ITC Limited: Navigating Margin Pressures with Strategic Resilience and FY26 Growth Catalysts

New Delhi, May 23, 2025 — ITC Limited's Q4 FY25 results underscore a company navigating macroeconomic headwinds with disciplined execution, positioning itself to capitalize on emerging opportunities in FY2026. While margin pressures in FMCG and paper segments remain a challenge, ITC's diversified portfolio, strategic cost mitigation, and high-value ventures—such as nicotine exports and acquisitions—signal a compelling case for long-term investors. Let's dissect how ITC is building resilience and priming for growth.

Core Performance: Revenue Growth Amid Margin Strains

ITC's Q4 FY25 net profit surged to ₹19,727 crore, driven by an exceptional gain of ₹14,652 crore from the demerger of its hotels business. However, profit from continuing operations rose just 3% YoY to ₹5,155 crore**, highlighting the fragility of core operations. Revenue grew 10% YoY to ₹20,376 crore, led by the FMCG-Cigarettes segment, which expanded 6.2% to ₹9,228 crore. Cigarettes remain the profit engine, contributing 54% of segment profits despite rising leaf tobacco costs.

Yet, the FMCG-Others segment faced a 28% YoY drop in segment profit to ₹346 crore, due to inflation in edible oils, wheat, and packaging materials. The paper segment also struggled, with profit falling 31% as low-priced Chinese imports and surging wood costs squeezed margins. These challenges reflect broader macroeconomic pressures, including global commodity volatility and competitive pricing.

Strategic Resilience: Cost Mitigation and Premiumization

ITC's response to margin pressures is multifaceted:
1. Premiumization: Value-added products now account for 14% of Aashirvaad's staples portfolio, with sales scaling 1.8x in two years. Categories like spices, snacks, and homecare drove growth, offsetting pricing pressures.
2. Strategic Pricing: Calibrated price hikes and cost-containment measures mitigated 60% of inflationary impacts in FMCG.
3. Cigarette Efficiency: Premium and differentiated offerings under mainstream trademarks boosted margins, while Track & Trace mechanisms improved market share amid illicit trade.

FY26 Growth Catalysts: Nicotine Exports and Acquisitions

ITC's aggressive moves in high-growth sectors will drive FY26 momentum:
1. Nicotine Derivatives:
- ITC has begun exporting nicotine and derivatives from its Mysuru factory, targeting a ₹2,350 crore export deal with British American Tobacco (BAT) by FY2026. This venture leverages ITC's agri-business expertise and positions it in the lucrative global nicotine market.
- The Agri Business segment's revenue rose 25% YoY in FY25, with value-added exports (coffee, spices) and raw tobacco shipments to BAT growing 23%.

1. Acquisitions and Partnerships:
2. Century Pulp and Paper: A ₹35 billion acquisition boosts paper capacity by 480,000 metric tonnes, countering global competition.
3. Sresta Natural Bioproducts (24 Mantra Organic): Adds ₹10,000 crore organic market exposure.

4. Ample Foods (Prasuma & Meatigo): Expands into the fast-growing ₹100 billion ready-to-cook segment.

5. Regulatory Tailwinds:

6. Track & Trace mechanisms introduced in the Union Budget 2025 are expected to reduce illicit trade, benefiting cigarette margins.
7. A potential rural demand revival (driven by a good monsoon) and lower input costs (post-inflation peak) could ease margin pressures.

Macroeconomic Tailwinds and Financial Fortitude

• Rural Demand: A strong monsoon and government capex plans (including ₹100 trillion in infrastructure over five years) bode well for agri and FMCG sales.
• Input Cost Relief: Cocoa, edible oil, and pulpwood prices have stabilized, with futures contracts hinting at further declines.
• Balance Sheet Strength: ITC's net debt-to-equity ratio of 0.2x and a revised dividend of ₹14.35 per share (up 4.4% YoY) reflect financial resilience.

Risks and Conclusion

Risks persist:
- Regulatory Uncertainty: A proposed 40% GST hike on tobacco products could squeeze margins if passed.
- Global Competition: Chinese paper imports and regional FMCG rivals remain threats.

However, ITC's diversified portfolio, disciplined cost management, and high-margin nicotine ventures position it to outperform peers in FY2026. With a historical dividend yield of ~4.5% and a strong track record of margin recovery, ITC deserves a "Buy" rating for long-term investors. The stock's current valuation at 34x trailing P/E offers a compelling entry point, especially as margin pressures ease and growth catalysts materialize.

In an era of macroeconomic volatility, ITC's strategic agility and fortress balance sheet make it a standout play in the Indian consumer sector.

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The author is a financial commentator specializing in corporate strategy and emerging markets.