Key Business Metrics: Q2 20251
Gross Revenue is up +16%, driven mainly by Hotels (+12%) and Agriculture (+47%; specifically, the value-added agricultural products and leaf tobacco). Subdued demand conditions, unusually heavy rains in parts of the country, high food inflation and sharp escalation in certain input costs (leaf, wood etc.) resulted in a challenging operating environment in Q2 2025. FMCG segment, both Cigarettes (+7%) and Others (+5%), delivered resilient top-line performance while Paper segment (+2%) returned to growth despite pressure from cheap Chinese supplies. Net Revenue is up +16.9%
EBITDA is up +4.9% (up +6.3% ex-Paper)
Profit before tax is up +3.7%. Profit after tax is up +3.1% (up +3.7% on comparable basis, when adjusted for Long Term Capital Gain tax related changes in FY24 Union Budget)
Q2 2025 EPS (diluted): ₹3.99 (up +1.8%)
12-month rolling EPS (diluted): ₹16.42 (trading at 28.7x trailing EPS based on the last closing price of ₹471.7)
FY24 Segment Highlights
Cigarette Segment: (36.5% weight in gross revenue, 79.6% weight in operating profit)
Relative stability in taxes and actions by enforcement agencies drive continued volume recovery from illicit trade:
– Gross segment revenue is up +6.8%. Net segment revenue and operating profit are up +7.3% and +5.1%, respectively
– Market position reinforced through focused product portfolio & commercial interventions (i.e. scale up of innovative & differentiated offerings, strategic laddering interventions, leveraging mainstream trademarks) and agile execution
– Sharp escalation in input costs (leaf & other input materials), partly mitigated through improved mix, strategic cost management and calibrated pricing. Trade marketing spending restructured for sharper last mile execution
Other Segments:
– FMCG (revenue is up +5.4%, operating profit is up +0.7%): margin decline (-40bps to 10.6%) driven by steep inflationary headwinds in input costs, partially mitigated by premiumization, supply chain optimization, calibrated pricing actions, digital initiatives & strategic cost management. Incessant rains & flooding in certain parts of the country and high competitive intensity (local / regional players) in certain categories (Noodles, Snacks, Biscuits & Popular Soaps) adversely impacted the segment while robust growth is achieved in Emerging Channels through channel-specific business plans, collaborations, format-based assortments and category-specific sell-out strategies.
– Agri Business segment (revenue is up +47.1%, operating profit is up +27.5%): Value-added agricultural portfolio (e.g. coffee, fruits & vegetables, spices etc.) and leaf tobacco exports recorded strong growth. Business interventions are ongoing to build resilience against extreme weather events across the value chain (including wheat, tobacco etc.) – which will enhance crop competitiveness and protect farmer incomes.
– Mysuru factory (to manufacture and export of nicotine & nicotine derivative products conforming to US & EU pharma standards): EU REACH (regulation on “registration, evaluation, authorization and restriction of chemicals”) approvals are received. Product trials at scale are underway. Export shipments are expected to be scaled up progressively.
– Paperboard, Paper & Packaging (revenue is up +2.1%, operating profit is down -23.4%): negatively impacted by low-priced Chinese supplies in global markets and muted domestic demand. Focus on portfolio augmentation, export customer/market development and structural cost management to mitigate near term challenges. Surge in domestic wood prices: incessant rains in core plantation areas impact wood availability, quality & procurement prices. Strategic interventions are underway to mitigate wood crisis: accelerating plantations, developing new areas and satellite-based monitoring. Engagement with policy makers to address key industry challenges: collaborative public-private plantation models and curbing the rapid increase of low priced imports.
– Hotels Demerger update: Scheme approved by National Company Law Tribunal (NCLT) on October 4, 2024 (certified copy of the Order awaited)
Summary:
Despite comfortably beating the top-line growth estimates, ITC misses at the bottom-line as the profit margin squeeze (from 34.2% to 31%, year-on-year basis) turned out to be more severe than expected – with costs & expenses soaring by +21% versus Q2 FY24. Subdued demand conditions in the overall consumption (FMCG) space, increasing input costs (leaf, wood etc.) as well as the circumstantial factors continue to adversely affect ITC’s bottom-line delivery.
Volume claw-back from illicit cigarette trade – as foreseen by the absence of a tax hike in the FY25 Union Budget – fell short of driving the sequential improvement in ITC’s bottom-line delivery to the level expected in Q2 2025. However, less-than-stellar Q2 results were mostly anticipated by the market; heading into the Q2 results release, ITC shares have pulled back more than 10% from the September 2024 high.
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