ITC shares: Citi raises rating to 'Buy' despite headwinds, sees 17% upside; here's why

Global investment bank Citi has upgraded its rating on ITC Ltd to 'Buy' from 'Sell', revising upward its target on the FMCG major to Rs 300 from Rs 270 earlier, implying at 17 per cent potential upside. This is even as it believes near-term ITC earnings are likely to remain under pressure following the sharp increase in cigarette taxation. Citi said the ITC stock's 34 per cent correction in 2026 now prices in the associated volume and profitability risks.

"Since the tax hike, ITC has implemented mitigating actions including calibrated price increases and portfolio interventions across key segments. As per our estimates, 75 per cent of the tax increase has already been passed through price hikes, while new launches across LSFT and Premium-DSFT should help retain consumers
within ITC's portfolio in the event of downtrading," Citi said.

While near-term cigarette volumes could be under pressure given competition from other branded and illicit products, Citi expects cigarette profitability to improve sequentially through FY27 as pricing actions flow through.

Importantly, it believes the earnings downgrade cycle for ITC is largely over, improving the risk-reward at current valuations.

"Mitigation actions progressing better than initially expected - We estimate that ITC has implemented further price hikes by end-2QFY27, offsetting c.75 per cent of the tax burden. It has also launched new variants across LSFT and Premium-DSFT to retain consumers within its portfolio amid downtrading and limit profitability leakage," Citi said.

The brokerage raised its FY27-29E EPS estimate by 3-11 per cent, and value cigarettes segment at 12 times earnings per share, driven by faster-than-expected price hikes driving recovery in both revenue and margins.

Citi said the profitability reset is largely behind ITC and that price increases and portfolio interventions should support a gradual recovery, with EBIT-to-stick improving sequentially through FY27E and approaching pre-tax-hike levels by FY27-end.

"We forecast cigarette EBIT to decline 23 per centin FY27E before recovering in FY28E as pricing actions gain traction and profitability normalizes. Key monitorables include (a) potential further regulatory actions and (b) competition from other branded players and illicit trade," it said.