---
endpoint: analytics
pattern: Consumer
status: done
latency_ms: 188703
conversation_id: 80fa358b-1bab-449d-99b5-4c3766fb6b67
citations: 14
created: 2026-05-31 21:13:07Z
---

# What are the key risks to ITC’s growth trajectory?

# Key Risks to ITC's Growth Trajectory

ITC Ltd. (BSE: 500875 / NSE: ITC) is an Indian conglomerate with cigarettes (~60% of EBIT), Other FMCG, Hotels (being demerged), Agri-business, Paperboards & Packaging, and Infotech. The risks below combine CLSA's most recent assessment (O-PF, TP Rs496) with disclosures from ITC's own filings and presentations.

## 1. Cigarette Taxation and Regulation — The Single Biggest Risk

Cigarettes drive the bulk of ITC's profit pool, so any disturbance to the tax regime is the dominant valuation risk. CLSA's formal investment-risk list flags four items, three of which sit inside the cigarette business: **a rise in illicit cigarettes, anti-smoking regulations, and sharp GST/cess hikes** [1]. CLSA's positive thesis explicitly assumes a "stable tax regime would aid growth in cigarette volumes" [5] — and CLSA's SOTP applies a 20x Mar'27 PE to cigarettes only "to reflect a stable tax regime" — so a reversion to punitive hikes directly de-rates the largest segment.

The structural evidence for this fragility comes from ITC's own filings:

| Period | Tax-rate change | Revenue collection growth |
|---|---|---|
| FY13–FY17 (CAGR) | **+15.7%** | **+4.7%** |
| Apr'18–Jan'20 (vs. Jul'17–Mar'18) | Stable | +10.2% |

Sharp excise hikes destroyed the tax base by feeding illicit trade rather than the exchequer [11]. The company itself describes the consequence: punitive taxation has "created extremely attractive tax arbitrage opportunities for unscrupulous players resulting in rapid growth in illicit cigarette trade, making **India the 4th largest illicit cigarette market globally**" [9], with an **estimated annual revenue loss of ~Rs 21,000 crore** to the exchequer [10]. Any future GST Council move to add a "sin cess" or normalise rates after the GST compensation cess sunset is therefore a direct hit to legal volumes — and ITC has publicly conceded the channel works both ways: stability lets it claw back volume from illicit trade, instability lets illicit trade reclaim it [9].

## 2. Leaf-Tobacco Cost Inflation Compressing Cigarette Margins

Even with no policy change, the cigarette segment is now seeing input-cost shock. In 4QFY25 the **cigarette EBIT margin contracted ~120 bps YoY** to 60.9%, driven by "higher leaf tobacco costs" [2][8]. CLSA flagged that "the cigarettes business continued to see sharp cost escalation in leaf tobacco prices" and lowered its **FY26-27 EPS estimates by 4% and target price from Rs518 to Rs496** in direct response [6]. ITC management has corroborated this: Q2 FY25 commentary cited "sharp escalation in certain input costs (leaf, wood etc.)" alongside subdued demand and unusually heavy rains [13]. Pricing power is the natural offset, but the cigarette segment showed **flattish pricing in 4QFY25 with growth being volume-led**, meaning the company is choosing not to push pricing — likely to protect against illicit trade — and absorbing margin compression instead [6].

## 3. FMCG (Other) Margin Erosion and Competitive Intensity

Improving margins in Other-FMCG has been a key valuation driver for ITC. That story is now under pressure. In 4QFY25:

- **FMCG revenue grew only 3.7% YoY** (5.4% ex-notebooks), missing CLSA's estimate by 1% and consensus by 4% [3].
- **FMCG segment EBIT margin contracted 273 bps YoY** to 6.3% [2][8].
- **FMCG profit fell 27% YoY** — the second consecutive quarter of decline — driven by "sharp increase in input costs… a significant increase in competitive intensity, sustained investment in trade and marketing" [4].

CLSA's broader 4QFY25 consumer review reinforces that this is a sector-wide moat erosion event, not idiosyncratic to ITC: the title literally asks "eroding moat(s)?" and concludes "4Q reaffirmed recent trends of weak consumption trends across the FMCG sector… urban lags rural but urban is where distribution is being challenged" [7]. With quick-commerce platforms (Blinkit, Instamart, Zepto) eating incremental staples spend, the FMCG re-rating thesis is at risk.

## 4. Paperboards — Structural China Dumping and Wood-Cost Shock

The Paperboards, Paper & Packaging segment is being hit on both sides of the P&L:

- **Revenue growth of only 6% YoY in 4QFY25**, with the segment "impacted due to low-priced Chinese supply" in global markets [3].
- **EBIT margin collapsed 491 bps YoY** as "domestic wood costs" surged [2]; absolute Paperboards EBIT was 31% below 4QFY24 and 40% below consensus [8].

This is not new — ITC has been flagging "muted domestic demand, surge in wood cost and high base effect" along with subdued global demand [12] — but the magnitude of the margin hit means the segment is now a **detractor** rather than a stable cash contributor in CLSA's SOTP.

## 5. Agri-Business Exposed to Government Trade Policy

The Agri segment was the bright spot in 4QFY25 (revenue +18% YoY), but ITC itself warns it is structurally exposed to non-commercial risk: **"Geopolitical tensions and climate emergencies have led to concerns over food security and food inflation globally. To ensure India remains food secure, Government has had to impose trade restrictions on agri commodities; consequently limiting business opportunities for the Agri Business"** [12]. The leaf-tobacco export sub-segment additionally faces "lower export incentives in India and high import duty levied in several markets, including the USA and Europe", which "have weighed on the competitiveness of Indian leaf tobacco exports" [14]. Climate variability (CLSA noted "unusually heavy rains" in 1HFY25 [13]) adds quarterly volatility to crop yields and procurement costs.

