ITC set for steady recovery as cigarettes, FMCG offset Agri drag: Analysts

Analysts remain cautiously optimistic on ITC’s outlook despite a muted September quarter of financial year 2026 (Q2FY26) performance, on the back of stable cigarette volumes, broad-based FMCG growth, and easing input costs that could lift margins in the second half of the year. 

 

While the Agri business continued to weigh on topline performance, analysts believe the worst of the headwinds are behind, setting the stage for gradual recovery across verticals.

 

Muted quarter, but core performance steady

 

ITC’s Q2 performance was subdued, with standalone revenue declining 3.4 per cent year-on-year (Y-o-Y) to ₹18,020 crore, dragged down by a sharp 31 per cent drop in Agri business revenues. Excluding Agri, growth stood at a healthy 7 per cent Y-o-Y, driven by resilient performance in cigarettes and the non-cigarette FMCG segment. Ebitda rose 2.1 per cent Y-o-Y to ₹6,550 crore, while margins expanded 186 basis points (bps) Y-o-Y to 34.7 per cent, aided by cost discipline and an improved mix.

 

Cigarette revenues grew 6.8 per cent Y-o-Y, implying a 6 per cent volume growth across most estimates. Analysts noted that while competitive intensity remains high, premium offerings and stable taxation helped sustain momentum. The non-cigarette FMCG business expanded around 7–8 per cent Y-o-Y, with strong showings in staples, dairy, and personal care products.

 

Cigarette momentum steady; margin pressure likely to ease

 

Most brokerages pointed to steady cigarette volumes but acknowledged continued pressure on profitability due to elevated leaf tobacco costs. According to Emkay Global, cigarette Ebit margins contracted 170bps Y-o-Y to 70.7 per cent, reflecting the gradual absorption of high-cost leaf tobacco inventories accumulated during FY23-24. However, with procurement prices moderating in the current crop cycle, analysts expect cost benefits to reflect meaningfully from FY27 onwards.

 

“Containment of market share loss will be key for valuations,” Emkay noted, maintaining an ‘Add’ rating with a target price of ₹475. The brokerage expects cigarette earnings growth of around 6 per cent in FY26, accelerating to low double digits in FY27 as input costs normalise.

 

ICICI Securities echoed similar sentiment, highlighting stable category trends across the cigarette industry. “Ebit margins were impacted by higher leaf costs and rising competition, but sequential stability offers comfort,” it said. The brokerage sees easing input costs and a healthy product mix supporting margin recovery in H2FY26. It maintained an ‘Add’ rating with a DCF-based target price of ₹450.

 

Nuvama Institutional Equities also underscored the steady 6 per cent cigarette volume growth and rising contribution from premium offerings. “Improved mix and operating leverage helped lift Ebitda margin by 186bps Y-o-Y to 34.7 per cent,” it said, adding that ITC’s dominance with over 75 per cent market share positions it well to defend its leadership despite intensifying competition. The brokerage cut FY27-28 earnings estimates marginally and revised its target price to ₹534 (from ₹540 earlier), maintaining a ‘Buy’ rating.

 

FMCG resilience continues; Agri and Paper weigh on growth

 

Brokerages were unanimous that the non-cigarette FMCG business remains a bright spot in ITC’s portfolio. 

 

Motilal Oswal said FMCG sales grew 8.5 per cent Y-o-Y, led by strong demand for staples, snacks, and personal care products, though notebook sales continued to weigh on growth. “Consistent focus on new launches, stable taxes, and a recovery in consumption are expected to drive momentum from H2FY26,” it said.  

 

Across brokerages, analysts noted that digital-first and organic brands such as Yogabar, Mother Sparsh, Prasuma, Meatigo, and 24 Mantra clocked annualised revenue run-rates (ARR) of over ₹1,100 crore, underscoring ITC’s growing presence in premium and health-conscious categories.

 

The Agri business, however, remained the biggest drag, down 31 per cent Y-o-Y due to a high base and shipment delays amid US tariff uncertainty. While segment Ebit was flat Y-o-Y, margins expanded sharply due to a favourable mix. The Paperboards and Packaging division grew 5 per cent Y-o-Y in revenue but faced a 21 per cent Ebit decline due to low-priced imports and elevated wood costs, though sequential performance improved as domestic demand recovered.

 

Analysts see recovery from H2FY26

 

Despite short-term weakness, most brokerages see earnings momentum strengthening into the second half of FY26 as commodity inflation eases and demand recovers. Stable cigarette taxation and improving cost dynamics are expected to cushion margins, while FMCG and Paper segments should benefit from normalised input prices and policy support.

 

“Portfolio balance, stable taxation, and disciplined execution reinforce earnings resilience,” ICICI Securities said. Those at Motilal Oswal added that cigarette Ebit margins are likely to improve from Q4FY26, with paper margins bottoming out. The brokerage has maintained its ‘Buy’ rating with a target price of 515.

 

That said, the Street’s tone remains constructive. Analysts agree that while ITC’s Q2 was muted, the company’s diversified portfolio, strong cash flows, and easing cost headwinds set the stage for a steady recovery ahead.