The cost of balance

Research evidence excerpt

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ITC

The cost of balance

Reiterate Rating: NEUTRAL | PO: 305.00 INR | Price: 281.00 INR

Measured actions to protect franchise; Earnings pressured

03 August 2026

1QFY27 was the first full quarter under the new cigarette tax regime and gives a clearer

sense of the earnings impact on ITC. Cigarette EBIT/overall EPS decline in 1Q was

extremely sharp at -35%/-27% YoY (15-18% below estimates). Given the unprecedented

tax hike, the company resorted to staggered price hikes, coupled with multiple portfolio

interventions (a record 30+ new launches/variants; see Exhibit 1), with an aim to protect

its consumer franchise. Primary cigarette volumes likely declined in mid-single digits (we

reckon reported volume dip may be slightly higher adjusting for possible trade stocking

around pricing actions?) – but, the earnings hit is material. The situation remains fluid –

ITC needs to finely balance pricing/profitability and restrict volume loss (esp. to illicit

trade). Pace of earnings decline should moderate through FY27E as the company takes

up pricing gradually (~2/3rd of the required pricing actions may have been done by now).

Mix is a watch-out – Kings segment may be substantially impacted, but we see premium

DSFT becoming more relevant (vs. RSFT); the latter may not an unfavorable outcome in

the new regime where we est. EBIT/stick for Rs10 DSFT to be similar to Rs12.5 RSFT.

Equity

Fine-tuning estimates lower – reit. Neutral on valuation

We cut earnings 2-6% post 1Q. Execution will be key as ITC keeps calibrating pricing &

portfolio actions to limit volume/earnings hit. Taking a cue from 1Q and the company’s

measured approach, expect FY27E volume decline to be limited to high single digits. The

-30% YoY dip in EBIT/stick in 1Q can become flattish in 3-4 quarters, assuming pricing

continues without meaningful demand disruption. Our new SoTP-based PO of Rs305 (vs.

Rs315) reflects lower earnings and a 6-month roll forward; implied target multiple works

out to 19x Sept-28E EPS (vs. 19.5x FY28E). We note non-cigarette businesses now form

roughly half of our fair value. Reit. Neutral on valuation (~10% below history).

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