ITC faces delayed cigarette recovery as excise absorption pressures margins

Investment View and Valuation

In its July 31, 2026 Q1 FY27 result update, Prabhudas Lilladher upgraded ITC to HOLD from Reduce, while cutting its target price to Rs291 from Rs302. The broker believes the worst operating performance may be over, but expects the recovery to be gradual and delayed as ITC continues to absorb a portion of the cigarette excise-duty increase.

The broker sees limited downside after the stock's approximately 30 per cent correction since December 2025, supported by a 16.7x FY28E P/E and an approximately 5 per cent dividend yield.

Q1 FY27 Financial Performance

ITC's Q1 FY27 results were weak relative to Prabhudas Lilladher's expectations. Revenue declined 14.4 per cent year-on-year to Rs169.1 billion, compared with the broker's estimate of Rs167.9 billion. EBITDA fell 27.9 per cent to Rs45.1 billion, which was 10 per cent below estimate, while EBITDA margin contracted by 498 basis points year-on-year to 26.7 per cent, versus the 30.0 per cent estimate. Adjusted PAT declined 27.1 per cent year-on-year to Rs35.8 billion, 12 per cent below the broker's estimate.

Cigarette Business: Excise Absorption Delays Recovery

The cigarette business was the principal drag on performance. Cigarette volume declined by approximately 5 per cent in Q1 FY27, better than the broker's expectation of an approximately 10 per cent decline. However, cigarette revenue net of excise fell 25 per cent to Rs53.4 billion and EBIT declined 35.1 per cent to Rs33.4 billion.

Net-of-excise cigarette margin contracted by 882 basis points to 62.7 per cent as ITC absorbed part of the large excise increase. ITC made 30 pricing interventions and introduced nearly 17 variants, mainly in RSFT, longs and Kings, to limit downtrading to unorganised and illicit products.

Prabhudas Lilladher estimates ITC's cigarette volume decline since Q3 FY26 at approximately 9 per cent, compared with a 13-15 per cent decline for peers. The broker expects a quicker recovery in 64mm products but a delayed recovery in longs and Kings, where cigarette prices could increase by approximately 40 per cent. It expects volume and margin pressure to continue over the next two to three quarters.

FMCG: Resilient Growth but Near-Term Margin Pressure

FMCG was relatively resilient, with revenue growing 12.2 per cent year-on-year to Rs64.8 billion. EBIT increased 20 per cent to Rs4.8 billion, while margin expanded by 52 basis points to 7.4 per cent.

Demand was healthy in both rural and urban markets. Dairy, snacks and frozen foods grew by more than 20 per cent, while personal care posted mid-teen growth. Digital-first and organic brands, including Yogabar, 24 Mantra, Prasuma, Meatigo and Mother Sparsh, had annual recurring revenue of approximately Rs15 billion.

However, the broker expects Q2 FY27 FMCG margins to face input-cost pressure from West Asia-related inflation in fuel, edible oil, soap noodles and packaging. El Niño is also a monitorable.

Paper, Agri and Emerging Businesses

Paperboard and Paper

Paperboard and Paper revenue rose 9.1 per cent to Rs23.1 billion. EBIT grew 38 per cent to Rs2.2 billion, while margin expanded by 203 basis points to 9.7 per cent, helped by higher realisations, volume growth and lower wood prices.

The minimum import price on virgin multilayered paper was extended to September 30, 2026. Approval of anti-dumping duty on Indonesian supplies remained pending.

Agri

Agri revenue fell 16.6 per cent to Rs80.8 billion and EBIT declined 18.5 per cent to Rs3.5 billion amid weak domestic and international demand and delayed customer call-offs linked to West Asia disruption.

Other Businesses and Management Updates

Nicotine and Nicotine Derivative Products remained PBIT-positive for the second consecutive quarter. Management highlighted that the food-tech footprint exceeded 75 cloud kitchens, with gross merchandise value growth of 90 per cent year-on-year and annual recurring revenue of Rs3 billion.

Earnings Estimates and Target Price

Prabhudas Lilladher cut FY27E and FY28E EPS by 15.0 per cent and 10.3 per cent, respectively. It forecasts FY27 PAT to decline 13 per cent, followed by 15.2 per cent growth in FY28.

The Rs291 target price is based on a sum-of-the-parts valuation:

Key Risks

• Prolonged cigarette volume disruption.
• Incomplete excise pass-through and continued cigarette margin pressure.
• Higher FMCG input costs.
• Unresolved West Asia disruption affecting Agri demand.
• Delayed recovery in cigarette pricing and profitability.