Its packaged consumer goods business has recovered but that is good for sales growth alone. Year-on-year growth is not comparable due to accounting differences under GST. Its comparable consumer business growth was 16.2%, similar to the 17% growth that Hindustan Unilever Ltd reported. Overall, ITC’s net sales rose by 5.7% over a year ago.

ITC needs its cigarettes business to normalize for sales growth to revive but especially for profitability to improve. Even if this were to happen sometime in fiscal 2019, if the government repeats its tax hikes on cigarettes, it may again set back ITC’s growth.

On a sequential basis, ITC’s profitability has improved with its segment margin rising by 96 basis points. One basis point is one-hundredth of a percentage point. But cigarettes played no role in that as its margin declined by 1.7 percentage points, which should worry investors. Margins improved mainly due to higher contribution from packaged consumer goods, trading in agricultural products and hotels.

If the improvement in the other businesses sustain, that can support profitability but ITC’s cigarettes business still contributes to 84% of segment profits. There is no alternative at this point by comparable size and profitability to offset a declining situation in its cigarettes business. Cigarette volumes are estimated to have declined by about 2% during the quarter, over a year ago, according to Motilal Oswal Securities Research.

And, ITC continues to invest heavily in businesses such as consumer products and hotels, which tends to pull down their contribution to profits, although they may add to sales growth. ITC’s net profit before exceptional items rose by a mere 1.1% over a year ago and the reported solid 16.7% increase was chiefly due to exceptional items.

ITC’s results indicate the worst is not behind it yet. Investors will want to see volumes revive and profitability improve at its cigarettes business. But a thriving cigarettes business could again tempt the government to tap it for higher tax revenues, if the need arises. That dagger continues to dangle overhead even if it may not fall during the 2018 budget.

After Hindustan Unilever Ltd’s results, ITC’s shares perked up, perhaps on hopes that consumer businesses are seeing a gradual recovery in demand. ITC’s shares have been underperforming the market and its peers.

A recovery in growth would imply a change in its valuations too. But the results are likely to dash investors’ hopes. As things stand, pricey though its shares may be, HUL has much more going for it than ITC has.