLSA values the cigarette business at **20x Mar'27CL P/E "to reflect a stable tax regime as the new government left the taxation rates on cigarettes unchanged in the recent budget"** [10]. After years of GST/cess headline risk, a multi-year window of unchanged taxation is the most important valuation unlock — the cigarette segment is ~58% of CLSA's SOTP fair value (Rs 285 of Rs 493/share). CLSA's quarterly volume series confirms volume momentum has been positive every quarter from 1QFY24 through 4QFY25, with FY25 full-year cigarette volume growth at +4% [11].

2. **Long-runway consumption story with high-quality financials.** CLSA explicitly bases its valuation on **"25 years of explicit forecasts to better model the growth opportunity for consumption in India, as we believe low penetration levels, rising incomes and a young population offer a long runway for sales growth"** [3]. The model supports **ROE expanding from 27.9% (FY25A) → 32.3% (FY26CL) → 37.6% (FY27CL) → 41.8% (FY28CL)** [9] and a **dividend yield rising to 5.2% in FY26CL** [9] — a rare combination of compounder-grade returns and yield support.

3. **Agri-business turning from cost-of-tobacco line into a real growth engine.** Agricultural revenue grew **+18% YoY in 4QFY25 driven by leaf tobacco and value-added agricultural products**, and **"the company commenced exports of nicotine and related products which we believe augurs well for the agricultural business starting from FY26"** [5]. The agri margin actually **expanded 46bps YoY** as inflation is a tailwind, not a headwind, for this segment [6].

4. **CLSA remains positive — house view is constructive on cigarettes recovery.** CLSA's own bottom line on the print: *"We remain positive on ITC, especially with cigarette growth picking up. We will watch closely for a recovery in FMCG margins. We maintain our Outperform rating…"* [2]. Forecast EPS growth profile is **+11% FY26CL / +15% FY27CL / +13% FY28CL** [9], with revenue projected to compound at ~11% from FY26 onward.

5. **Defensive balance sheet, capital-returns story intact.** Net debt/equity at **-38% (net cash)** with FY26CL free cashflow of ~Rs 169bn vs Rs 149bn FY25A — funding a free-cashflow payout ratio of 140%+ [9][1].

---

## Bear Case

1. **FMCG is the moat that is eroding.** This is the single most important new datapoint in the latest note. **"FMCG profit decline of 27% for the quarter was below recent trends and the second in a row. There was a sharp increase in input costs during the quarter, and investors are likely to watch this trend closely since improving FMCG margins have been a key driver of ITC's valuation. In addition to inflation, a significant increase in competitive intensity, sustained investment in trade and marketing were key drivers of margin contraction during the quarter."** [7]. **FMCG (others) EBIT margin** has fallen from ~8% in late FY24 to **~4.5% in 4QFY25** [11], rolling back several years of margin progress. CLSA's sector note flags ITC's revenue growth at only **+3.8% YoY in 4QFY25 with EBITDA -3.7% YoY and consolidated margin -264bps to 33.8%** — among the weakest in the F&B coverage [12].

2. **Estimates cut, target price cut.** CLSA **lowered FY26–27CL estimates by 4% and the target price from Rs 518 to Rs 496** on this print [1], driven by margin disappointment. Reported margin moves were ugly across the P&L: **cigarette margin -120bps YoY (leaf tobacco cost inflation), FMCG margin -273bps YoY, paper margin -491bps YoY** [6]. If the FMCG margin reset is structural rather than cyclical, the SOTP loses meaningful value (FMCG-Others is Rs 129/share at 6x EV/Sales — the second-largest SOTP bucket) [10].

3. **Paperboards remains structurally pressured by Chinese supply.** The paperboards, paper and packaging segment grew only **+6% YoY (2% below consensus) and remains impacted due to low-priced Chinese supply** [5]; paper margin dropped 491bps as **domestic wood costs surged** at the same time international supply pressured pricing [6] — a textbook margin squeeze.

