ITC’s tobacco business is going cheap but Kotak Institutional Equities thinks market has it wrong

ITC's tobacco segment appears undervalued by the market, according to Kotak Securities. The broker's reverse-SoTP valuation suggests the tobacco business is worth around 11 times its one-year forward earnings, while the market's current valuation is implied to be just 16 times earnings for the tobacco segment and 30 times EV/EBITDA for the non-tobacco segment.

This disparity indicates either a lack of confidence in the tobacco business's future earnings growth or an overvaluation of the non-tobacco segment by the market. Kotak notes that its assumptions for the tobacco segment should provide reassurance to investors who are skeptical of the 11X implied P/E ratio. The brokerage believes that ITC's non-tobacco business could deliver higher profit growth than its peers due to potential growth in key categories and margin expansion opportunities as the business grows.

Kotak also suggests that a split of ITC into separate tobacco and non-tobacco entities could unlock significant shareholder value, with the tobacco entity attracting value-focused investors seeking steady growth and high dividends, and the non-tobacco entity appealing to growth-oriented investors and a broader investor base concerned with ESG issues related to the tobacco business.