Concerns over cigarette biz may cap gains in ITC despite FMCG growth

ITC reported a steep 22 per cent decline in net cigarette sales in the fourth quarter of 2025-26 (Q4FY26) after a sharp hike in excise duty. There was an unusual one month gap between tax announcement and implementation (February 1), which led to a big gap between primary and secondary sales, making it hard to compare Q4 sales.

 

ITC has also adopted a strategy of gradual price hikes to dissuade customers from switching to smuggled brands. Cumulative price hikes have not yet reached tax-neutrality. So, more hikes are on the cards and revenue volatility in the key division can be expected.

 

Gross cigarette revenues grew 31.7 per cent Y-o-Y to ₹11,070 crore with earnings before interest and tax (Ebit) up 7 per cent Y-o-Y at ₹5,490 crore. Ebit margin contracted 1,134 basis points (bps) Y-o-Y to 49.6 per cent.

 

In the consolidated fast-moving consumer goods (FMCG) segment (ex-cigarettes), sales grew 15 per cent Y-o-Y to ₹6,350 crore. Ebit grew 52 per cent Y-o-Y to ₹530 crore and Ebit margin expanded 200 bps to 8.3 per cent. FMCG sales were driven by multiple categories like staples, biscuits, noodles, dairy, premium personal wash, home care and agarbattis. There was a rebound in notebooks in the second half of the financial year 2026 (H2FY26).

 

Towards the end of Q4, there was a sharp rise in input prices due to the West Asia conflict. The FMCG business continued to perform well with better margins as ITC managed its supply chain well and took calibrated price hikes and undertook cost optimisation measures. The premium portfolio and NewGen channels performed, with digital-first and organic portfolio delivering 60 per cent Y-o-Y growth. 

 

The agri division was also under pressure with sales down 15 per cent Y-o-Y at ₹3,170 crore, due to geopolitics affecting exports and high base effects. Ebit margin contracted 50 bps Y-o-Y to 6.3 per cent and Ebit fell 21 per cent Y-o-Y to ₹200 crore.

 

Paperboards, paper & packaging business’ sales grew 2 per cent Y-o-Y to ₹2,230 crore. Ebit grew 19 per cent Y-o-Y to 230 crore (on low base of decline in Q4FY25), while Ebit margin expanded 150 bps Y-o-Y to 10.4 per cent. Wood rates remained high but net realisations improved. The packaging and printing business saw good growth and there was also growth in speciality paper.

 

Given the likelihood of continuing consumer shifts to smuggled brands, the earnings pressure in cigarettes may offset growth in FMCG and Paper. ITC has to tread carefully in implementing price hikes to achieve tax-neutrality. If it opts to keep customers by absorbing tax hike, it would impact earnings but hikes could impact volumes. The business was also hurt by geopolitical disruptions, and subdued exports.

 

The consolidated Q4 revenue declined 5 per cent Y-o-Y to ₹17,820 crore. Ebitda grew 6 per cent Y-o-Y to ₹6,920 crore and adjusted PAT grew 7 per cent Y-o-Y to ₹5,407 crore.

 

In FY26, ITC’s revenue grew 3 per cent while Ebitda grew 4 per cent and adjusted PAT grew 5 per cent.

In the key division, ITC expects the sharp increase in taxation to weaken near-term demand for leaf tobacco, adversely impacting stakeholders across the value chain. The company was able to leverage its state-of-the-art facility at Mysuru for exports of nicotine and nicotine derivative products. The operating environment is “challenging amid ongoing geopolitical tensions in West Asia and oversupply in global tobacco markets”.

 

In agri, despite a weak quarter, ITC is scaling up value-added agri products portfolio, across spices, coffee, marine products and horticulture products. These have grown 1.4 times over the last two years. There is still a focus on market development and scaling up sourcing, processing, and customer relations.

 

The fresh food business is an attempt to further monetise capabilities in food science, FMCG food brands, and culinary expertise. The business offers a diverse and expanding range of cuisines across four brands -- ITC Master Chef Creations, ITC Aashirvaad Soul Creations, ITC Sunfeast Baked Creations, and Sansho by ITC Master Chef -- and has good consumer response. The platform is being progressively rolled out across India with 70 cloud kitchens, of which 25 kitchens opened in FY26. The gross merchandise value (GMV) more than doubled Y-o-Y to ₹220 crore in FY26 from ₹105 crore in FY25.

 

Analysts are cutting earnings per share estimates and some analyst opinion is negative given the near-term uncertainties around the cigarettes business. But ITC retains its leadership in tobacco and has steady growth in FMCG and improved performance in paper.

 

Twelve of the 27 analysts polled by Bloomberg after results were bullish, 10 were neutral and five were bearish on ITC. The average one-year target price stood at ₹346.37. On Friday, the stock closed 2 per cent lower at ₹301.75 on the BSE, which translates to a dividend yield of about 4.8 per cent.