Buy ITC Ltd For Target Rs.490 by Axis Securities Ltd
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Est. vs. Actual for Q1FY26: Revenue – BEAT; EBITDA – MISS; PAT – MISS
Changes in Estimates post Q1FY26
FY26E/FY27E: Revenue: 0%/0%; EBITDA: -1%/-2%; PAT: -1%/-2%
Recommendation Rationale
Healthy Topline Performance: ITC reported a healthy 20.7% YoY revenue growth in Q1FY26, driven by broad-based performance across key segments. The Cigarette business grew 7.6% YoY, supported by resilient volumes and continued premiumisation. Agri Business surged 39% YoY on the back of robust trading activity and strong leaf tobacco exports. FMCG (ex-Notebooks) maintained solid growth at 8.6% YoY, led by Staples, Biscuits, Dairy, Premium Personal Wash, Homecare, and Agarbatti. The Paperboards, Paper & Packaging segment also rose 7% YoY, aided by higher volumes despite pricing pressures.
Gross Margins declined by 750 bps YoY to 48.6%, impacted by a sharp escalation in key input costs, including edible oils, wheat, maida, cocoa, leaf tobacco, and pulpwood. Additionally, subdued realisations in the paper business further weighed on margins.
Demand Outlook: As per the management, growth momentum is likely to strengthen, supported by moderating inflation, potential rate cuts, sustained RBI liquidity support, and fiscal thrust through tax relief and front-loaded government spending as outlined in the Union Budget. Macro fundamentals remain solid, with rural demand sustaining and early signs of recovery evident in urban markets.
Long-term Story Remains Strong: We believe ITC’s long-term growth trajectory remains intact, with nearly all segments progressing steadily. 1) Cigarette volumes continue to register growth, aided by innovations and ongoing premiumisation. 2) The Agribusiness remains resilient, underpinned by robust customer relationships and agile execution across leaf tobacco, coffee, and spices. 3) The FMCG segment has witnessed a pickup in demand momentum and is well-positioned for a recovery. Government budgetary measures, coupled with expanding outlet reach, localisation strategies, and premiumisation, are expected to support growth revival in the upcoming quarters.
Sector Outlook: Positive
Company Outlook & Guidance: Considering the volatility in commodity prices, we have cut the margin estimates for FY26/FY27.
Current Valuation: 25x Mar’27 EPS; ( Earlier Valuation: 25x Mar’27 EPS ).
Current TP: Rs 490/share; ( Earlier TP: Rs 500/share).
Recommendation: With an upside potential of 18% from the CMP, we maintain our BUY rating on the stock.
Financial Performance: ITC reported 20.7% YoY revenue growth, driven by strong performance in the Cigarette, Agri, and FMCG businesses. Gross margins contracted by 750 bps YoY to 48.6%, primarily due to higher raw material costs. EBITDA grew by 2.8% YoY, though margins declined by 554 bps YoY to 31.9%. The reported PAT stood at Rs 4,912 Cr, up ~2% YoY.
Cigarettes(~80% of EBIT): ITC’s cigarette revenue growth was strong at 7.6% YoY, supported by resilient demand and a strategic focus on premiumisation.EBIT grew by 3.7% while EBIT margins declined by 225 bps YoY to 60.4% owing to higher RM (tobacco). However, this was partly offset by the improved mix and strategic cost savings.
Outlook: We believe ITC’s long-term growth outlook remains intact. The stock is currently trading at 19.6x FY27E EPS, providing a margin of safety compared to peers.
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