ITC EBIDTA growth missed estimates due to higher than expected margin pressure in Paper business and impact of demand and cost headwinds in FMCG. Cigarette volumes grew by ~3.3% as ITC continued to invest behind brands and go to market initiatives. FMCG business sales grew 7% (ex of stationary) which although lower than previous years, however seems better than most of its FMCG peers.

We remain optimistic on cigarette demand and expect further increase in volume growth; margins are unlikely to improve due to higher leaf tobacco prices. FMCG sales are likely to show slow recovery, margin headwinds are likely in near term due to rising RM price of wheat, edible oils etc. Although Hotels have, a high, base, expect better performance in 2H25 due to uptick in seasonal demand. We believe paper margins will continue to face pressure in near term & expect delayed recovery.

We cut our FY 25/26/27 estimates by 4.4%/1.3%/0.6% & estimate 10% EPS CAGR over FY25-27 given pressure in Paper margins & tepid FMCG environment. ITC trades at 24.5x Sep’26 EPS with ROE/ROCE of 31.6/41.9% and ~80%+ dividend payout. We assign SOTP based target price of Rs539 (Rs541 earlier) based on Sept26. Retain Accumulate

2Q Revenue up 16.8%: Revenues grew by 16.8% YoY to Rs193.3bn (PLe: Rs179bn). EBITDA grew by 4.9% YoY to Rs63.4bn (PLe:Rs 65bn); Margins contracted by 373bps YoY to 32.8% (PLe:36.4%) Adj PAT grew by 3.1% YoY to Rs50.8bn (PLe:Rs52.5bn).We estimate ~3.3% cigarette volume growth

2QFY25: Hotels and Agri key drivers: Paper and FMCG drag

•   Cigarette Revenues grew by 6.8% YoY to Rs81.8bn; EBIT grew by 5% YoY to 50.2bn. Margins contracted by 101bps YoY to 61.4%. Volumes grew 3.3%
•  FMCG Revenues grew by 5.4% YoY to Rs55.8bn; EBIT grew by 1% YoY to 4.4bn. Margins contracted by 37bps YoY to 7.9%
•  Hotels Revenues grew by 12.1% YoY to Rs7.3bn; EBIT grew by 20% YoY to 1.5bn. Margins expanded by 140bps YoY to 20.8%
• Agri Revenues grew by 47.1% YoY to Rs57.8bn; EBIT grew by 27% YoY to 4.5bn. Margins contracted by 121bps YoY to 7.9%
• Paperboard & Paper Revenues grew by 2.1% YoY to Rs21.1bn; EBIT grew by 23% YoY to 2.4bn. Margins contracted by 379bps YoY to 11.5%