ITC Ltd. Faces Downgrade Amidst Prolonged Underperformance and Index Implications

Significance of Nifty 50 Membership

As a prominent member of the Nifty 50, ITC Ltd. holds a pivotal role in India’s benchmark equity index, which represents the top 50 companies by free-float market capitalisation on the National Stock Exchange. This membership not only confers prestige but also ensures substantial institutional and passive fund flows, as many index-tracking funds and ETFs allocate capital in line with the index composition. Consequently, ITC’s stock movements often have a magnified impact on the broader market sentiment and sectoral indices, particularly within FMCG and tobacco segments.

However, the company’s recent performance has been disappointing relative to the benchmark. Over the past year, ITC’s share price has declined by 30.71%, starkly contrasting with the Sensex’s 7.13% gain over the same period. This underperformance has raised concerns among investors and analysts alike, especially given ITC’s historical stature as a defensive large-cap stock.

Institutional Holding Changes and Market Impact

Institutional investors, including mutual funds, insurance companies, and foreign portfolio investors, play a critical role in shaping ITC’s stock trajectory. The downgrade in the company’s Mojo Grade from Hold to Sell on 29 December 2025, accompanied by a Mojo Score of 48.0, signals a deteriorating outlook from a quality and momentum perspective. This downgrade often triggers rebalancing by institutional portfolios, potentially leading to reduced holdings or cautious positioning.

On 1 February 2026, ITC’s stock closed near its 52-week low, just 2.65% above the bottom at Rs 316.4, and underperformed its sector by 0.95% on the day. The stock’s price currently trades above its 5-day moving average but remains below its 20-day, 50-day, 100-day, and 200-day moving averages, indicating a bearish medium- to long-term trend. Such technical signals often influence institutional decisions, especially for large-cap stocks where liquidity and trend adherence are critical.

Moreover, ITC’s price-to-earnings (P/E) ratio stands at 16.70, slightly below the FMCG industry average of 17.12, reflecting a modest valuation discount. While this could attract value investors, the broader negative sentiment and sectoral headwinds, particularly in the cigarettes and tobacco segment where 8 out of 29 stocks have reported negative results recently, weigh heavily on the stock’s appeal.

Benchmark Status and Sectoral Context

ITC’s role as a benchmark stock in the FMCG sector and tobacco industry means its performance is often viewed as a barometer for sector health. The cigarettes and tobacco sector has seen mixed results recently, with 12 stocks reporting positive results, 9 flat, and 8 negative. ITC’s own struggles have contributed to a cautious tone in the sector, especially given its sizeable market capitalisation of approximately ₹4,01,499.16 crores.

Year-to-date, ITC’s share price has declined by 20.48%, significantly underperforming the Sensex’s 3.50% fall. Over three and five years, the stock has lagged the benchmark by wide margins, with a 3-year return of -6.27% versus Sensex’s 38.21%, and a 5-year return of 56.88% compared to Sensex’s 77.67%. Even over a decade, ITC’s 56.50% gain pales in comparison to the Sensex’s 230.65% surge, highlighting the company’s challenges in delivering sustained growth relative to the broader market.

These figures underscore the pressure on ITC to innovate and adapt in a rapidly evolving FMCG landscape, where consumer preferences and regulatory environments are shifting. The company’s large-cap status and index inclusion mean that any recovery or further deterioration will have outsized implications for index funds and sectoral benchmarks.

Outlook and Investor Considerations

Given the current downgrade to a Sell rating and the deteriorating momentum signals, investors should approach ITC Ltd. with caution. The company’s valuation metrics, while not stretched, do not yet reflect a clear turnaround, and the persistent underperformance relative to the Sensex and FMCG sector raises questions about near-term catalysts.

Institutional investors are likely to monitor quarterly earnings closely, especially in light of the mixed sectoral results and regulatory pressures on tobacco products. Any signs of stabilisation in revenue growth, margin improvement, or successful diversification into non-tobacco FMCG segments could help restore confidence.

Meanwhile, passive funds tracking the Nifty 50 will continue to hold ITC due to its index membership, but active funds may reduce exposure in favour of higher momentum or quality stocks within FMCG or other sectors. This dynamic could lead to increased volatility and trading volume in the near term.

For long-term investors, ITC’s entrenched market position, diversified business model, and large-cap status remain positives, but the stock’s recent trend and downgrade suggest a need for careful portfolio review and risk management.

Historical Performance in Perspective

ITC’s decade-long performance, while positive at 56.50%, has lagged the Sensex by a wide margin, reflecting the company’s challenges in capitalising on India’s broader economic growth and equity market rally. The 5-year and 3-year returns further highlight this underperformance, emphasising the importance of sectoral shifts and competitive pressures in shaping ITC’s trajectory.

Investors should weigh these historical trends alongside current market conditions and the company’s strategic initiatives to assess the stock’s suitability within their portfolios.

Conclusion

ITC Ltd.’s status as a Nifty 50 constituent and large-cap FMCG player ensures it remains a key focus for investors and market participants. However, the recent downgrade to a Sell rating, coupled with significant underperformance relative to the Sensex and sector peers, signals caution. Institutional holding patterns and benchmark fund flows will continue to influence the stock’s price action, while sectoral headwinds in tobacco and FMCG add complexity to the outlook.

Investors should remain vigilant, monitor upcoming earnings and sector developments, and consider alternative FMCG opportunities that may offer better risk-adjusted returns in the current market environment.

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