Sustained pressure in ITC Ltd’s margin makes it difficult for investors in the stock to appreciate the solid revenue performance it put up in the June quarter (Q1FY26). Standalone net total operating revenue increased nearly 21% year-on-year to ₹19,750 crore in Q1.
On the other hand, Ebitda margin at 31.7% landed far below Street estimates, contracting as much as 547 basis points (bps), with total raw material costs rising a huge 41% compared to a year ago.
The consumption of high-cost leaf tobacco inventory was a drag on margins of the company, which derived around 83% of its overall segment Ebit (earnings before interest and tax) from cigarettes. Net of excise duty, ITC’s FMCG-cigarette Ebit margin fell 269 bps year-on-year to 71.4%; the measure had declined 137 bps in FY25 to 72.2%.
Thus, Q1FY26 cigarette Ebit growth at 3.7% was slower than net revenue growth of 7.6% aided by higher volumes. The company said it is seeing a moderation in leaf tobacco procurement prices in the current crop cycle. Still, margin recovery is expected to be gradual.
“We believe ITC will start consuming low-cost inventory post Q4FY26, indicating margins to remain under pressure through FY26,” said analysts from Nomura Financial Advisory and Securities (India). The broking firm forecasts 6.5% cigarette sales growth for FY26 and Ebit margin contraction of 70 bps year-on-year to 71.5%, leading to cigarette Ebit growth of 5.5% for FY26. For perspective, cigarette Ebit growth was 5% in FY25.
It does help that ITC’s cigarette volumes were on fire in Q1FY26 with analysts estimating year-on-year growth at 6.5%, a figure ahead of forecasts and at a multi-quarter high. The company said differentiated variants and the premium segment continued to perform well.
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Beyond cigarettes
Coming to the FMCG-others vertical, revenue growth was 5.2% year-on-year, driven by staples, biscuits, dairy, premium personal wash, homecare and agarbatti. FMCG-others’ growth was 8.6%, excluding notebooks, which suffered due to elevated competition in the industry amid low-priced paper imports.
Unseasonal rains impacted beverage sales last quarter. Overall, the vertical’s Ebit margin dipped 179 bps year-on-year to 6.9% given that prices of key commodities such as edible oil, wheat, maida, cocoa, soap noodles, etc, were elevated year-on-year.
Meanwhile, ITC’s paperboards segment revenue grew by 7% thanks to higher volumes, although Ebit margin saw a steep fall owing to sustained influx of low-priced supplies into global markets, including India and subdued realisations. The agri business segment did well, reporting 39% revenue growth led by trading opportunities in bulk commodities and exports of leaf tobacco. Agri Ebit was up 22%.
As things stand, ITC’s shares are around 20% lower than their 52-week highs of ₹528.50 apiece seen on 27 September. “We note cigarette and FMCG demand trends are improving; however, elevated competition (in cigarette) and continued investment in brands (in FMCG) could weigh on near-term profitability,” said ICICI Securities’ analysts.
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The broking firm has cut its Ebitda estimates for FY26 and FY27 by about 5% and 3%, respectively, largely on lower margin expectations, modelling in revenue and profit-after-tax CAGR of 11% each over FY25-27.
To be sure, valuations are not demanding and lower than other FMCG companies. The ITC stock trades at nearly 22 times estimated FY26 earnings, as per Bloomberg. Still, the expected slow recovery in margin can act as a dampener. In general, a key risk for ITC remains high tax increases in cigarettes, potentially leading to a sharp drop in cigarette volumes and Ebit.
