Buy ITC Ltd for the Target Rs.500 by Motilal Oswal Financial Services Ltd
Healthy cigarette growth; margin weakness persists
* ITC sustained healthy performance in core segments in a tepid consumption environment, though margins remained under pressure. Gross cigarette sales grew 8% YoY (est. 6%) and volume growth was ~6% (vs. est. 5%). The premium cigarette segment continued to outperform. Cigarette EBIT grew by 4.6% YoY (est. 5.2% YoY). EBIT margin contracted 190bp YoY to 57.6% (est. 59%), impacted by the sharp escalation in the leaf tobacco cost.
* FMCG segment sales grew 5.5% YoY (ex-notebook 8.6%). Notebook industry continued to operate under deflationary conditions, while unseasonal rains during the quarter impacted beverages sales. Growth was driven by Staples, Dairy, Premium Personal Wash, Homecare and Agarbattis. EBIT declined 17% YoY. EBIT margin contracted by 180bp to 6.9% (in line).
* Agri business sales increased significantly by 39% YoY (est. 15%), driven by trading opportunities in bulk commodities and leaf tobacco exports. EBIT margin contracted by 45bp YoY to 4.5% (est. 6%).
* Paper business continued to struggle due to low-priced supplies into global markets (including India), subdued realizations and elevated wood prices. Revenue grew 7% and EBIT margin contracted 580bp to 7.2% (all-time low).
* ITC’s core business growth has been steady, with cigarette growth coming in better than expected. Consistent focus on new launches, stable taxes and a variety of other initiatives led to 7% cigarette growth in FY25 and the momentum continued in 1QFY26. FMCG performance was below par in FY25, but with demand recovery, we expect improving trends. We reiterate our BUY rating on ITC with our SOTP-based TP of INR500 (implying 26x Jun’27E P/E).
Cigarette volume up ~6%, but FMCG and paper remain soft
* Consolidated performance (ex-hotel business): ITC’s 1QFY26 net revenue grew by 21% YoY to INR214.9b (est. INR194b), mainly led by cigarette and agri businesses. Gross margin contracted 700bp YoY to 52.4% (est. 58.7%), impacted by high food inflation and the rise of certain input costs (leaf, wood, etc.). EBITDA margin contracted 510bp YoY to 31.7% (est. 34.9%). EBITDA grew 4% YoY to INR68.2b (est. INR67.8b). PBT and APAT grew by 4% and 5%, respectively.
* Cigarette volumes up ~6%, with 5% EBIT growth: Gross cigarette sales grew 8% YoY to INR95.5b (est. INR93.7b). Cigarette volume growth was ~6% (est. 5%). Differentiated and premium offerings continued to perform well. EBIT grew by 4.6% YoY to INR55b (est. INR55.3b). Cigarette EBIT margin contracted 190bp YoY to 57.6% (est. 59%). Consumption of high-cost leaf tobacco inventory weighed on margins. Procurement prices moderated in the current crop cycle.
* FMCG-Others sales grew 5.5% YoY to INR58b (est. INR57.1b), while ex-notebook growth was 8.6%. Notebook industry continues to operate under deflationary conditions on account of low-priced paper imports and opportunistic play by local/regional players. Unseasonal rains during the quarter impacted beverages sales. EBIT declined 17% YoY to INR4b (est. INR4b) in 1QFY26. EBIT margin contracted by 180bp to 6.9% (est. 7%).
* Agri business sales increased significantly by 39% YoY to INR97.2b (est. INR80.5b). EBIT grew by 26% YoY to INR4.3b. EBIT margin contracted by 45bp YoY to 4.5% (est. 6%). ? Paperboards business sales grew 7% YoY to INR21.1b (est. INR20.7b). EBIT fell 41% YoY to INR1.5b and EBIT margin contracted 580bp YoY to 7.2% (est. 9%).
* FoodTech Business, a key growth area in ITC Next strategy, combines ITC’s food science, FMCG brands, and culinary expertise to rapidly build a capital-efficient, tech-enabled full-stack platform with ~60 cloud kitchens in five cities currently. It achieved GMV of INR1b in FY25.
Valuation and view
* There is no material change in our EPS estimates for FY26 and FY27.
* ITC’s core business of cigarettes saw steady performance. With stable taxes on cigarettes, we anticipate stable growth in this business. We model a 5% revenue CAGR in FY26-28.
* While the FMCG segment is seeing moderation due to multiple headwinds. ITC has historically enjoyed industry-leading growth due to several category drivers, e.g., a large unorganized mix, under-penetration, etc. With the overall demand environment expected to improve, we expect FMCG performance to improve in the coming quarters. We model an 11% revenue CAGR during FY26-28.
* If ITC sustains mid-single digit volume growth in cigarette, and FMCG business sees a recovery in FY26, we expect valuation re-rating. We reiterate our BUY rating on ITC with our SOTP-based TP of INR500 (implying 26x Jun’27E P/E)
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