Prabhudas Lilladher has maintained BUY recommendation on FMCG major ITC, establishing a forward-looking 12-month target price of Rs 530, reflecting its conviction in a strong margin recovery and multi-segmental earnings acceleration from the second half of FY26. The research report underscores ITC’s resilience amid regulatory disruptions and raw material inflation, positioning it as a compelling risk-reward play for investors attuned to India's evolving consumption and export landscape.

ITC's second quarter of FY26 reveals a nuanced operational landscape—robust growth in cigarettes, a margin rebound in FMCG and paperboard, yet a significant setback in Agri. Analysts anticipate margin recovery on the back of easing input costs and fiscal tailwinds from GST changes. Portfolio innovations, inorganic expansion, and strategic cost management are elevating the conglomerate’s growth profile, setting the stage for above-average EPS trajectory in the medium term.

Investment Rationale: Prabhudas Lilladher Elevates Confidence

The research house reiterates its BUY call, with ITC’s prevailing price near Rs419, and affirms a target of Rs530. ITC's valuation at approximately 21.5x FY27E EPS and a 3.7% dividend yield provides a strong floor for investors seeking both growth and yield. The SOTP (Sum-of-the-Parts) methodology assigns prime value to the cigarettes business, but forthcoming earnings upgrades hinge on a sustained margin uptrend in FMCG and the completion of strategic mergers such as Century Paper.

Key Performance Highlights: Q2FY26 in Focus

- Cigarette volumes surged 6%, revenues grew 6.7% YoY, yet margins contracted moderately, settling at 60.1% due to elevated tobacco leaf costs. - FMCG margins rebounded QoQ, closing at 7.4%, with digital-first and food tech verticals demonstrating notable annualized run rates (ARR of Rs11bn and H1 GMV of Rs900mn). - The Agri segment encountered a 31% YoY revenue decline, but margins improved substantially, pointing to a more value-added export mix and offsetting tariff obstacles. - Paperboard and Packaging achieved resilience, absorbing low-priced imports due to regulatory interventions, with EBIT margins expanding sequentially to 8.6%.

Strategic Sectoral Analysis: Foundational Pillars of Growth

- Cigarettes: Despite margin pressures from raw materials, the business remains the group’s cash engine, contributing 82.8% of EBIT and driving forward uplift through superior mix and pricing discipline. - FMCG: Challenges from GST transitions and volatile input prices were countered by portfolio rationalization. The stationary sector remains pressured, yet GST cuts and future ADD relief will likely buttress earnings growth. - Paperboard & Packaging: Industry headwinds from low-priced paper imports have eased due to Minimum Import Price (MIP), and further anti-dumping duties (ADD) will lift margin recovery expectations. - Agri: Margin expansion despite topline shrinkage reflects a pivot towards high-value exports such as aqua, spices, and coffee, promoting medium-term growth resilience.

Future Outlook: Margin Recovery and Upside Triggers

- Margin improvement expected from Q3FY26 as procurement prices for tobacco moderate and planned GST reforms are implemented across key staples. - The acquisition of Century Paper, scheduled for completion in FY26, is poised to unlock operational synergies, especially in the paperboard division. - Structurally, secular growth in cigarettes, margin normalization in FMCG, and stabilization post-GST disruptions position ITC for a 9.9% EPS CAGR from FY26-28 (ex-Century Paper integration). - Dividend growth remains a pillar, with DPS forecasted to steadily increase from Rs14.0 in FY25 to Rs17.0 by FY28, enhancing the total shareholder return profile.

Stock Levels and Targets for Investors

- Current Market Price (CMP): Rs419 - Target Price (TP): Rs530 (12-month horizon) - Stop-Loss for investors: Rs390 (recent 52-week low, pivotal support) - Key upside triggers include successful cost pass-through in cigarettes, sustained digital and food tech momentum in FMCG, and improved utilization post-Century Paper merger.

Valuation and Segmental Multiples

Here’s a snapshot of the SOTP valuation basis:

Closing Assessment: Risks and Recommendations

- Risks to watch include regulatory fluctuations (GST, tobacco taxation), commodity price volatility, and disruption from illicit trade in the cigarettes category. - Prabhudas Lilladher’s steadfast BUY stance is underpinned by sector leadership, valuation comfort, and visible handles for margin renaissance heading into FY27. - Investors are advised to accumulate on dips towards Rs400 for optimal risk-adjusted returns, keeping an eye on quarterly progress and fiscal policy evolution.
ITC remains a bellwether for India’s consumer and agribusiness theme, its diversified portfolio and disciplined capital allocation translating into robust financial performance and steady dividend accretion.