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Worst seems over, expect gradual recovery

ITC reported 8% decline in cigarette volumes, however EBIT increased by Rs4.7bn QoQ as it continued to increase prices to pass on excise burden. We estimate that ITC would have passed on more than 75-80% of burden so far, suggesting that steady recovery should continue. FMCG growth and margins have been positive across Food, HPC, Stationary, however margin trajectory needs to be watched out for given rising input costs, although demand remains steady so far. Paper business will likely gain from

1) extension of MIP

2) integration of century paper and higher prices, although input costs remain elevated. We expect gradual recovery to set in across businesses, however demand trends and any potential increase in cigarette duty need to be watched out for. We believe worst seems over, although cigarette volumes recovery will be gradual. However, downside seems limited given ~50% decline from the peak and 5% dividend yield. Upgrade to Accumulate from Hold.

2QFY27: Cigarette volumes declined ~8%, PAT up Rs4.7bn QoQ

Revenues grew by 1.8% YoY to Rs184bn (PLe:Rs156.79bn). EBITDA declined by 17.4% YoY to Rs51.6bn (PLe:Rs 49.70bn); Margins contracted by 653bps YoY to 28% (PLe:31.7%). Adj PAT declined by 18.2% YoY to Rs41.6bn (PLe:Rs40.95bn).

Cigarette Revenues grew by 78.1% YoY to Rs155.4bn; EBIT declined by 27% YoY to 38.1bn. Margins contracted by 3553bps YoY to 24.5%

FMCG Revenues grew by 15.7% YoY to Rs69.7bn; EBIT grew by 27% YoY to 5.6bn. Margins expanded by 80bps YoY to 8%, ex atta sales grew 23%

Agri Revenues grew by 12% YoY to Rs44.5bn; EBIT grew by 11% YoY to 5.1bn. Margins contracted by 7bps YoY to 11.5%

Paperboard & Paper Revenues grew by 35.9% YoY to Rs30.2bn; EBIT grew by 48% YoY to 2.8bn. Margins expanded by 74bps YoY to 9.3%. It includes 2 month sales of Century paper

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