ITC Q2 Results Review: Cigarette Volumes Steady But Margins Hit—What Brokerages Project Now

ITC Ltd.'s cigarette business remained a focal point for brokerages following the company's second quarter results, even as its operating margin contracted to the lowest level in three years.

Despite positive cigarette volume growth, overall margin pressure across other segments, particularly the agri and paper businesses, weighed on the company's performance.

The company reported an operating margin of 32.8% for the quarter, down 470 basis points year-on-year, marking the lowest margin since the second quarter of fiscal 2022. This contraction was largely attributed to a higher mix of lower-margin agri business, which surged during the period.

Nirmal Bang retained its 'hold' rating with a target price of Rs 515, reflecting a 9% upside. The brokerage noted that while ITC's September quarter results were broadly in line with expectations, cigarette EBIT growth slowed to 5.1%, down from 6.5% in the previous quarter. 

Channel checks indicated early signs of ITC regaining lost market share in cigarettes, which could bolster sales growth in the second half of FY25. However, EBIT growth may lag until the company takes price increases to combat rising leaf tobacco costs.

Nuvama Institutional Equities maintained its 'buy' rating on ITC with a revised target price of Rs 585, noting that cigarette volumes grew 3.3% YoY, ahead of their expectation of 2.5%. The agri business, which saw a significant 47% YoY growth, drove the company's revenue up 16.8% YoY. However, margins disappointed, with Ebitda margin dipping by 373 basis points YoY. Nuvama also pointed out the underperformance of the paper business and continued inflationary headwinds in the FMCG segment, particularly affecting notebooks and paperboards.

Emkay Global held an 'add' rating with a target price of Rs 520, citing the resilience of ITC's cigarette business, where revenue grew by 7% and volumes by 3%. However, margin pressure persisted, with a 155 basis points contraction in cigarette segment margins due to rising leaf tobacco costs. Emkay highlighted that the agri business, despite its 47% growth, also saw a contraction in operating margins, underscoring the overall margin stress across ITC's segments.

• Cigarette Business: Despite slowing EBIT growth, cigarette volumes grew by 3-3.3% YoY, with revenue growth driven by market initiatives and portfolio adjustments.

• Margins: ITC's overall margin contracted significantly due to a larger contribution from lower-margin agri business and rising input costs, particularly in tobacco.

• Segmental Performance: Agri business saw robust growth, while FMCG and paper businesses remained under pressure from inflation and competition.

Looking ahead, brokerages expect margin pressures to continue, particularly in the cigarette and paper segments, unless ITC implements price hikes to offset cost inflation. However, the company's strong position in the cigarette market and improving agri business performance are seen as key drivers for future growth.

Shares of the company closed 0.87% higher at Rs 475.80 per share on Thursday, compared to a 0.08% advance in the NSE Nifty 50.