ITC Limited is experiencing a remarkable market paradox.
This makes ITC the second-most leveraged stock on NSE's MTF book, behind only HDFC Bank. The divergence between falling prices and rising leverage signals a battle between momentum sellers and value buyers betting on a recovery.
Several factors are driving investors to accumulate ITC exposure using borrowed funds despite the price decline. The current valuation appears attractive to contrarian investors—the stock trades at a P/E ratio of 16.89, which may be seen as undemanding for a quality large-cap with strong cash flows. Q4 FY26 results showed resilience, with net profit growing 9% sequentially to ₹5,469.74 crore despite revenue declining 11%, demonstrating effective cost control.
The non-cigarette FMCG business has reached an inflection point. Q4 FY26 revenue grew 15% year-on-year to ₹6,352 crore, with segment PBIT surging 51% to ₹526 crore. EBITDA margins expanded 200 basis points to 11%, reflecting years of brand investment finally reaching scale efficiency. The digital-first portfolio is growing 60% annually, contributing around ₹1,000 crore in annual recurring revenue.
Additionally, the paperboards segment is showing signs of margin recovery. Q4 FY26 segment results grew 21.2% year-on-year to ₹245 crore, driven by the Minimum Import Price (MIP) of ₹67,200 per metric tonne on virgin multi-layer paperboard and moderating wood prices. Analysts estimate a potential ₹10 billion EBIT boost by FY27 from this recovery.
The tax structure changed fundamentally: GST increased from 28% of transaction value to 40% of Retail Sale Price (RSP), while excise duties rose steeply following the phasing out of Compensation Cess. The overall tax burden increased by approximately 60-65% for ITC, requiring around 35% hike in MRPs at historical mix—the steepest hike seen historically.
This creates severe earnings pressure. While specific Motilal Oswal projections of 15% revenue decline and 19% EBT drop were not directly accessible, multiple brokerages forecast similar declines. Crisil Ratings estimates 6-8% industry volume contraction in FY27, while analysts cited in Business Standard project 9.5% volume decline and 6.8% EBIT decline for ITC's cigarette business. The unprecedented tax increase enhances tax arbitrage opportunities for illicit operators, which already account for approximately 25% of India's total cigarette market by volume.
The company cannot fully pass through the 50%+ tax increase without triggering massive volume losses to cheaper illicit alternatives, which can offer cigarettes at 50-60% discount to legal products while maintaining attractive margins. InvestorPresentations
Ongoing MRP revisions add another layer of uncertainty. The transition to RSP-based valuation for GST calculation has created accounting distortions—excise duty is now included in Gross Revenue while GST is not, making Q4 FY26 cigarette revenue growth of 29.5% appear artificially strong. On a net basis, cigarette revenue grew only 11.4% year-on-year. The channel filling effects and product mix changes during this transition make near-term earnings visibility poor.
Jefferies captured this uncertainty: "Real test is in 1QFY27 when impact of sharp tax hike will be visible, as price hikes are only partial while volumes and margins will be affected".
The fundamental reason cigarette headwinds dominate ITC's near-term trajectory is the massive earnings contribution disparity. The cigarette segment's Q4 PBIT of ₹5,797 crore is more than 10x the FMCG Others segment PBIT of ₹526 crore. Even a 10% decline in cigarette earnings completely overwhelms a 50% increase in FMCG profits.
The market is pricing in the transition rather than rewarding current improvements. Brokerages have cut FY27/FY28 EPS estimates by 2-15%, with tobacco valuation multiples reduced from 23x to 17x forward earnings. Emkay notes the cigarette business is now valued at 13x earnings, down from 17x earlier. This sector-wide de-rating reflects regulatory overhang.
The FMCG business, while showing structural improvement, remains a multi-year scaling story. Revenue has nearly doubled since FY20, but it still contributes only 23% of total revenue and a much smaller portion of profits. The paperboards recovery, while promising with potential ₹10 billion EBIT boost by FY27, operates in a cyclical industry with historical volatility.
Motilal Oswal's rating evolution tells the story of changing sentiment.
The 42% reduction in target price reflects profound concerns about near-term earnings visibility.
The brokerage assigns overwhelming weight to cigarette business risks due to their earnings magnitude. Key risks include volume contraction (6-10% decline projected), margin compression from incomplete tax pass-through, illicit trade expansion, and ongoing regulatory uncertainty. The structural nature of GST 2.0—representing a permanent change rather than cyclical challenge—warrants a valuation discount.
While Motilal Oswal acknowledges positive developments in FMCG, paperboards, and agri businesses, it views these as insufficient to offset cigarette headwinds in determining near-term stock trajectory. The conservative ₹300 target price (implying 8.3% upside from current ₹277) reflects a risk-adjusted valuation that applies conservative multiples due to regulatory uncertainty and earnings visibility discount.
The surge in MTF positions amidst falling prices represents a classic contrarian bet. Leveraged investors are essentially wagering that the market has over-discounted the tax impact, that the non-cigarette transformation will succeed, and that current valuations represent a deep value opportunity. However, the structural challenges in the cigarette business—unprecedented tax magnitude, enhanced illicit competitiveness, and constrained pricing flexibility—create a prolonged transitionary phase where earnings visibility remains limited.
The next 2-3 quarters will be critical. Q1 FY27 results will provide the first clear picture of true tax impact on volumes and margins. Until these parameters become clearer, the market's focus on cigarette earnings uncertainty is likely to persist, despite the impressive structural improvements in other segments. The divergence between rising leverage and falling prices suggests a high-stakes battle between value investors seeing opportunity and momentum sellers seeing structural decline.
