Kotak flags ITC valuation gap as large-cap investor apathy persists
Kotak Institutional Equities says ITC’s tobacco business trades at 10.4x one-year forward EPS after adjusting for its FMCG operations, other businesses and cash, pointing to a valuation disconnect amid momentum-led investing.
What happened
Kotak says large-cap investor apathy has left ITC, HDFC Bank and ONGC undervalued. For ITC, it highlights a 10.4x forward EPS valuation for tobacco after
Key facts
- ITC tobacco business: 10.4 times one-year forward EPS, adjusted for non-tobacco FMCG, other businesses and cash
- HDFC Bank EPS CAGR: 10% over FY2024-26; 12% expected over FY2026-29
- HDFC Bank RoE: 15.1% over FY2024-26; 14.2% over FY2026-29
- ONGC valuation: 4.4 times FY2027 EPS and 4.5 times FY2028 EPS
- ONGC stock: 17% below pre-war levels
- Crude prices: up 70% over the period
- Oil India: up 13% in the past month
- ONGC: down 3% in the past month
Why this matters
The valuation disconnect could heighten pressure on ITC to clarify the standalone value of its businesses and capital allocation, although no transaction catalyst is indicated.
What to watch
- Cigarette tax or excise changes in the Union Budget, especially a tax increase that could pressure legal-market volumes or widen illicit trade.
- Two or more quarters of resilient cigarette volume growth alongside pricing-led earnings expansion.
- FMCG EBIT margin reaching a sustainably positive level or management upgrading profitability targets.
- A meaningful capital-return announcement, asset sale, demerger, listing or improved segment-level disclosure.
- Reversal in foreign institutional investor flows toward defensives or low-volatility large caps.
- Evidence that ESG-related ownership restrictions or tobacco regulation are increasing the required valuation discount.
- Track quarterly cigarette volume growth, net realization growth and EBIT margin to test whether the low implied multiple reflects a deteriorating core business or investor neglect.
- Watch FMCG margin progression and management commentary on the path to material profitability; recurring losses would reinforce the conglomerate discount.
- Monitor capital-allocation signals, including dividend payout, buyback potential, cash deployment and any asset or subsidiary monetization.
- Compare ITC's relative performance and valuation against Indian defensives, consumer staples and other tobacco-exposed global peers to assess whether the gap is company-specific or sector-wide.