ITC Results Suggest Worst May Be Over for Cigarette Business — Market Talk

What happened

ITC Ltd.'s second-quarter results suggest the worst of its cigarette profitability reset may be over after a sharp tax increase, according to Citi Research. Citi estimates ITC has passed through about 75%-80% of the tax rise through gradual price increases and maintains a buy rating with a 300-rupee target price.

Confirmed

Global impact / market context

Cigarettes are a major profit source for ITC, so recovering profit per sale matters for overall earnings. Passing most of the tax rise to smokers through higher prices helps rebuild profit, though it can reduce how many cigarettes people buy, which affects revenue.

Analyst inference

Citi's 300-rupee target price sits above the current share price, implying the analyst sees room for further recovery if remaining price increases flow through. The buy rating signals Citi expects cigarette profit per sale to keep improving as pricing actions continue.

Analyst inference

What to watch

1. Citi estimates ITC has passed through about 75%-80% of the tax increase via calibrated price increases. Watch whether the remaining portion is passed through, since that affects profit per sale and cigarette earnings. Confirmed
2. Citi says profitability should continue to recover as further pricing actions flow through, and keeps a buy rating with a 300-rupee target price. Watch whether coming quarters show segment profit per sale improving again. Proposed
3. Watch cigarette sales volumes alongside prices. If higher prices lead smokers to buy fewer cigarettes, revenue and profit could suffer even as profit per sale improves, changing the recovery path Citi expects. Analyst inference

Evidence

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