According to Kotak Securities, ITC's tobacco business appears significantly undervalued by the market, with the brokerage's reverse-SoTP valuation suggesting the business is valued at around 11X its one-year forward earnings. The implied one-year forward P/E of ITC's tobacco business is based on depressed FY2027-28E earnings per share compared with FY2026 levels. As reported by Kotak Securities, this valuation suggests that the market either expects the tobacco business' earnings to remain stagnant at low levels in perpetuity, believes the value of ITC's non-tobacco businesses is significantly lower, or has limited appetite for the tobacco business. The brokerage noted that the 11X implied P/E for ITC's tobacco business in the reverse-SoTP valuation suggests that the market either expects earnings to stagnate at low levels in perpetuity or considers Kotak's near-term earnings estimates for the business too aggressive.
According to Kotak Securities, the brokerage assigns a 16X multiple to September 2028E earnings for the tobacco business, resulting in a 12-month fair value of ₹194. For the non-tobacco business, it uses 30X September 2028E EBITDA to arrive at a 12-month fair value of ₹80. The brokerage assigns another ₹84 to ITC's other businesses and cash. The implied growth in net profit is similar to the PAT growth estimates for major global tobacco companies, as noted by Kotak Securities.
According to Kotak Securities, the brokerage expects ITC's non-tobacco business to deliver faster profit growth than other companies. The brokerage attributes this to likely stronger growth in several key categories where ITC has lower market shares, along with the scope for margin expansion as the business scales up. Kotak expects strong growth in revenue and EBIT from the non-tobacco business over the next few years, even with only moderate expansion in its EBIT margin.
According to Kotak Securities, the brokerage's core argument is that ITC's current valuation does not appear to fully reflect the value it assigns to the tobacco and non-tobacco businesses separately. The brokerage suggests that splitting ITC's operations could unlock significant shareholder value. The tobacco entity could attract value-oriented shareholders seeking steady growth and high dividend yields, while the non-tobacco entity could appeal to growth investors as well as a broader pool of investors who may otherwise be deterred by ESG concerns associated with tobacco. The brokerage noted that its assumptions for the tobacco business should address the market's concerns about aggressive near-term earnings estimates.
