- You could be overlooking a margin squeeze that may affect ITC's valuation.
- Core cigarette volumes rose 6.5% YoY, beating consensus.
- EBIT margin fell 140 basis points, driven by soaring leaf tobacco costs.
- Motilal Oswal maintains a neutral stance with a 21x Dec’27E P/E target.
- Sector peers are reacting differently—understanding why matters for allocation.
You missed the silent warning hidden in ITC's latest earnings.
Why ITC's Gross Cigarette Sales Beat Estimates Yet Margin Shrinks
ITC reported an 8% year‑on‑year growth in consolidated gross cigarette sales, topping the 7% consensus, while volume rose roughly 6.5% against a 6% estimate. The headline looks bullish, but the underlying EBIT margin contracted 140 basis points to 56.7% from 58.3% a year earlier. The primary culprit? A steep uptick in leaf‑tobacco prices, a cost component that directly erodes the profit per stick.
For investors, the contrast between top‑line growth and bottom‑line pressure is a classic red flag. When input costs accelerate faster than price hikes, margins compress, and earnings become more volatile. In the tobacco sector, leaf‑tobacco is the most price‑elastic raw material because it is sourced globally and subject to agricultural cycles, weather shocks, and regulatory tariffs.
How Premium Segment Outperformance Shapes the Competitive Landscape
ITC’s premium cigarette segment continued to outshine the mass market, delivering a higher EBIT contribution despite the overall margin dip. Premium brands typically enjoy stronger pricing power, allowing firms to pass a portion of raw‑material cost hikes to consumers without sacrificing volume. When a market leader levers its premium portfolio, competitors scramble. Tata Consumer Products, though not a direct tobacco player, has been expanding its packaged‑food premium lines, competing for discretionary spend. Meanwhile, domestic rivals such as Godfrey Phillips and VST Industries are intensifying promotional activity in the mass segment, which could further pressure ITC’s volume growth if price wars ensue.
Investors should monitor whether ITC can sustain its premium pricing advantage or if regulatory pressures—like higher excise duties or packaging bans—will erode that moat.
Historical Echoes: Past Margin Compression Episodes and Market Reaction
ITC faced a similar margin squeeze in FY22 when leaf‑tobacco prices spiked by 12%. The stock initially slipped 4%, but a strategic shift toward higher‑margin FMCG and digital services helped the company recover, delivering a 15% total return over the subsequent 12 months. The lesson: ITC’s diversified business model can cushion short‑term tobacco headwinds, but the timing and magnitude of the recovery depend on execution in its non‑cigarette segments.
Another reference point is British American Tobacco’s 2019 margin dip. Investors who understood the temporary nature of raw‑material cost spikes and the company’s cost‑optimization program were rewarded when margins rebounded, driving a 9% rally within a year.
Technical Snapshot: What a 21x Dec’27E P/E Means for Your Valuation
Motilal Oswal’s target price of INR 365 implies a forward price‑to‑earnings (P/E) multiple of about 21 times the projected earnings for December 2027. In simple terms, the market is pricing in a 21‑year‑ahead earnings stream at today’s price. For context, the broader Nifty 50 averages a forward P/E of roughly 18×, while the consumer‑goods segment trades near 20×. ITC’s premium suggests investors expect either higher growth, superior cash conversion, or a margin recovery.
If you believe the margin compression is temporary and the premium segment can lift EBIT margins back toward 58%+, the 21× multiple could look cheap relative to the company’s long‑term earnings power. Conversely, if raw‑material costs stay high and regulatory headwinds intensify, the multiple may be overly generous.
Investor Playbook: Bull vs Bear Cases on ITC
Bull Case
- Premium segment pricing power restores EBIT margin to 58%+ by FY28.
- Non‑cigarette businesses (FMCG, hotels, digital) deliver double‑digit growth, offsetting tobacco volatility.
- Leaf‑tobacco price cycle normalizes, reducing cost pressure.
- Regulatory environment remains stable, with no abrupt tax hikes.
- Stock trades below the 21× forward P/E, offering upside of 12‑15%.
Bear Case
- Continued rise in leaf‑tobacco costs squeezes margins further.
- Excise duty increases erode profitability of the mass segment.
- Competitive discounting forces volume decline in the core market.
- Non‑cigarette businesses underperform, leaving the company overly exposed to tobacco.
- Market re‑ratings push the forward P/E above 25×, compressing valuation upside.
Bottom line: ITC’s 3QFY26 numbers signal a classic growth‑vs‑margin trade‑off. Your decision hinges on how quickly you think the company can convert premium‑segment strength and diversified earnings into a restored margin profile.