Lower-Than-Expected Cigarette Volume Decline, Improving FMCG Margins and Positive Brokerage Commentary Lift Investor Sentiment Despite Earnings Pressure

Shares of ITC Ltd. rallied nearly 4% on Monday after the FMCG and cigarette major reported its first-quarter FY27 earnings, with investors taking comfort from resilient cigarette volumes and improving prospects for margin recovery. Although the company reported pressure on profitability due to higher cigarette taxation introduced earlier this year, analysts believe the June quarter may represent the peak impact of the tax changes, with earnings expected to improve gradually over the coming quarters.

The positive market reaction came after ITC's cigarette business performed better than feared, while its non-cigarette businesses—including FMCG and paperboards—continued to show operational resilience. The results have strengthened expectations that the company could return to a stronger earnings trajectory as calibrated price hikes begin to restore profitability.

ITC Emerges Among Top Market Gainers

Following the quarterly earnings announcement, ITC shares gained nearly 4% during Monday's trading session, making the stock one of the top performers on the benchmark indices.

The rally marks a notable turnaround for the stock, which has significantly underperformed the broader market during 2026. Before Monday's recovery, ITC had fallen nearly 30% this year, compared with a decline of around 8% in the benchmark Sensex.

The recent rebound suggests investors believe much of the negative impact from higher cigarette taxes may already be reflected in the stock price.

Cigarette Business Performs Better Than Expected

The biggest positive surprise from ITC's quarterly results came from its flagship cigarette business.

According to brokerage estimates:

• Cigarette volumes declined by only 4–5% during the quarter.

• Market expectations had pointed to a sharper decline of 8–10%.

• The lower-than-expected volume contraction indicates resilient consumer demand despite recent price increases.

While profitability remained under pressure due to higher taxes, the relatively stable volume performance reassured investors that demand for the company's premium brands continues to remain healthy.

This resilience is viewed as an encouraging sign for the company's long-term earnings outlook.

Tax Increase Continues to Impact Profitability

The cigarette tax increase announced in the Union Budget remains the primary reason behind the decline in earnings.

ITC has adopted a calibrated pricing strategy by passing on only part of the higher tax burden to consumers instead of implementing steep price hikes immediately.

This approach has helped preserve demand while temporarily reducing margins.

Management is expected to continue introducing gradual price increases over the next few quarters, allowing profitability to recover without significantly affecting consumer volumes.

The strategy is also intended to reduce the risk of consumers shifting towards illicit cigarette products, which remain a key challenge for the organised tobacco industry.

Brokerages Expect Earnings Recovery

Several brokerage firms believe that the June quarter could represent the most difficult period for ITC's cigarette business.

As additional price hikes are implemented during FY27:

• Operating margins are expected to improve.

• Profitability should recover progressively.

• Earnings growth is likely to strengthen in the second half of the financial year.

Many analysts now expect ITC's cigarette margins to move closer to pre-tax levels by the final quarter of FY27, earlier than previously anticipated.

The improving outlook has contributed to renewed investor confidence in the stock.

FMCG Business Continues to Deliver Stable Growth

Apart from cigarettes, ITC's FMCG business continued to demonstrate encouraging operational performance.

The segment benefited from:

• Improving operating margins.

• Better product mix.

• Effective pricing strategies.

• Stable demand across key categories.

• Continued focus on premiumisation.

The company's packaged foods, personal care and household products continue to strengthen ITC's diversified revenue base.

Improving profitability in the FMCG division has helped offset some of the weakness experienced in the cigarette segment.

Paperboards and Packaging Business Improves

ITC's paperboards, paper and packaging division also showed signs of recovery during the quarter.

Lower raw material costs and improving demand supported better sequential performance.

The segment benefited from:

• Favourable input costs.

• Higher capacity utilisation.

• Better pricing environment.

• Improving industrial demand.

The recovery demonstrates the importance of ITC's diversified business portfolio in maintaining earnings stability during periods of regulatory pressure.

Brokerages Remain Positive but Selective

Although analysts broadly welcomed the quarterly performance, opinions remain balanced.

Positive Factors Highlighted by Analysts

• Better-than-expected cigarette volumes.

• Improving FMCG margins.

• Recovery in paperboards.

• Attractive valuations after recent correction.

• Gradual earnings recovery expected.

Key Risks Identified

• Additional cigarette price hikes may impact volumes.

• Short-term earnings volatility could continue.

• Illegal cigarette trade remains a competitive challenge.

• Margin recovery will take several quarters.

Overall, brokerages expect improvement but remain cautious regarding the pace of earnings normalisation.

Valuation Appears More Attractive

Following the substantial correction earlier this year, several analysts believe ITC's valuation has become increasingly reasonable.

The stock now offers:

• Strong cash generation.

• Healthy dividend profile.

• Diversified business exposure.

• Potential earnings recovery.

• Improved long-term risk-reward balance.

While near-term earnings remain under pressure, many investors view the recent weakness as an opportunity to accumulate quality defensive businesses.

Diversification Continues to Support Long-Term Growth

ITC remains one of India's most diversified consumer companies.

Its business portfolio includes:

• Cigarettes.

• Packaged foods.

• Personal care.

• Hotels.

• Agri-business.

• Paperboards and packaging.

• Information technology services.

The diversified structure provides greater earnings resilience and reduces dependence on any single business segment.

As non-cigarette businesses continue expanding, they are expected to play an increasingly important role in supporting future profitability.

Key Factors Investors Should Watch

Going forward, investors will monitor several important developments:

Business Performance

• Cigarette volume trends.

• Progress of price hikes.

• FMCG margin expansion.

• Paperboards recovery.

• Revenue growth.

External Factors

• Regulatory policy.

• Taxation changes.

• Raw material prices.

• Competitive environment.

• Consumer demand.

The pace at which ITC restores cigarette margins while maintaining volume growth will be the most critical driver of future earnings.

Investment Perspective

ITC's latest quarterly results indicate that the company is navigating the impact of higher cigarette taxation more effectively than initially feared.

Key Positives

• Resilient cigarette demand.

• Improving FMCG profitability.

• Recovery in paperboards.

• Strong balance sheet.

• Attractive valuation.

Potential Risks

• Continued earnings volatility.

• Regulatory uncertainty.

• Competitive pressure from illicit cigarettes.

• Delay in full margin recovery.

For long-term investors, the combination of improving fundamentals and diversified operations continues to make ITC an important stock to monitor.

Outlook

ITC's first-quarter FY27 performance suggests that the company may have passed the most challenging phase following the recent cigarette tax increase. Better-than-expected cigarette volumes, improving FMCG margins and a recovering paperboards business have strengthened confidence in the company's ability to restore earnings over the coming quarters.

While near-term profitability may remain under pressure as ITC gradually passes higher taxes to consumers, the long-term outlook appears more constructive. Supported by strong cash flows, diversified businesses and disciplined pricing strategies, the company is well positioned to benefit from improving operating conditions. Investors are now likely to focus on margin recovery, volume stability and the continued growth of ITC's FMCG portfolio as key indicators of sustained earnings improvement.