ITC Ltd has received an upgrade from Prabhudas Lilladher, with the research house elevating its rating to BUY and revising the target price to Rs 538 from the previous Rs 524. Despite near-term pressures from input costs and margin contractions, the brokerage expects an earnings recovery from the second half of FY26. Aided by improved cigarette volumes, recovery in agri-exports, and expected stabilization in the paper segment, ITC presents a compelling risk-reward profile. The stock’s attractive valuation at 21.4x FY27E EPS and a healthy dividend yield of 3.5% enhance its investment appeal.

Topline Growth Supported by Cigarette and Agri Segments

Revenue for Q4FY25 rose by 9.6% YoY to Rs 172.5 billion, led by a 5% uptick in cigarette volumes and a 17.7% surge in agri revenue. While overall EBITDA grew by 2.5% YoY to Rs 59.9 billion, margins contracted 242 basis points YoY to 34.7%, reflecting broad-based cost pressures.

Cigarette volumes showed healthy growth, validating the company's volume-led strategy amid high input cost inflation in leaf tobacco. The agri segment outperformed on the back of leaf tobacco and rice exports, while the FMCG and paper divisions lagged due to subdued margins.

Cigarette Business: Steady Volumes Amid Cost Pressures

Cigarette revenue grew 6% YoY to Rs 84 billion, with EBIT expanding 4% YoY to Rs 51.2 billion. However, EBIT margins contracted by 120 basis points YoY to 60.9%, primarily due to elevated tobacco leaf prices.

Despite this, ITC’s premium portfolio, product innovations such as Classic Clove and Gold Flake Indie Clove, and cost discipline helped maintain a competitive edge. Stable taxation on cigarettes continues to support volume expansion.

FMCG Segment Sees Mixed Performance

Revenue in the FMCG business rose 3.7% YoY to Rs 54.9 billion, though the growth would have been 5% excluding the notebooks segment, which saw pressure from regional competitors.

EBIT fell 28% YoY to Rs 3.4 billion, while margins slipped by 273 basis points to 6.3%. The EBITDA margin stood at 8.4%, impacted by high inflation in key raw materials like palm oil, cocoa, and packaging.

Growth was supported by categories like Atta, Spices, Frozen Foods, Dairy, Premium Soaps, Homecare, and Agarbatti, with strong traction in modern trade and digital channels (now forming 31% of FMCG sales).

Paper Segment Grapples with Global Headwinds

Paperboard and Packaging revenue rose 5.5% YoY to Rs 21.9 billion, but EBIT fell 31% YoY to Rs 2 billion due to weak realizations and an unprecedented rise in domestic wood prices.

Margins compressed sharply to 9.2%, impacted by dumping of low-cost Chinese and Indonesian paper. Recovery in this segment is expected only in H2FY26, aided by potential import duty hikes and the integration of Century Paper.

Agri Business Outshines Expectations

Agri revenues jumped 17.7% YoY to Rs 36.5 billion, while EBIT grew 26% to Rs 2.6 billion. The segment benefited from robust exports in leaf tobacco, spices, coffee, and rice.

Nicotine and its derivatives saw initial exports from ITC’s new export-oriented facility in Q4FY25. A scale-up in production and distribution is expected through FY26, which could further bolster margins in the segment.

Segment-Wise Revenue and EBIT Breakdown

Forward Estimates and Financial Outlook

Prabhudas Lilladher projects 11% PAT CAGR for FY25–FY27, despite near-term pressures. The firm adjusted its FY26/FY27 estimates by -3.4% and +1.2%, respectively, as margin expansion is expected to kick in after H1FY26.

Key Financials:

Strategic Initiatives: Organic and Inorganic Expansion

ITC has been aggressive on the M&A front, acquiring 100% stake in 24 Mantra Organics and increasing its holding in Mother Sparsh from 26.5% to 49.3%. These investments underscore its ambition to scale high-margin natural and premium brands in the FMCG portfolio.

Valuation: SOTP-Driven Target of Rs 538

The brokerage derives its target price using a Sum-of-the-Parts (SOTP) methodology, valuing cigarettes at 24x FY27E EPS and FMCG at 5.5x EV/Sales. The hotels business and ITC Infotech are also factored in.

Conclusion: Strategic Patience Rewarded

ITC’s fundamentals remain solid, bolstered by a diversified portfolio and forward-looking management strategy. While input cost inflation and competitive intensity in FMCG may weigh on near-term earnings, the outlook beyond FY26 is one of stabilization and growth.

Investors with a medium-term horizon may find ITC a compelling BUY at current levels, especially given the attractive yield, favorable valuation, and potential for margin recovery across core verticals.