ITC Q2 Results Preview: Profit seen falling nearly 30% YoY as cigarette tax hikes bite

ITC is expected to report another challenging quarter when it announces its September-quarter earnings on Monday, November 2, with brokerages forecasting a sharp decline in cigarette volumes and profitability following the introduction of a new tax regime. Growth in its FMCG and paper businesses is likely to provide some support to the company's overall performance.

Analysts expect cigarette volumes to decline around 8% year-on-year (YoY), while operating profit from the business could fall as much as 29%, as higher taxes and insufficient price increases continue to weigh on margins.

Nuvama Equities expects ITC's consolidated revenue to decline 3% YoY, hurt by weakness in the cigarette business and subdued agricultural operations, partially offset by growth in FMCG. The brokerage also projects a 20% YoY decline in consolidated EBITDA, with the margin contracting by 619 basis points to around 28.5%.

JM Financial and Motilal Oswal Financial Services have also flagged pressure on cigarette earnings, although both expect the company's non-cigarette businesses to deliver relatively healthy growth.

Cigarette volumesThe cigarette business, ITC's largest profit contributor, is expected to remain under pressure for another quarter as higher taxation affects pricing and consumer demand.

JM Financial estimates cigarette volumes will decline 8% YoY, while segment EBIT is expected to fall 29%. The brokerage said the decline would reflect the impact of the new tax regime and the normalisation of channel inventory.

Nuvama expects cigarette net revenue to fall 23% YoY, while EBIT could decline 27%. The brokerage noted that ITC has implemented price increases across 75% of its cigarette portfolio, with the remaining increases expected during the second half of FY27.

However, the price adjustments have yet to fully offset the impact of higher taxation. Nuvama sees the regular-size filter-tipped cigarette segment remaining particularly weak, as ITC has yet to pass on the entire tax burden to consumers in this category.

Motilal Oswal has a similar outlook, forecasting an 8% decline in cigarette volumes and a 22% fall in segment revenue. It expects cigarette EBIT to decline 28% YoY, accompanied by a significant contraction in margins.

The company's pricing strategy and the pace at which cigarette volumes stabilise will be among the key factors investors will watch in the upcoming results.

FMCG businessITC's fast-moving consumer goods business is expected to remain a relatively strong performer during the September quarter. Nuvama forecasts 11% YoY revenue growth in the FMCG business, compared with 12% in the June quarter and 6.9% in the corresponding quarter last year.

The brokerage expects segment EBIT to increase 9%. Motilal Oswal is more optimistic, projecting 14% revenue growth and a 10% increase in EBIT, with margins remaining broadly unchanged.

JM Financial also expects FMCG sales growth and margins to remain resilient despite the challenging operating environment.

Paper businessThe performance of ITC's packaged foods, personal care and other consumer products will be closely watched as the company continues to expand its non-cigarette businesses. The paperboards, paper and packaging business is expected to benefit from improved demand and the contribution from acquired assets.

Nuvama projects 32% YoY revenue growth in the paper business, compared with 9.1% in the preceding quarter. Segment profits are expected to increase 15%.

The brokerage said the Century Pulp and Paper business, included for two months during the quarter, has expanded ITC's paper manufacturing capacity by around 50%. The acquired operations are expected to add around 30% to sales but only 5% to segment profit, reflecting their relatively lower-margin product mix.

Motilal Oswal, meanwhile, expects a more modest 11% revenue increase from the paper business.

Agri businessITC's agricultural business is expected to report subdued growth, although performance could improve from the sharp revenue declines recorded in recent quarters. Nuvama estimates agri-business revenue will increase 3% YoY, compared with declines of 16.6% in the June quarter and 31.2% in the corresponding period last year.

Segment profit is expected to remain broadly unchanged. Motilal Oswal forecasts 2% revenue growth in the business.

Performance will depend on commodity trading activity, agricultural exports and the impact of global trade disruptions on the company's operations.

Margin pressureThe expected weakness in cigarette profitability is likely to weigh heavily on ITC's consolidated operating margins. Nuvama projects gross margin will decline 458 basis points YoY to around 50%, while EBITDA margin is expected to contract 619 basis points to 28.5%.

The brokerage expects consolidated EBITDA to fall 20%, following a 27.9% decline in the June quarter.

ITC had reported a challenging first quarter of FY27, with standalone EBITDA and profit after tax falling 28% and 27%, respectively, as the sharp increase in cigarette taxation affected earnings.

The company had then said it was implementing staggered price increases and adjusting its product portfolio to protect market share while limiting the risk of consumers shifting towards illicit cigarettes.

Management commentary on further price increases, consumer demand, cigarette market share and the profitability of non-cigarette businesses will remain important as ITC enters the second half of FY27.

Disclosure: This article has been written by Podishetti Akash, who is not a SEBI-registered Research Analyst or an Investment Adviser. Podishetti Akash and his ‘relative(s)’ (as defined under Section 2(77) of the Companies Act, 2013) do not hold any financial interest in the companies mentioned in this article as of the date of publication. The views/recommendations mentioned in this article, wherever applicable, are those of the respective SEBI-registered Research Analyst/brokerage and have been reproduced/reported with due attribution. They should not be construed as the views or recommendations of The Economic Times Digital or the journalist. Readers are advised to consider the original research report and make their investment decisions based on their own assessment. Brokerage disclosures here.
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