4. **CLSA's own enumerated downside risks.** *"Risks include an increase in illicit cigarettes, anti-smoking regulations, sharp goods and services tax/cess hikes, and aggressive diversification in the healthcare sector."* [4]. Illicit-cigarette share gain is the single biggest threat to the cigarette volume thesis — if the macro shifts and the union government reverts to cess hikes, the 20x P/E multiple on the cigarette business compresses. The "aggressive diversification in the healthcare sector" risk specifically flags capital misallocation as a value-destroyer.

5. **Valuation no longer cheap; not in CLSA's top picks.** ITC trades at **23.8x 12-month forward P/E, a 5.4% premium to its long-run average of 22.5x** [14]. In CLSA's June-2025 4Q consumer review, ITC is rated O-PF but **is not on the top-picks list** — those are Eternal, Swiggy, DMart, Varun Beverages, Britannia and Nestlé in F&B/discretionary [13]. EPS CAGR over FY24–27 of **only 7%** is the lowest in the staples coverage [13], reinforcing that the multiple has limited room to re-rate from here unless FMCG margins recover.

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## CLSA's Net View

CLSA carries **Outperform with TP Rs 496 (+16% upside)** [1][8]. The thesis is asymmetric to two binary outcomes: (a) cigarette taxation staying benign + FMCG margin recovery → fair value moves toward Rs 500+, dividend yield + ROE compounding does the rest; (b) FMCG margin reset proves structural and/or GST/cess returns → the 20x cigarette multiple and the 6x FMCG EV/sales both compress. Today, the cigarette leg is working (+5% 4QFY25 volume) while the FMCG leg is failing (–27% segment profit, –273bps margin) — explaining the maintained O-PF rating but with TP and estimates cut.

---

**Sources**
[1] ITC – O-PF (In-line sales & slightly weak margins) — CLSA, 22-May-2025 — 607960308LinqAlpha.PDF (overview/thesis chunk)
[2] ITC – O-PF (In-line sales & slightly weak margins) — CLSA, 22-May-2025 — 607960308LinqAlpha.PDF (positive on cigarettes / maintain O-PF)
[3] ITC – O-PF — CLSA, 22-May-2025 — 607960308LinqAlpha.PDF (valuation details: SOTP + 25-yr DCF, low-penetration thesis)
[4] ITC – O-PF — CLSA, 22-May-2025 — 607960308LinqAlpha.PDF (investment risks paragraph)
[5] ITC – O-PF — CLSA, 22-May-2025 — 607960308LinqAlpha.PDF (segment volume growth: cigs/agri/FMCG/paper)
[6] ITC – O-PF — CLSA, 22-May-2025 — 607960308LinqAlpha.PDF (segment margin walk: -120/-273/-491bps, +46bps agri)
[7] ITC – O-PF — CLSA, 22-May-2025 — 607960308LinqAlpha.PDF (FMCG others: -27% profit, inflation + competitive intensity)
[8] ITC – O-PF — CLSA, 22-May-2025 — 607960308LinqAlpha.PDF (snapshot: TP, +16% upside, BAT 29.4%)
[9] ITC – O-PF — CLSA, 22-May-2025 — 607960308LinqAlpha.PDF (financials table: EPS, P/E, div yield, ROE FY24–28CL)
[10] ITC – O-PF — CLSA, 22-May-2025 — 607960308LinqAlpha.PDF (SOTP rationale: 20x cig P/E, stable tax)
[11] ITC – O-PF — CLSA, 22-May-2025 — 607960308LinqAlpha.PDF (cigarette volume growth quarterly series; FMCG EBIT margin series)
[12] India consumer (4Q review: eroding moat(s)) — CLSA, 5-Jun-2025 — 607961234LinqAlpha.PDF (ITC 4QFY25 revenue +3.8%, EBITDA -3.7%, margin -264bps)
[13] India consumer (4Q review) — CLSA, 5-Jun-2025 — 607961234LinqAlpha.PDF (comp table: ITC O-PF, EV/EBITDA, ROE, EPS CAGR, div yield; top picks list)
[14] India consumer (4Q review) — CLSA, 5-Jun-2025 — 607961234LinqAlpha.PDF (ITC 12M forward P/E 23.8x vs LT avg 22.5x, +5.4% premium)

