Sustaining cigarette volumes, FMCG recovery key monitorables for ITC stock

ITC reported healthy volume performance in the April-June quarter of 2025-26 (Q1FY26), but margins remained under pressure. Consolidated revenue (ex-hotel business) in Q1FY26 grew by 21 per cent year-on-year (Y-o-Y) to ₹21,490 crore, led by cigarette and agri businesses. Gross margin contracted 700bp Y-o-Y to 52.4 per cent, due to high food inflation and the rising input costs of leaf, wood. The earnings before interest, taxes, depreciation, and amortisation (Ebitda) margin contracted 510 basis points (bps) Y-o-Y to 31.7 per cent while Ebitda grew 4 per cent Y-o-Y to ₹6,820 crore. Profit before tax (PBT) and adjusted profit after tax (PAT) grew by 4 per cent and 5 per cent, respectively.

 

Gross cigarette sales grew 8 per cent Y-o-Y to ₹9,550 crore and volume growth was 6 per cent. Cigarette Ebit (earnings before interest and tax)  grew 4.6 per cent Y-o-Y to ₹5,500 crore and Ebit margin contracted 190 bps Y-o-Y to 57.6 per cent due to escalation in leaf tobacco costs. The sharp cost escalation in leaf was partly offset by an improved product mix, calibrated pricing hikes, etc.

 

The paper business struggled due to low-priced imports. Revenue grew 7 per cent to ₹2,110 crore and Ebit margin contracted 580 bps to 7.2 per cent while Ebit fell 41 per cent Y-o-Y to ₹150 crore. Fast-moving consumer goods (FMCG) sales grew 5.5 per cent Y-o-Y to ₹5,800 crore (ex-notebook growth was 8.6 per cent). The notebook industry is in a deflationary spiral and rains have impacted beverages sales. Growth was driven by staples, dairy, premium personal wash, homecare and agarbattis. Ebit  declined 17 per cent Y-o-Y to ₹400 crore. Ebit margin contracted by 180 bps to 6.9 per cent. Agri sales increased by 39 per cent Y-o-Y to ₹9,720 crore due to trading opportunities in bulk commodities and leaf tobacco exports. Ebit  margin contracted 45 bps Y-o-Y to 4.5 per cent. Ebit grew by 26 per cent Y-o-Y to ₹430 crore. 

 

The disappointing FMCG performance could see recovery on better consumption since ITC has historically enjoyed industry-leading growth in several FMCG category drivers. The FoodTech Business, a key growth area in ITC Next strategy, combines food science, FMCG brands, and culinary expertise to build a platform with 60 cloud kitchens in five cities at a gross merchandise value (GMV) of ₹100 crore in FY25. It operates four brands – ITC Master Chef Creations, ITC Aashirvaad Soul Creations, ITC Sunfeast Baked Creations, and Sansho by ITC Master Chef.

 

Severe inflationary pressures were seen in inputs such as edible oil, wheat, maida, potato, cocoa, and packaging materials. Price moderation would positively impact margins. Continued investments in trade and marketing will support growth and market standing. In paper, ITC is focussed on accelerating plantation, developing new areas, and satellite-based plantation monitoring to mitigate challenges like sharp growth in wood prices.

 

Geopolitical volatility and climate-related disruptions have intensified concerns over food security and inflation and the government has reintroduced stock limits on wheat in June 2025 to manage domestic supply and pricing. Growth in leaf tobacco exports is being driven by crop development expertise, superior product quality, and long-standing customer relationships. ITC is also scaling up exports of Nicotine and Nicotine products.

 

If ITC can sustain current volume growth in cigarettes, and the FMCG business sees a recovery in FY26, valuations could see rerating. This assumes stability in cigarette taxes, coupled with enforcement against smuggling. Profitability should improve in the second half of FY26 as prices of inputs, especially that of key leaf tobacco, has started easing. ITC management also noted early signs of a recovery in urban consumption. There could be an upside from current levels given that consensus is bullish.

 

A whopping 30 of the 31 analysts polled post results by Bloomberg are bullish on the stock, and only one is neutral. Their average one-year target price is ₹500.39 for the stock which closed almost flat at ₹416.55 on the BSE on Monday.