ITC's healthy core business signals rerating scope amid weak Q2 agri show

ITC's cigarette and FMCG segments delivered steady performance in Q2 FY26 despite a slump in agri sales; analysts see scope for a valuation re-rating as core margins improve

ITC delivered a healthy performance in core segments in the second quarter of financial year 2026 (Q2FY26) with sequential improvement in margins, though the year-on-year (Y-o-Y) performance remained under pressure.

 

Consolidated gross cigarette sales grew 6 per cent Y-o-Y and volume growth was also 6 per cent. Cigarette EBIT (earnings before interest and tax) was up 4.2 per cent Y-o-Y, but EBIT margin contracted 100 basis point (bp) on year to 58 per cent due to higher leaf tobacco prices.

 

The consolidated FMCG segment sales grew 8.5 per cent Y-o-Y. Notebooks continued to do badly but staple products have seen strong demand. Snacks and noodles have seen increased grammage, while biscuit Low Unit Packs (LUPs) have seen price cuts. EBIT declined 17 per cent Y-o-Y, and the EBIT margin contracted 70bp Y-o-Y to 7.2 per cent.

 

Agribusiness sales declined by 31 per cent Y-o-Y hit by delayed cancellations by customers amid tariff uncertainty. EBIT margin rose 360bp Y-o-Y to 11.2 per cent. The paper business continued to struggle due to low-priced supplies in global markets (including India), subdued realisations, and high wood prices. But performance was better compared to Q1FY26. The revenue grew 5 per cent Y-o-Y, while EBIT margin contracted 290bp Y-o-Y to 8.2 per cent.

 

The core business growth has been steady, with healthy cigarette volume growth. Focus on new launches, stable taxes, and other initiatives led to 7 per cent cigarette growth in FY25, and the momentum has continued.

 

The second half of FY26 (H2FY26) cigarette EBIT margin is likely to improve from Q4FY26. The FMCG demand may benefit from a recovery. The paper business is also bottoming out. 

 

ITC’s Q2FY26 net revenue declined 2 per cent Y-o-Y at ₹19,500 crore. Ex-agri business sales grew 8 per cent Y-o-Y. Gross margin improved 240bp Y-o-Y to 58.3 per cent but the margin was impacted by high food inflation and the rising leaf and wood costs. The Ebitda margin improved 170bp Y-o-Y to 34.3 per cent but Ebitda dipped 1 per cent Y-o-Y to ₹6,690 crore while PBT (profit before tax) grew 1 per cent and Adjusted PAT grew by 1.3 per cent.

 

The FMCG growth ex-notebook was 8 per cent. Growth was driven by staples, dairy, premium personal wash & agarbattis. The standalone Ebitda margin compressed 60bp Y-o-Y while improving 50bp quarter-on-quarter (Q-o-Q) to 10 per cent. Consolidated EBIT declined 1 per cent Y-o-Y to ₹440 crore in Q2FY26. EBIT margin contracted 70bp to 7.2 per cent.

 

Agribusiness sales declined significantly by 31 per cent Y-o-Y to ₹4,000 crore. EBIT grew by 2 per cent Y-o-Y to ₹450 crore. EBIT margin expanded by 360bp Y-o-Y to 11.2 per cent. The paperboards business sales grew 5 per cent Y-o-Y to ₹2,220 crore. EBIT was down 23 per cent Y-o-Y to ₹180 crore and EBIT margin dipped 290bp Y-o-Y to 8.2 per cent.

 

FoodTech Business, a key growth area in ITC Next’s strategy, has combined ITC’s food science, FMCG brands, and culinary expertise to build a capital-efficient, tech-enabled full-stack platform with 60 cloud kitchens in five cities.

 

The Q2 is usually a soft quarter and that showed in the drop in Agri revenues. But given steady core performance and stable taxes on cigarettes, a stable compounded annual growth rate (CAGR) of 6-7 per cent is possible.

 

FMCG performance may also improve.

 

If ITC can sustain mid-single-digit volume growth in cigarettes (as it did in Q2) and the FMCG business sees recovery in H2FY26, valuation re-rating may be on the cards. Exports were impacted by US tariff related uncertainty. FMCG business should see sequential uptick in profitability in H2, with improving macro & benign raw material scenarios. The hotel demerger reduces capex intensity and may aid improvement in return on invested capital. Analyst consensus seems positive.