In today's FirstScroll, we break down why a brokerage thinks one of India's steadiest companies is quietly worth more split in two than it is whole, and why the reason has less to do with its business than with the kind of investor who refuses to touch it.
With that out of the way, let's dive into today's story.
The Story
ITC is the kind of company most investors think they understand. It sells the cigarettes behind the counter, the Aashirvaad atta in the kitchen, the Sunfeast biscuits in the cupboard, the Classmate notebooks in the schoolbag. It is old, it is profitable, it pays a fat dividend, and its shares are held by millions of ordinary Indians who treat it as a sturdy, boring anchor in their portfolio.
So it is a little strange to hear a serious brokerage argue that this steady giant is being mispriced by the market, and that the fix is to cut it in half.
That is roughly what Kotak Institutional Equities has argued. Their claim, in plain terms: the market is valuing ITC's cigarette business at only about 11 times its forward earnings, a price that assumes the business will basically stop growing forever. For a division that still gushes cash and grows steadily, that is a punishingly low number.
So the question is, how can a company be both perfectly stable and, according to this argument, quietly worth more than its own share price suggests?
To see it, you have to understand a strange idea in how markets value companies: sometimes a bundle of good businesses is worth less together than those same businesses would be worth apart.
You see, the market does not value every business the same way. It pays a low multiple, a low price per rupee of earnings, for businesses it thinks are risky, shrinking, or unfashionable. It pays a high multiple for businesses it thinks are clean, fast-growing, and safe. A packaged-foods business like the maker of Aashirvaad and Sunfeast is exactly the kind of thing the market loves, and standalone FMCG companies in India trade at very rich multiples, often 30 times earnings or more.
Here is ITC's problem. That lovely food business is welded to a cigarette business. And because the whole company trades as one stock, the market applies something closer to a single, blended, tobacco-flavoured multiple to the entire thing. The fast-growing food arm gets dragged down and priced as if it were part of a sin-stock, rather than the premium consumer business it actually is.
This has a name: the conglomerate discount. When several businesses sit under one roof and trade as one share, the market often pays less for the bundle than it would for the pieces sold separately. The good business is held hostage by the reputation of the one sitting next to it.
Now, why would the cigarette business drag so hard, when it is the most profitable part? This is the part that has almost nothing to do with the numbers. A large pool of global investment money, particularly the big institutional and pension funds, operates under ESG rules, mandates that forbid them from owning "sin" stocks like tobacco. It does not matter how much cash ITC's cigarettes throw off. A fund with a no-tobacco rule cannot buy the share at any price, because the tobacco is right there on the label. So a whole class of buyers who would happily own ITC's food, hotels-adjacent and paper businesses are locked out, purely because of the company they would be keeping.
Fewer eligible buyers means weaker demand for the share, and weaker demand means a lower price. The discount is not really a judgement on the business. It is the price of being un-ownable to a big slice of the market.
So the logic of a split falls into place. Separate the tobacco business from the non-tobacco business into two listed companies, and two things happen at once. The clean, non-tobacco business becomes buyable by all those ESG-bound funds, and can finally be priced like the premium consumer company it is. And the tobacco business, now a pure cash-and-dividend machine, gets valued honestly on its own merits by the investors who are happy to own it. Kotak's sum-of-the-parts math, a fair value on the tobacco piece plus a much richer multiple on the non-tobacco earnings, adds up to more than the single stock trades at today. Two halves, worth more than the whole.
But here's the twist, and it is why ITC has not simply done this years ago. The discount is real, but so is the glue. The cigarette business is the cash engine that has, for decades, funded the very FMCG and other businesses the market now wants to set free. The steady, enormous cash flow from tobacco built the food brands, paid for the factories, and funded the dividends. Splitting them severs the young businesses from the parent that bankrolled them. The market wants the growth without the smoke, but the smoke is what paid for the growth.
There is a second catch worth naming. A demerger unlocks value on a spreadsheet, but only if the freed-up businesses can then stand and grow on their own. And ITC's non-tobacco businesses, while large, have often grown more slowly and earned thinner margins than the pure-play FMCG stars they would be compared against. A split reveals the truth in both directions. It could show a hidden gem. It could also show that, on its own, the food business is not quite the 30-times-earnings darling everyone assumed.
Now, why should you care about a brokerage's valuation exercise on one stock? Because the conglomerate discount is one of the most useful lenses you can carry into the market. Any time you see a sprawling company, several good businesses bolted together, ask whether the market is pricing the whole at the level of its least-loved part. Sometimes the biggest hidden value in a company is not a new product or a clever deal. It is simply the possibility of drawing a line down the middle and letting each half be judged on its own.
Whether ITC's board ever actually picks up the knife, and whether the freed halves live up to the spreadsheet, is the part the math cannot promise.
Until then…
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