HDFC Securities kept an 'Add' rating on ITC Ltd with a target of Rs 300. The brokerage notes that while price hikes may help profit margins by the fourth quarter of FY2027, the company is likely to see a 6% decline in cigarette sales volumes this year amid pressure from illicit trade and competitive pricing.
HDFC Securities has maintained its 'Add' rating on ITC Ltd, setting a price target of Rs 300. This target is calculated using a method that breaks down the company into its individual business parts, valuing the cigarettes segment at Rs 137 per share and the FMCG division at Rs 98 per share. While the company is implementing price hikes to maintain profitability, the brokerage indicates that the overall health of its earnings will depend on whether sales volumes can recover.
Volume Pressures and Pricing Strategy
Although the company has raised prices to manage costs, these decisions have come with trade-offs. The brokerage projects a 6% decline in cigarette sales volumes for the current fiscal year. Data through the first nine months of fiscal year 2027 showed underlying weakness in sales, and projections for fiscal year 2028 remain cautious with an expected 3% volume drop. The brokerage suggests that aggressive pricing strategies, while necessary for margins, have contributed to these lower sales volumes.
The Impact of Illicit Trade
Beyond internal business strategy, the brokerage report highlights the rise of illicit trade as a significant risk. The unregulated tobacco market acts as a major competitor, often undercutting legal cigarette prices, which can further impact volume growth. This issue is a common factor in the Indian tobacco sector, as the industry faces high tax structures that make lower-priced, illegal alternatives attractive to some consumers.
What Investors Should Monitor
Looking ahead, the brokerage expects that the price hikes implemented by the company could help stabilize profit margins on a per-stick basis by the fourth quarter of fiscal year 2027. For shareholders, the most important development to track will be signs of a consumer demand rebound. If demand strengthens, it could offset the current volume contraction. Investors may also look for any updates on regulatory shifts regarding tax policies or enforcement against illicit trade, as these factors directly influence the company's competitive position and ability to grow volumes.