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Thriving on non-cigarette expansion

Non-cigarette business remains a key driver

During a recent analyst meeting, ITC (ITC IN) management emphasized on a strategy which identified several growth drivers in the non-cigarettes segment. This segment has  seen  a 2.5x rise in revenue and 3.2x increase in bottom line in the past decade. ITC employs a three-fold growth framework: 1) reinforcing core businesses, 2) developing emerging ventures, such as beverages, frozen foods, liquid wash, nicotine, and value-added agri, and 3) exploring potential growth avenues, including premium skincare and food tech. There has been an increase in ROCE of the non-cigarettes business to 21.7% in FY23 from 14.3% in FY13    

Huge room for growth and profitability in other FMCG businesses

In the foods segment, management expects significant growth runway, led by non-branded (82% of category) to branded conversion, penetrating emerging markets, building newer avenues, such as Yoga Bar and Sunrise acquisition, building future-led portfolio, such as plant-based protein and millets to cater to the affluent India and leveraging its agri sourcing for cost competitiveness. It aims to expand EBITDA margin by 80-100bp pa through improved product mix and premiumization by ~30bp, scale advantages of ~20bp, and cost optimization of ~30bp.   

Focus on clawing back market share in cigarettes from illicit trade     

In the cigarettes business, management remains committed to its strategy of a tier-wise product portfolio, innovative distinct offerings, and effective last-mile execution. This approach aims to seize significant growth potential in the cigarettes market, which constitutes 9% of total tobacco consumption, reclaim market share from illicit trade (one-third of legal cigarettes), and bolster its position among peers. Management believes that in a stable tax environment ITC will continue to claw back share from the illicit market.

Positive outlook for the hotels and agri businesses

ITC is set to sustain robust growth in its hotels business, capitalizing on rising average room rate (ARR) and occupancy rate. The company targets expansion to 200 hotels with 18,000 keys in the next five years via a managed portfolio which accounts for two-thirds of keys. In the agri business, the company also sees nicotine as a significant exports opportunity due to a huge demand-supply gap and high margin. 

Valuation: retain Accumulate with a higher TP of INR 516

We raise our earnings estimates by ~1% each in FY25 and FY26 to factor in higher profitability. We retain Accumulate with a higher TP of INR 516 from INR 491 on a SOTP method, valuing cigarettes at 22x (unchanged) March 2026E P/E and FMCG at 6x (unchanged) March 2026E price/sales as we roll forward.

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