Why Is UBS Still Bullish on ITC Despite Cutting Its Target Price?

Synopsis: Shares of ITC Ltd were in focus after UBS Group AG cut its target price to Rs 395 but retained a ‘buy’ rating. Despite the revision, the new target implies nearly 21% upside from the previous closing price of Rs 325.3, citing attractive valuations and a calibrated pricing strategy.

The shares of this company, which is the largest cigarette manufacturer and seller in the country and operates in four business segments at present, which are FMCG Cigarettes, FMCG Others, Paperboards, Paper and Packaging, and Agri Business, were in the news today after UBS revised their target on the company along with the rationale.

With a market cap of Rs 4.15 lakh crore, the shares of ITC Ltd gained 2 per cent in today’s trading session and reached a high of Rs 331.9. When compared to its previous day’s closing price of Rs 325.3, the shares are trading at a PE of 20.1 compared to its industry PE of 43.5.

UBS on ITC.

The shares of ITC Ltd were down by almost 20% in the year-to-date period, hitting a 52-week low of Rs 302 recently, but then recovering to around Rs 330 in early trade, outperforming the benchmark Nifty 50 index for the day. Although reducing its target price to Rs 395 from Rs 420, UBS Group AG has retained a ‘buy’ rating, which suggests a potential upside of about 21% from the previous closing levels. 

UBS is of the view that the current correction has made its valuations more attractive, especially in view of ITC’s strong cigarette brand and diversified business streams. The broking firm’s positive views are based on ITC’s quick and measured response to the recent excise duty hike. 

The distributor checks reveal that price hikes are imminent in the major categories of cigarettes. The 84mm KSFT category is likely to see a sharp increase in prices to Rs 24 per stick from Rs 17, which is the hardest hit by taxes. The 64 mm category may go up to Rs 7 from Rs 5.9, while the high-selling 69 mm Gold Flake variety could advance to Rs 12 from Rs 9.5, as per competitive pricing benchmarks.

Crucially, the price increases in the premium cigarette business have been fully passed on, and the price increases in the more price-sensitive segments have been moderate to ensure that volumes are not impacted. This pricing approach, which is based on the company’s portfolio, is designed to ensure that the impact on volumes and EBIT is minimal, with UBS predicting only a low single-digit decline in EBIT for FY27. 

Once the new pricing structure is stabilised, the broking believes that ITC will see a significant earnings recovery in FY28. Since the cigarette business is a significant cash flow generator that funds growth in the FMCG, hotel, and agribusiness businesses, the company’s ability to maintain profitability in this business could be a strong catalyst for stock re-rating

Financials

The revenue from operations for the company stood at Rs 20,047 crores in Q3 FY26 compared to Q3 FY25 revenue of Rs 18,790 crores, up by about 7 per cent YoY. Similarly, the net profit stood at Rs 5,018 crore in Q3 FY26, up compared to the Rs 5,013 crore profit in Q3 FY25.

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