## 6. Hotel Demerger and Capital-Allocation Execution

The Hotels demerger is CLSA's bull-case catalyst — "the de-merger of its hotels business also assures investors that the company is increasingly looking at capital allocation and unlocking value" [5]. The conversion of catalyst into risk if either (a) the spin-off underperforms post-listing, depressing value-unlock perception, or (b) ITC fails to follow through with the next stage (ITC Infotech listing, restructuring of Other-FMCG). CLSA's TP itself was reduced partly to "reflect hotel demerger" math [6].

## 7. "Aggressive Diversification in Healthcare"

CLSA flags this explicitly as a formal investment risk [1]. ITC has historically been criticised for diluting capital-allocation discipline through new-segment expansion. Healthcare is capital-intensive, low initial-margin and far from ITC's core competencies — meaningfully aggressive M&A or organic spend here would be a return-on-capital risk and a re-rating risk in itself.

## Summary Table — Segment Risk Map (4QFY25 actuals)

| Segment | Rev YoY | EBIT YoY | Margin YoY change | Key risk |
|---|---|---|---|---|
| Cigarettes | +6% | +4% | **-120 bps** | Tax hikes, illicit trade, leaf tobacco inflation [2][8] |
| Other FMCG | +4% | **-28%** | **-273 bps** | Input inflation + competition + weak urban demand [4][8] |
| Agri | +18% | +26% | +46 bps | Govt trade restrictions, climate, export incentives [12][14] |
| Paperboards | +6% | **-31%** | **-491 bps** | Chinese dumping, wood cost surge [2][3][8] |
| Total ITC | +7% | flat | **-204 bps** | Re-rating risk if FMCG margins don't recover [6][8] |

## Bottom Line
ITC's growth trajectory is most exposed to **(1) any GST/cess hike that breaks the post-2020 stability in cigarette taxation**, which would simultaneously feed illicit trade and compress legal volumes [1][9][10][11]; **(2) sustained leaf-tobacco and wood inflation** that the company is currently absorbing via margin rather than passing on via price [2][6]; **(3) FMCG margin compression** from rising competitive intensity in an environment of weak urban consumption [4][7]; and **(4) execution risk on the Hotels demerger and any aggressive healthcare diversification** that misallocates capital [1][5]. The 4QFY25 result already forced CLSA to cut estimates ~4% and the TP from Rs518 to Rs496 — quantifying how rapidly these risks translate into value loss when they materialise simultaneously [6].

---
**Sources**
[1] ITC – O-PF (In-line sales & slightly weak margins), Investment risks — CLSA (22 May 2025) — 607960308LinqAlpha.PDF
[2] ITC – O-PF, Margins impacted by inflation — CLSA (22 May 2025) — 607960308LinqAlpha.PDF
[3] ITC – O-PF, Volume-driven growth in cigarettes; FMCG and paper weak — CLSA (22 May 2025) — 607960308LinqAlpha.PDF
[4] ITC – O-PF, FMCG Others: inflation a concern — CLSA (22 May 2025) — 607960308LinqAlpha.PDF
[5] ITC – O-PF, Investment thesis — CLSA (22 May 2025) — 607960308LinqAlpha.PDF
[6] ITC – O-PF, In-line sales & slightly weak margins (summary) — CLSA (22 May 2025) — 607960308LinqAlpha.PDF
[7] India consumer (4Q review: eroding moat(s)) — CLSA (5 Jun 2025) — 607961234LinqAlpha.PDF
[8] ITC – O-PF, 4QFY25 segment results table — CLSA (22 May 2025) — 607960308LinqAlpha.PDF
[9] ITC Limited — Q4 FY21/22 Report (press release) — ITC corporate filing
[10] ITC Ltd. — Annual Report FY24/25 (ended Mar-2025) — ITC corporate filing
[11] ITC Ltd. — Annual Report FY21/22 (ended Mar-2022) — ITC corporate filing
[12] ITC Limited — Q3 FY23/24 Report (press release) — ITC corporate filing
[13] ITC Ltd. — Q2 FY25 IR PPT / Earnings Call slides — ITC corporate presentation
[14] ITC Ltd. — Annual Report FY22/23 (ended Mar-2023) — ITC corporate filing

## 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] **607961234LinqAlpha.PDF** · clsa — <s3://ext-linq-rms-clsa/2025/06/607961234LinqAlpha.PDF>
- [8] **607960308LinqAlpha.PDF** · clsa — <s3://ext-linq-rms-clsa/2025/05/607960308LinqAlpha.PDF>
- [9] **ITC Limited - Q4 21/22 - Report** · external
- [10] **ITC Ltd. (500875-IN) - Annual Report for period end 31-Mar-2025 (English) - PDF** · external
- [11] **ITC Ltd. (500875-IN) - Annual Report for period end 31-Mar-2022 (English) - PDF - 1 / 3** · external
- [12] **ITC Limited - Q3 23/24 - Report** · external
- [13] **ITC Ltd. IR PPT: Q2 2025 Earnings Call** · external
- [14] **ITC Ltd. (500875-IN) - Annual Report for period end 31-Mar-2023 (English) - PDF - 2 / 4** · external

