Add ITC Ltd For Target Rs. 475 by Emkay Global Financial Services Ltd
We maintain a positive stance on ITC with ADD and a Jun-26E SOTP-based target price of Rs475, as we believe most headwinds are now in the base. Q1FY26 profit was in line with expectations, supported by stable performance in the cigarettes business (revenue up 7.7% with an estimated 6.5% volume growth). Non-cigarette revenue grew 22% YoY, led by a strong 39% growth in the agri business. However, weak margins in other FMCG and the paper segment resulted in an 11% YoY decline in non-cigarette EBIT. Looking ahead, we expect gradual improvement in cigarette performance, driven by improved execution and a catch-up in volume growth relative to the industry—containing market share loss will be key. That said, a near-term overhang persists due to potential cig tax increases linked to the replacement of the compensation cess.
Cigarette business (37% of net sales/84% of EBIT) had an in-line show
Cigarette revenue grew 7.7% YoY (stood in line) with ~6.5% volume growth (vs 5% estimate). Differentiated and premium portfolio continues to drive overall growth. Sequential growth acceleration is heartening, but likely to be lower than industry growth, implying steady market share loss. Innovation, portfolio fortification, and recent launches have been like Q4, where we see a focus on execution. We expect a near-term overhang of tax hikes with replacement of GST compensation cess. We largely maintain estimates, where we shift part of the growth from realization to volume. Segment EBIT margin came in at 71.1%, moderated by 270bps YoY and 80bps QoQ. Segment EBIT grew 3.7% YoY. We expect high costs for leaf tobacco to enter the base from Q2 and expect moderate margin expansion from Q3FY26. We continue to see 10% EBIT CAGR over FY25-28E.
Non-cig portfolio continues to hurt the overall show
Non-cigarettes revenue saw 22% revenue growth YoY, aided by 39% growth in the agri business. Adj for agri, revenue grew 6%. Driven by weakness in the paper and other FMCG businesses, non-cigarette business EBIT fell 11% YoY in Q1. Other FMCG sales grew ~5.2%, with pressure seen in notebooks (ex-Notebook, revenue grew 8.6%). Other FMCG EBITDA declined 16.5% YoY, given a 180bps contraction in OPM to 9.4% in Q1 (up 50 bps QoQ). Digital first and organic portfolio is clocking Rs10bn ARR. The company now generates ~6% of revenue from Quick Commerce channel (50% of ecommerce). Agri business saw an improvement in topline with 39% revenue growth, aided by strong growth in leaf tobacco exports. Segment EBIT grew 22% YoY, with 60bps margin contraction to 4.5%. Paper business saw 7% growth, driven by volume growth, though margin weakness (down by 550bps YoY to 7.7%) caused a 38% EBIT decline.
Valuation to factor improving outlook; share losses in cig a concern
While we see optical performance improvement ahead, steady share loss in cigarettes and expectation of tax increases on cigarettes linked to replacement of compensation cess are likely to keep valuation in check in the near term.
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