ITC Q2 Profit Seen Plunging 30% on Cigarette Tax Hit, Brokerages Cut Volume Estimates

ITC Ltd, the cigarettes-to-hotels conglomerate and a Nifty 50 heavyweight, is expected to report a sharply weaker September quarter as brokerages factor in an 8% year-on-year decline in cigarette volumes and a drop of up to 29% in cigarette operating profit following steep excise duty hikes. The anticipated profit contraction underscores the sensitivity of India's largest cigarette maker to regulatory taxation changes and sets the tone for FMCG sector earnings amid persistent cost pressures.

What Happened

According to the Economic Times report, multiple brokerages have previewed ITC's second-quarter results with a notably bearish tone. The consensus points to a near-30% year-on-year decline in consolidated net profit, driven primarily by the cigarettes business which contributes over 80% of the company's operating profit. Brokerages are forecasting an 8% decline in cigarette volumes for the quarter, reflecting the pass-through of higher excise duties announced in the Union Budget 2024-25. Nuvama Institutional Equities, among others, expects the cigarette segment's operating profit to contract by up to 29% year-on-year, even as the non-cigarette FMCG, hotels, and paperboards segments are seen posting steady growth.

The report states that the tax hikes — which raised the National Calamity Contingent Duty (NCCD) on cigarettes by up to 16% across various length categories — have compressed realisations and triggered downtrading to lower-priced variants or illicit trade. Analysts note that the volume impact is more pronounced in the premium and mid-premium segments where ITC holds dominant market share. The street is also watching for commentary on the trajectory of raw material costs, particularly leaf tobacco and packaging materials, which have shown signs of easing in recent months.

Why It Matters for India

ITC carries a weight of approximately 3.8% in the Nifty 50 and 4.2% in the Sensex, making its earnings trajectory a direct driver of benchmark index performance. The cigarettes business, despite contributing only about 45% of revenue, generates over 80% of segment EBIT, giving it disproportionate influence on consolidated profitability. A 29% drop in cigarette operating profit would mark one of the steepest quarterly contractions in recent years, revising full-year earnings estimates downward across brokerage models.

Beyond index implications, the results preview highlights the structural vulnerability of India's legal cigarette industry to fiscal policy. The compounded annual growth rate of excise duties on cigarettes has averaged 15-18% over the past five years, far outpacing inflation and income growth. This has progressively shrunk the legal market's share — now estimated below 85% — while fuelling a parallel illicit trade estimated at over ₹15,000 crore annually in lost revenue. For investors, ITC's quarter serves as a real-time case study of how regulatory risk translates into earnings volatility for a blue-chip constituent.

The FMCG sector more broadly is navigating a mixed demand environment: rural consumption remains uneven despite improving monsoon trends, while urban discretionary spending shows fatigue. ITC's non-cigarette FMCG portfolio — spanning staples, biscuits, noodles, and personal care — has been growing at mid-teens rates and now contributes nearly 30% of revenue. The quarter will test whether this diversification can meaningfully cushion cigarette-led profit declines, a key thesis for long-only institutional holders.

Market Impact

Nifty 50 / Sensex: As a high-weight constituent, ITC's post-results reaction could swing the Nifty by 15-20 points intraday depending on the magnitude of surprise versus consensus. The stock has underperformed the Nifty FMCG index by roughly 8 percentage points year-to-date, reflecting the tax overhang. A miss on cigarette volumes or margin guidance could trigger fresh short covering in index futures, particularly with the Nifty weekly expiry due on Tuesday, November 3, 2026. Open interest in ITC November futures stands at 1.2 crore shares, with a put-call ratio of 0.85 indicating mild bearish positioning.

Bank Nifty: Limited direct impact, though any broad risk-off sentiment from a heavyweight miss could spill over into financials via index arbitrage flows.

Sectoral Impact: The Nifty FMCG index, where ITC holds ~28% weight, is likely to see heightened volatility. Peer stocks such as Godfrey Phillips, VST Industries, and Golden Tobacco may gap down in sympathy. Conversely, non-cigarette FMCG plays — HUL, Nestle, Britannia, Dabur — could attract relative rotation if ITC's non-cigarette growth prints above 12-13%. The hotel segment, where ITC is expanding inventory, will be watched for RevPAR (revenue per available room) trends as a leading indicator for the hospitality cycle.

Derivatives: With Nifty weekly expiry on Tuesday, November 3, the 440-450 strike range in ITC options has seen maximum open interest addition on the put side, suggesting support near ₹440. A break below ₹435 could accelerate put writing unwinding. The stock's implied volatility has risen to 22% from 18% a week ago, pricing in an earnings move of roughly ±4%.

Historical Context

ITC's earnings have historically exhibited high sensitivity to Budget announcements. In February 2023, a 16% NCCD hike led to a 22% year-on-year drop in cigarette EBIT in the March quarter, with volumes contracting 10%. The stock corrected 12% over the subsequent month before recovering as the company demonstrated pricing power through calibrated hikes and mix improvement. In 2017, the GST transition — which subsumed multiple levies into a 28% GST plus compensation cess — caused a 15% volume decline over two quarters, but the legal industry regained share within 18 months as illicit trade enforcement improved.

More recently, the September 2024 quarter marks the first full quarter of the latest duty hike implementation. Analysts at Jefferies and CLSA have noted that the current tax incidence — now exceeding 52% of retail price for king-size filter cigarettes — is approaching the Laffer curve inflection point where further hikes yield diminishing revenue and accelerate downtrading. The government's stated objective of reducing tobacco consumption via taxation is colliding with revenue maximisation, creating policy uncertainty that the market has consistently underpriced.

What to Watch

1. Volume trajectory: Whether the 8% volume decline forecast holds or worsens. Sequential improvement (quarter-on-quarter) would signal consumer adaptation to new price points.

2. Non-cigarette FMCG margin: The segment has been EBITDA-negative due to distribution investments. Any narrowing of losses — currently ~₹150 crore per quarter — would be rewarded.

3. Hotel RevPAR and occupancy: With 15 new properties in the pipeline, the segment's return on capital employed (RoCE) trajectory is critical for sum-of-parts valuations.

4. Capital allocation: ITC holds ~₹50,000 crore in cash and investments. Management commentary on buybacks, special dividends, or hotel demerger timelines could re-rate the stock independent of cigarette earnings.

5. Illicit trade enforcement: Any update on government action against smuggled cigarettes — which now account for an estimated 25% of the market in some states — would be a positive surprise.

6. Raw material outlook: Leaf tobacco prices have softened 8-10% year-on-year. Sustained easing would support margin recovery in H2 FY27.

Disclaimer

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