# Kotak Equities sees ITC's tobacco division as undervalued Brokerage suggests spin-off could unlock shareholder value amid growth disparity. - **Source:** [Economic Times](https://brifing.si/source/37791137-c35a-4ffe-b6a9-fe103afc9e48) - **Published:** 2026-09-05 - **Topic:** [Finance](https://brifing.si/c/finance) - **Original article:** - **On Brifing:** https://brifing.si/s/97ac159f-00f7-4ac1-8834-81ee06d49feb ## Undervalued Tobacco Segment Kotak Institutional Equities estimates ITC's tobacco business trades at just 11X forward earnings, significantly below industry benchmarks. This valuation gap persists despite stable cash flows from India's regulated tobacco sector. The brokerage notes this segment contributes 40% of ITC's revenues but receives disproportionately low market valuation compared to global peers trading at 15-18X multiples. ## Growth Disparity Non-tobacco businesses including FMCG, hotels, and agri-products are growing at 12% CAGR versus tobacco's 4%. Kotak highlights that ITC's food division alone has doubled revenue since 2020. This divergence creates an 'conglomerate discount' where investors undervalue faster-growing segments due to association with the tobacco business, mirroring patterns seen with global players like Altria and Philip Morris. ## Spin-off Thesis Analysts propose separating tobacco (Rs 45,000 crore revenue) from other operations could create Rs 25,000-30,000 crore in additional market cap. Historical precedents include British American Tobacco's 2021 restructuring that unlocked 18% value. The move would allow distinct investor bases - income-focused for tobacco and growth-oriented for FMCG/hotels. ## Regulatory Considerations India's strict tobacco advertising bans (COTPA 2003) limit brand-building, depressing multiples. However, Kotak notes stable 6% volume growth persists due to inelastic demand. The business generates Rs 8,000 crore annual free cash flow with 75% margins, providing reliable dividends - a key attraction for income funds despite ESG concerns. ## Comparable Valuations ITC's 11X multiple trails Godfrey Phillips (14X) and VST Industries (13X). Global comps like Imperial Brands trade at 8X but with slower growth. The discount appears excessive given ITC's 65% market share in cigarettes and pricing power that's delivered 7% annual price hikes despite taxation consuming 55% of retail prices. ## Shareholder Impact Kotak estimates the tobacco business could independently support Rs 450/share (current price: Rs 380). Separation would let non-tobacco entities access growth capital at higher multiples. Similar moves by RJ Reynolds in 1985 and Altria in 2008 created 22-30% upside within 12 months post-demerger. ## Execution Challenges Potential hurdles include Rs 15,000 crore in shared infrastructure, tax dis-synergies from separate entities, and regulatory approvals. The 2024 BAT-ITC stake sale talks collapsed over valuation gaps. Kotak suggests phased separation starting with financial demerger before operational splits to mitigate risks. ## Strategic Imperative With ESG funds controlling 35% of institutional capital, ITC's tobacco drag may worsen. The analysis suggests immediate action could prevent the 'diworsification' penalty affecting conglomerates like Unilever. A decisive move before 2027 tax changes could position both entities for optimal capital allocation in their respective growth trajectories. ## Sources covering this story - https://economictimes.indiatimes.com/markets/stocks/news/itcs-tobacco-business-is-going-cheap-but-kotak-institutional-equities-thinks-market-has-it-wrong/articleshow/133796628.cms — --- _Summary written by Brifing from the original reporting. Copyright in the original article belongs to its publisher; read the full piece at the link above._