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ITC reported a strong 6.5% volume growth in Cigarettes, ~39% growth in Agri business and sequential uptick in FMCG business(ex-notebooks) even as Paper Business continues to drag growth. ITC’s margin continues to remain under pressure due to high leaf tobacco prices in Cigarettes, high wood prices and dumping (Indonesia and China) in Paper board, elevated commodity costs in FMCG and pricing pressure in stationary due to cheap imported paper.

However, we expect margin recovery to set in post 2Q26 as 1) leaf tobacco prices have softened by 10-15% in current season which would start benefitting from 3Q26 2) likely decline in wood prices and hopes of anti-dumping duty in paper board 3) integration of century paper acquisition and 4) expected recovery in demand and margins in FMCG business (~50bps sequential uptick in margins in 1Q26). FMCG business has shown resilience with Digital First & Organic portfolio clocking Rs.10bn ARR and we expect ITC to be more aggressive in new acquisitions, which should push growth.

We estimate 8.9% PAT CAGR over FY25-27 post factoring in the demerger of Hotels business but without century paper integration. We believe ITC offers a favorable risk reward at 22.4xFY27 EPS and a dividend yield of 3.7%. We assign SOTP based target price of Rs530 (Rs538 earlier). Retain BUY.

1Q Revenue up 20.6%, cigarette volumes grow 6.5% (Ple:4.7%): Revenues grew by 20.6% YoY to Rs197.5bn (PLe: Rs180bn). EBITDA grew by 2.9% YoY to Rs62.6bn (PLe:Rs 6.3bn); Margins contracted by 547bps YoY to 31.7% (PLe:34.3%). Adj. PAT grew by 1.9% YoY to Rs49.1bn (PLe: Rs49.7bn).

1QFY26: Cigarette volumes up 6.5%, broad based margin pressure across segments

• Cigarette Revenues grew by 7.6% YoY to Rs85.2bn; EBIT grew by 4% YoY to 51.5bn. Margins contracted by 225bps YoY to 60.4%. Leaf tobacco prices are down 10-15% in the current season, which should benefit with a lag.
• FMCG Revenues grew by 5.2% YoY to Rs57.8bn; EBIT declined 11.9% YoY to 5.45bn. Margins contracted by 190bps YoY to 9.4%, however margins improved 50bps QoQ
• Agri Revenues grew by 38.9% YoY to Rs96.9bn; EBIT grew by 22% YoY to 4.3bn. Margins contracted by 62bps YoY to 4.5% on higher share of commodity exports
• Paperboard & Paper Revenues grew by 7% YoY to Rs21.2bn; EBIT de-grew by 38% YoY to 1.6bn. Margins contracted by 553bps YoY to 7.7%.
• Cigarette volumes grew ~6.5%; EBIT up 4%: Cigarette Revenues grew by 7.6% YoY to Rs85.2bn; EBIT grew by 4% YoY to 51.5bn. Margins contracted by 225bps YoY to 60.4% due to high leaf tobacco costs—partly offset by product mix and cost efficiencies. Moderation in leaf tobacco procurement prices witnessed in current crop cycle. Growth was supported by stable taxes and the strong performance of premium offerings, with new launches like Classic Clove and Gold Flake Indie Clove. ITC remains focused on the volumeled growth strategy and expect margins to recover post 1H26 since leaf tobacco prices have started to cool off.
• FMCG EBITDA margins 9.4%: Revenues grew by 5.2% YoY (~8% exnotebooks) to Rs57.8bn lead by Staples, Biscuits, Dairy, Premium Personal Wash, Homecare and Agarbattis; EBIT de-grew by 16% YoY to 3.97bn due to elevated commodity prices (edible oil, wheat, maida, cocoa, soap noodles etc) The notebooks industry continues to face deflationary pressures due to the influx of low-priced paper imports and opportunistic behavior by local and regional players. Additionally, unseasonal rains during the quarter adversely impacted beverage sales. Premium portfolio and NewGen channels sustain their high growth trajectory. Digital-First (Yogabar, Mother Sparsh and Prasuma & Meatigo) & Organic (24 Mantra) delivered ~Rs. 10bn ARR. ? Paperboards, Paper & Packaging: Revenues grew by 7% YoY to Rs21.2bn; EBIT de-grew by 38% YoY to 1.6bn. Margins contracted by 553bps YoY to 7.7% The operating environment continued to be challenging during the quarter, marked by a steady influx of low-priced supplies into global markets, including India, alongside high domestic wood prices and muted realizations. Specialty Papers saw strong growth, aided by capacity expansion in Décor paper. The Packaging and Printing Business witnessed signs of a gradual uptick in domestic demand. ITC should gain from integration of century paper acquisition and any increase in import duty given huge amounts of dumping.
• Agri Business: Revenue grew by 38.9% YoY to Rs96.9bn trading opportunities in Bulk commodities & exports of Leaf Tobacco; EBIT grew by 22% YoY to 4.3bn. Margins contracted by 62bps YoY to 4.5% The Business continued to focus on scaling up Value-added agri portfolio (e.g. Aqua, Spices, Coffee) 2.2x over the last 4 years.

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