ITC cigarette pricing recovery and resilient FMCG growth support upgraded BUY view

Investment View and Valuation

ICICI Direct Research’s August 4, 2026 result update upgrades ITC Ltd. to BUY from HOLD and assigns a revised sum-of-the-parts target price of Rs 341. The broker considers the risk-reward favourable after the stock corrected about 28% following the significant cigarette tax increase, with improving visibility for the core cigarette business over the coming quarters.

At the report’s CMP of Rs 287, ITC traded at 17 times FY27E earnings and 15 times FY28E earnings. ITC is a diversified consumption company spanning cigarettes, FMCG, agri, and Paperboards, Paper and Packaging. Its strategy is to use cash generated by the cigarette business to build growth in FMCG and other businesses.

Q1FY27 Financial Performance

Standalone comparisons for Q1FY27 are affected by the changed cigarette tax structure effective February 1, 2026. Gross revenue increased 27.9% year-on-year to Rs 26,943.2 crore, driven mainly by 80.6% growth in cigarette gross revenue. However, net revenue declined 14.4% to Rs 16,907.6 crore, operating profit fell 27.9% to Rs 4,514.3 crore, and adjusted PAT declined 27.1% to Rs 3,578.8 crore.

EBITDA margin contracted 498 basis points year-on-year to 26.7%, as the higher incidence of cigarette taxation reduced segment profitability.

Cigarette Business: Pricing Recovery Underway

Cigarette sales volume fell only 4–5% in Q1FY27, better than ICICI Direct’s expectation of an 8–10% decline. ITC implemented a calibrated 22–23% price increase to offset a 35% tax hike. The gradual implementation enabled retailer and distributor stocking at lower prices and limited the immediate volume impact.

Cigarette net revenue declined about 26% year-on-year, or about 10% on a like-for-like basis, while net EBIT margin fell about 900 basis points to 62.5%. The broker expects ITC to take a further 12–13% price increase over the next two quarters to restore EBIT per stick to pre-tax-increase levels.

ICICI Direct expects a somewhat higher volume decline in Q2FY27, but anticipates that the full price increase will be absorbed by Q4FY27. Cigarette volumes are then expected to return to positive territory, with margins improving sequentially.

FMCG-Other: Broad-Based Growth and Margin Expansion

FMCG-other revenue grew 12% year-on-year to Rs 6,482 crore, or 16% excluding staples. Segment PBIT increased 20.9% to Rs 478.6 crore. EBITDA margin excluding Sresta expanded 55 basis points to 10%, despite inflation in fuel, edible oil, soap noodles and packaging, supported by cost management, inventory hedging and price-volume management.

Growth was broad based, with about 20% growth in dairy, snacks, noodles and frozen foods, and mid-teen growth in personal care. ICICI Direct expects innovation, premiumisation, digital-first brands with current annual recurring revenue of Rs 1,500 crore, new-generation channels and adjacent categories to support scale-up. However, West Asia disruption and a monsoon deficit could add input-cost pressure.

Agri and Paperboards, Paper and Packaging

Agri

Agri revenue fell 16.6% to Rs 8,082.1 crore and EBIT declined 18.5% to Rs 353.8 crore amid weaker exports due to the West Asia crisis, lower leaf-tobacco demand, weak global offtake and delayed customer orders. Adjusted for wheat timing differences and the West Asia disruption, the agri business grew 9%.

Paperboards, Paper and Packaging

Revenue increased 9% to Rs 2,307.2 crore, while EBIT rose 37.9% to Rs 224.2 crore. EBIT margin expanded 203 basis points to 9.7%, helped by anchor grades, sustainable paperboards, packaging, exports and lower wood costs.

Earnings Estimates

ICICI Direct reduced its FY27E and FY28E PAT estimates by 2.8% and 2.6%, respectively, due to lower-than-previously-expected cigarette net revenue.

Sum-of-the-Parts Valuation

The target price of Rs 341 is based on a sum-of-the-parts valuation.

Key Risks

• Sustained inflation in key FMCG inputs.
• A further cigarette tax-rate increase at an upcoming GST meeting.
• Export restrictions on agri commodities.