Cigarette Stock: Should ITC Ltd Split Its Business Into 1:2? What's Smoking In This FMCG Giant?

If you have used brands like Gold Flake, Classic, India Kings, Ashirwad, Sunfeast, and Yippee noodles, you will probably be familiar with its maker, ITC Ltd. The 116-year-old company, which started as a tobacco producer, is trying to create a household name in the FMCG market. However, the market seems to be ignoring ITC Ltd, who went from being one of the top 10 most valued companies in India to holding a 23rd position as of now. ITC stock has barely grown in the past five years, but yet it has a healthy return on equity (RoE) of 25.99% and lower price-to-equity ratio of 17.45x.

Are Investors Ignoring ITC Ltd Stock?

At present, ITC shares trade around Rs 264 apiece level on BSE, with market cap of Rs 3.31 lakh crore. This is already a deep correction of 38% from its 52-week high of Rs 426.50 apiece. ITC is in fact closer to its 52-week low of Rs 256.25 apiece. YTD, ITC is down by over 27%, while on year-on-year basis, the stock has slipped over 35%. In the 5-years performance, ITC crashed 36%.

ITC has over the time grown into a top contender in the FMCG sector despite its initial start in the tobacco industry.

The company's market cap which stood at Rs 5,571 crore in 1996, crossed Rs 1 lakh crore in 2005 and further surpassed Rs 2 lakh crore in 2012. Till 2017, ITC remained as the biggest FMCG until Hindustan Unilever dethroned it in 2018 for the first time. Despite being pushed to as second largest FMCG, ITC remained in top 10 most valued companies. At one point, ITC was above Rs 5 lakh crore m-cap in 2024.

However, gradually, ITC has lost its position but still holds the second largest FMCG title in India. It does appear that investors have broadly ignored ITC.

What Could Be The Reason?

"Our reverse-SoTP valuation exercise of ITC shows that the tobacco business of ITC is available at around 11X 1-year forward EPS. This would suggest that the market (1) expects the earnings of the tobacco business to stagnate at 'low' levels in perpetuity, (2) believes that the value of non-tobacco business is much lower and/or (3) has large apathy for the tobacco business," said analysts at Kotak Institutional Equities.

As per these analysts, the current market of ITC implies that the tobacco business is trading around 11x 1-year forward EPS.

What is 1-year forward EPS? 1-year forward EPS means the earnings per share a company is expected to generate over the next 12 months. From this we derive the forward PE ratio.

Example:

Current share price: Rs 500

Last 12-month EPS: Rs 20

Expected EPS over the next 12 months = Rs 25

Then: 1-year forward EPS = Rs 25

And the 1-year forward P/E would be: Rs 500/Rs 25 = 20x

Hence, this means that investors are paying 20× the earnings they expect the company to generate over the coming year.

Coming back to ITC, analysts explain that their 16X 2-year forward P/E multiple for the tobacco business seems
reasonable, as it implies 4.8% growth in FCFE in perpetuity assuming 11% cost of equity and 5.8% growth in FCFE in perpetuity assuming 12% cost of equity.

"We would note that the implied growth in net profits is similar to PAT growth estimates for the major global tobacco companies," analysts added.

Further, these analysts' 30X 2-year forward EV/EBITDA for the non-tobacco business may seem aggressive compared to peers, post the sharp derating in their multiples in the past few months.

However, analysts are predicting that ITC's non-tobacco business will likely grow faster than other companies, due to (1) likely stronger growth versus peers given lower market shares in several key categories and (2) scope for expansion in margins as the business scales up.

They added, "We see strong growth in revenues and EBIT despite moderate expansion in EBIT margin of the non-tobacco business in the next few years."

This is why Kotak's analysts strongly believe that ITC should split its tobacco and non-tobacco business. They believe a 1:2 split in the business could unlock potential values.

It needs to be noted that the split of business is not a new notion. ITC has already played that game when it demerged its hotel business this year. ITC split its hospitality business into a standalone company, ITC Hotels Ltd, with effect from January 6, 2026. Every eligible shareholder received 1 share of ITC Hotels for every 10 ITC shares held. ITC still holds 40% in the hospitality business, while 60% became publicly traded.

Why ITC Should Split In 1:2 Ratio?

"We believe that a vertical split of ITC into two different entities with (1) the tobacco business in one entity and (2) non-tobacco businesses in another entity could unlock significant value for shareholders," analysts added.

Additionally, they highlighted that the tobacco entity will likely attract 'value' shareholders looking for steady growth and high dividend yields while the non-tobacco entity will attract 'growth' investors as also a broader set
of investors who will not be deterred by ESG concerns associated with tobacco.

Overall, as of now, analysts model ITC's tobacco segment EBIT to be flat over FY2026-29E and non-tobacco FMCG segment EBIT to grow at 19% CAGR over FY2026-29E.

Accordingly, their 12-month target price on ITC is of Rs 360 per share, which does hint at potential upside.

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