ITC Q1: Margin Woes Seen as Blip, Analysts Pin Hopes On a Better H2

Diversified consumer goods major ITC posted modest Q1 earnings that while showcasing the strength of its core segments, also the highlighted the play out of cost headwinds. While the company delivered a strong revenue performance driven by robust growth in its cigarettes and agri businesses, margin pressures weighed on profitability.

ITC reported a 21% year-on-year jump in its April-June revenue, even as Ebitda and net profit expanded by a marginal 3% and 2%, respectively. That said, analysts on the Street see a rather bright future for the cigarettes-to-hotels conglomerate, anticipating the worst of margin headwinds to be over.

Shares of ITC also reacted positively to the optimistic analyst views and rose 1% on August 4.

Cigarettes Light Up the Quarter

The cigarettes segment posted 8% on year revenue growth, with volume growth of around 6–7%, its highest in several quarters. This was aided by a stable tax environment and continued market share gains through interventions in retail and pricing. However, rising input costs, particularly in leaf tobacco, shaved off 220 basis points from cigarette Ebit margins.

Still, brokerages like Citi and Goldman Sachs believe the pressure is temporary. Both firms maintained their ‘buy’ ratings on ITC, with target prices of ₹500 and ₹490, respectively. Citi pointed to a ‘strong revenue beat’ and early signs of urban consumption recovery as factors behind its optimism. On the other hand, Goldman expects margin recovery in cigarettes in the second half of FY26.

FMCG Remains Steady

ITC’s FMCG segment grew 5.2% on year to ₹5,777 crore. Even though modest on the surface, this growth came with a positive sliver as Ebitda margins in the segment improved by 60 bps sequentially, suggesting some resilience despite broader headwinds.

Analysts see room for stronger growth and margin improvement in the second half of the fiscal. Goldman Sachs flagged this as a key driver of potential earnings acceleration in FY27, while Macquarie, which has an ‘outperform’ rating and a ₹500 target for ITC, maintained a constructive view on the company’s broader growth prospects.

Agri Business Surprises, Paper Continues to Lag

The agri business was the outperformer this quarter, growing 39% on year to ₹9,685 crore, aided by favourable trading conditions. However, this was offset in part by continued weakness in the paperboards, paper and packaging segment, where Ebit remained under pressure.

Brokerages largely agree that the worst may be over for paper margins, even though recovery may take time. Goldman Sachs and Jefferies both noted that the segment appears to be at or near bottom, with Jefferies keeping a ‘buy’ rating and a target price of ₹535, the highest among peers.

Analysts Stand In Favour

Across the board, most analysts have chosen to look through the short-term margin pain, instead focusing on ITC’s steady revenue build-up, broad-based growth across segments, and signs of urban demand revival.

Nuvama Institutional Equities said it was encouraged by early signs of a turnaround, particularly in urban FMCG consumption. The firm raised its FY26 and FY27 revenue estimates by 3% and 4%, respectively, and marginally lifted its target price to ₹340 while retaining a ‘buy’ call.

In short, while margins have seen better days, ITC’s core businesses remain on solid footing. If input costs ease and urban demand gains momentum, the company could be well-positioned to deliver accelerated earnings growth in H2 and beyond, a view most analysts on the Street seem to vouch for.