Cigarette business weakness drags ITC margins in March quarter

ET Intelligence Group: ITC‘s cigarette business reported margin pressure in the March quarter due to the recent increase in taxes. While other segments such as FMCG and paperboards showed improved profitability, their smaller size meant they could not fully offset the decline in cigarette margins.

To manage the impact of higher tax, the company is implementing tactics around pricing and product portfolio. It has taken multiple steps in recent months to strengthen its portfolio and protect market share. However, revenue growth and profitability in the near term remain exposed to the risk of higher illicit cigarette trade.

The stock has dropped nearly 24% so far in 2026, reflecting concerns around the company’s growth prospects following the tax increase. While valuations appear attractive, with the price-to-earnings (P/E) multiple at around 18 times, below its three- and five-year average of 23-24 times, the stock is likely to remain under pressure until there is more clarity on how the company navigates these challenges and whether its strategies deliver results.

The company stated that sharp tax hikes have historically fuelled illicit trade, with India being the fourth-largest market globally, according to Euromonitor estimates. It makes up nearly one-third of the legal market. The recent tax increase may further widen price gaps and encourage illicit activity.

ITC’s margin was weighed down by weakness in the cigarette business, which accounted for nearly half of revenue. The standalone operating margin before depreciation and amortisation (EBITDA margin) on gross revenue basis dropped to 50% from 61% in the year ago quarter.

The agri segment’s margin also contracted to 5.8% from 7% during the period due to US tariffs, climate-related supply issues and West Asia-led logistical disruptions. Domestically, the government’s imposition on stock limits and export curbs on key commodities restricted business opportunities.

This was partly offset by margin expansion in the FMCG segment to 8.3% from 6.3%.