ITC’s Tobacco Division Priced Low, but Kotak Institutional Equities Sees Underrated Value

ITC’s valuation within the market reveals a significant disparity regarding its tobacco business, which is currently priced at an implied one-year forward price-to-earnings (P/E) ratio of around 11X, according to Kotak Securities. This drastically underestimates the potential growth and profitability of the tobacco segment, prompting speculation that the market either anticipates stagnant earnings or lacks interest in the tobacco sector altogether. Conversely, Kotak assigns a 16X multiple to the tobacco business’s earnings forecast for September 2028, suggesting a recorded value of Rs 194. This implies a cautious optimism about future free cash flow growth, equating to an expected 4.8% growth in perpetuity, but still raises questions about the aggressive nature of near-term earnings predictions.

In contrast, ITC’s non-tobacco business is valued more favorably, with Kotak applying a 30X multiple based on expected enterprise value/EBITDA. This high valuation reflects anticipated rapid profit growth as ITC expands its presence in several key categories where it currently holds lower market shares. Although this multiple might seem elevated, the underlying growth potential supports the brokerage’s outlook. Kotak’s analysis foresees robust revenue and EBIT growth from the non-tobacco sector, despite projected modest improvements in operational margins.

A noteworthy insight from Kotak’s assessment is the potential for value creation through a vertical split of ITC into two separate entities. Such a move could attract a diversified investor base; the tobacco sector would likely appeal to value-focused investors while the non-tobacco entity could draw in those concerned with ESG and seeking higher growth. The current integrated structure appears to undervalue the individual components of ITC, and a distinct separation could enhance clarity around investment propositions while optimizing shareholder returns.

Source: The Economic Times

(Expert Note: This intelligence brief was structured and verified by the Wealthova editorial desk.)