Cigarette-to-soap maker ITC Ltd’s shares rose 1.5% on Wednesday, even though its March quarter net profit just about met Street expectations. Worse, revenues were 11% lower than Bloomberg consensus estimates. It’s not that there were any hidden gems in the company’s results; rather, there is a fancy for consumer sector stocks in the markets currently.

In fact, ITC is only enjoying a rub-off effect; other consumer goods stocks are doing far better. Hindustan Unilever Ltd (HUL), ITC’s nemesis in the market cap tables, has caught up dramatically in the past year, as the chart above shows. A year ago, ITC’s market cap was 60% ahead; the gap has shrunk to merely 2.4%.

There have been earlier occasions in 2018 when the gap has narrowed, though not to this extent. HUL is on the verge of overtaking ITC at this point, for the first time after it ceded the pole position back in 2005.

The divergence in the performance of the two stocks is sort of reflective of differing fortunes in terms of volume growth. HUL’s growth of 11% was far ahead of estimates, while ITC’s growth, or the lack of it, remains a concern. ITC does not provide volume details but Dolat Capital Market Pvt. Ltd estimates a 2-4% decline in cigarette volumes during the March quarter. From an investor’s perspective, this amounts to small mercy, as it compares favourably with a 5% estimated decline in volumes in the December quarter.

ITC has said that volume growth is getting affected by the large pictorial warnings. And while the worst of harsh taxes may be behind it, policy-related concerns may continue to weigh on growth.

The silver lining is that in ITC’s case, while its revenues may have been lower than expected, there are signs of improvement in its business segments, leading to better profitability sequentially in most of its divisions.

The cigarettes business, which accounted for as much as 87% of ITC’s total segment Ebit, saw a 7% improvement as against the December quarter. Ebit is earnings before interest and tax.

ITC’s consumer goods business did well with comparable sales growth of 11.3% over a year ago, but it was lower than HUL’s 16% growth. Although this segment’s Ebit growth was impressive, this could change once ITC begins to invest heavily in growing the business, which is its main priority. Still, analysts say that ITC’s consumer goods business Ebit of nearly 3% is rather encouraging.

On a sequential basis, its margins were down slightly but this was chiefly due to a decline in the agricultural exports segment margins.

But given the sluggishness in cigarettes volumes, it isn’t surprising that ITC shares have underperformed at a time when most FMCG stock valuations are running ahead of their fundamentals and are expensive. Currently, the ITC stock trades at 27-times estimated earnings for this fiscal year, based on Bloomberg data. That appears rather cheap when compared to the nearly 55 times FY19 expected earnings that HUL is trading at.

An improving profitability outlook for the cigarettes business does raise the prospect of better valuations for ITC but for that volume growth will have to look up.