ITC FMCG margin gains offset by cigarette tax pass-through volatility

Investment View and Key Concern

In its May 21, 2026 results update, Motilal Oswal Financial Services Limited maintained its Neutral rating on ITC with a target price of Rs 335, compared with the current market price of Rs 308.

The broker’s central concern is the transitionary impact of cigarette tax increases and ITC’s calibrated, slower-than-expected price pass-through. This approach could limit migration of consumers from legal to illicit cigarettes, but it creates near-term earnings risk and should keep cigarette revenue and EBIT volatile at least through Q1 FY27.

ITC has a full cigarette portfolio to navigate the tax increase, although illicit-cigarette competition remains a material risk for the formal cigarette industry. Motilal Oswal believes improving FMCG margins and a recovery in FMCG and paper are supportive, but expects cigarette earnings pressure to outweigh these near-term catalysts and reduce valuation comfort.

Q4 FY26 Consolidated Performance

ITC’s Q4 FY26 consolidated net revenue declined 5 per cent year on year to Rs 17,820 crore, below Motilal Oswal’s estimate of Rs 19,820 crore. EBITDA increased 6 per cent year on year to Rs 6,920 crore, marginally above the broker’s estimate of Rs 6,810 crore. Profit before tax and adjusted profit after tax rose 5 per cent and 7 per cent, respectively.

The quarter’s cigarette numbers were not considered comparable year on year because there was a one-month gap between the new tax announcement and its implementation on February 1, 2026. This created a significant difference between primary and secondary sales, particularly in January.

Cigarette Business: Tax Pass-Through Creates Volatility

Consolidated gross cigarette sales rose 30 per cent year on year to Rs 11,950 crore, ahead of the broker’s estimate of Rs 9,040 crore. However, net cigarette sales fell 22 per cent to Rs 5,950 crore following the increase in excise duty.

Cigarette EBIT grew 7.3 per cent to Rs 5,800 crore, above the Rs 5,150 crore estimate, but gross cigarette EBIT margin contracted 1,000 basis points year on year to 48.5 per cent, below the 56.9 per cent estimate.

ITC stated that the GST rate increase from 28 per cent of transaction value to 40 per cent of retail sale price, together with a steep excise-duty increase after the compensation cess was phased out, resulted in an unprecedented rise in cigarette tax incidence. The cumulative price increase had not yet reached a tax-neutral level.

FMCG-Others Delivers Strong Margin Improvement

FMCG-Others was the principal positive in the quarter. Sales grew 15 per cent year on year to Rs 6,350 crore, ahead of the Rs 6,140 crore estimate, led by Staples, Biscuits, Noodles, Dairy, Premium Personal Wash, Home Care and Agarbattis.

Notebooks recovered in H2 FY26 following focused interventions and calibrated pricing. Segment EBIT rose 52 per cent to Rs 530 crore, ahead of the Rs 470 crore estimate, while EBIT margin expanded 200 basis points to 8.3 per cent.

ITC managed higher edible-oil, soap-noodle and packaging costs through market interventions, supply-chain agility, cost management and judicious pricing.

Agri and Paperboard Segment Performance

Agri

Agri sales declined 15 per cent year on year to Rs 3,170 crore, below the Rs 4,160 crore estimate, as West Asia-related disruptions kept exports subdued and the base was high. Agri EBIT fell 21 per cent, while margin declined 50 basis points to 6.3 per cent.

Paperboard

Paperboard sales grew 2 per cent year on year to Rs 2,230 crore, below estimate. EBIT increased 19 per cent and margin improved 150 basis points to 10.4 per cent as wood availability improved. The minimum import price on virgin multi-layer paperboard showed early signs of improving net realisations.

Revised Earnings Estimates and Valuation

Motilal Oswal cut its FY27E and FY28E EPS estimates by about 3 per cent. Its revised estimates are as follows:

The Rs 335 target price is based on a sum-of-the-parts valuation and implies 20 times FY28E EPS. The broker considers improving FMCG margins and recovery in FMCG and paper supportive, but expects cigarette earnings pressure to outweigh these near-term catalysts.

Key Risks and Outlook

• Slower-than-expected cigarette price pass-through could create near-term earnings risk and keep cigarette revenue and EBIT volatile through at least Q1 FY27.
• The unprecedented increase in cigarette tax incidence has not yet been fully offset by cumulative price increases.
• Illicit-cigarette competition remains a material risk for the formal cigarette industry and could affect consumer migration and volumes.
• West Asia-related disruptions may continue to weigh on agri exports.