ITC Anticipates Significant Decline in Q2 Earnings Amid Tax Hikes

ITC is expected to report a difficult second quarter when it releases its earnings on November 2, with analysts predicting a notable decline in cigarette volumes and profitability as a result of recent tax hikes. Brokerages estimate that cigarette volumes may decrease by approximately 8% year-on-year, while operating profit could fall by as much as 29%.

Nuvama Equities forecasts a 3% year-on-year decline in consolidated revenue and a 20% drop in EBITDA, attributing the downturn primarily to the cigarette segment's struggles. Despite these challenges, growth in ITC's fast-moving consumer goods (FMCG) and paper businesses may help mitigate some of the financial pressure.

The cigarette sector, which is ITC's largest profit contributor, is anticipated to remain under strain due to increased taxation affecting pricing and consumer demand. JM Financial projects a similar 8% decline in cigarette volumes, with segment EBIT expected to decrease by 29%. Nuvama also notes that while ITC has raised prices on 75% of its cigarette portfolio, these adjustments have not fully countered the impact of higher taxes.

In contrast, ITC's FMCG business is expected to perform relatively well, with Nuvama predicting an 11% revenue growth in this segment. The paper business is also projected to benefit from improved demand, with Nuvama estimating a 32% year-on-year revenue increase.

Overall, the anticipated weakness in cigarette profitability is likely to significantly impact ITC's consolidated operating margins, with Nuvama estimating a decline of 458 basis points in gross margin to around 50%. As ITC approaches the second half of FY27, management's commentary on pricing strategies and market share will be closely monitored by investors.