Nomura has upgraded ITC to 'Buy' as it expects the impact of recent cigarette tax hikes to stabilize. While Q1 saw a volume dip, the brokerage anticipates a gradual recovery in profit margins through strategic pricing and portfolio growth. The company’s ability to manage tax-related cost pressures remains a key factor for future performance.
Nomura has upgraded its rating on ITC from 'Reduce' to 'Buy', raising the target price to Rs 340. The move comes as the brokerage firm signals that the most difficult period for the company’s core cigarette business, driven by recent tax adjustments, may be coming to an end.
Cigarette Business Performance
In the June quarter, ITC reported a 5% year-on-year decline in cigarette volumes. While this represents a drop in sales volume, the impact was less severe than the double-digit decline that many analysts had previously anticipated. However, the segment's profitability faced significant pressure, with earnings before interest and taxes (EBIT) falling 35% compared to the same period last year. This sharp decline reflects the immediate challenges of passing on tax-related cost increases to consumers.
Despite these hurdles, Nomura’s analysis suggests that the consumer response to price hikes has remained resilient. The brokerage observed that profitability hit its lowest point early in the quarter, specifically in April, followed by a gradual month-on-month improvement. This recovery is supported by the company’s strategy of implementing staggered price increases, which allows the business to adjust to tax changes without causing a massive drop in demand.
Profitability and Growth Outlook
Nomura expects that ITC will continue to improve its profit margins through product innovation and expansion of its existing portfolio. The brokerage firm now projects that the company could return to pre-tax hike EBIT levels by the fourth quarter of fiscal year 2027. This timeline is notably faster than earlier market projections.
For the full fiscal year 2027, the firm forecasts a 5% decline in cigarette volumes and a 20% decline in EBIT. However, these figures are expected to serve as a base for a rebound in fiscal year 2028, with anticipated volume growth of 3% and EBIT growth of 18%. These projections are based on the company's ability to balance pricing power with market demand.
Monitorable Risks
While the outlook for profitability is improving, ITC still faces potential challenges. A primary risk remains the regulatory environment, specifically the possibility of further tax increases on tobacco products. Any additional fiscal changes could disrupt the current recovery path. Additionally, investors will need to monitor whether the company can maintain its volume growth if further pricing actions become necessary to protect profit margins. The progress of the company’s non-cigarette businesses, such as FMCG and hotels, will also be an important factor in the overall financial health and stability of the company in the coming quarters.