ITC Limited reported an 18.7% decline in Q2 FY27 net profit to ₹4,168.40 crore, primarily due to higher excise duties on tobacco products. While reported revenue shows a sharp increase due to accounting changes, the underlying growth remains modest at 3.9%. Investors should note that the company’s core cigarette division is facing pressure from tax hikes and a rising illicit market.
ITC Limited’s latest financial results for the second quarter ending September 2026 reveal a challenging period for the company, as heavy excise duties on tobacco products weighed on its profitability. The conglomerate reported a consolidated net profit of ₹4,168.40 crore, a decline of 18.7% compared to the ₹5,126.11 crore recorded in the same quarter last year.
Investors looking at the headline revenue figures should be careful to separate actual business growth from accounting adjustments. The company reported a 43.9% jump in revenue to ₹30,578.40 crore; however, this increase is primarily attributed to accounting shifts related to how excise duties are recorded, rather than a massive surge in sales volume. When adjusted for these tax-related changes, the underlying revenue growth for the quarter stood at a more modest 3.9%.
Margin Pressure and Tax Impact
The core cigarette business, which is the main profit driver for ITC, faced significant headwinds. The company’s EBITDA margins—a measure of operating efficiency—contracted to 27.9% from 34.3% in the previous year. This margin erosion highlights the difficulty of passing on rising tax costs to consumers without hurting demand.
Management has explicitly pointed to the impact of aggressive tax hikes, which have widened the price gap between legal, tax-paid cigarettes and illegal, non-taxed alternatives. This discrepancy has fueled a rise in the illicit cigarette trade, a factor that continues to pose a structural risk to the company’s legal volume growth.
Diversification as a Buffer
While the tobacco segment struggled, ITC’s strategy to diversify into other areas provided a necessary buffer. The FMCG segment, which includes staples like biscuits, snacks, and noodles, performed well with growth exceeding 20%. The paperboards and packaging business also delivered a strong performance, reporting a 36% jump in revenue and a 48% increase in segment profit. This performance in the paper division was supported by the recent integration of Century Pulp and Paper, which the company acquired in August 2026.
Macroeconomic Risks
Looking ahead, ITC continues to navigate a complex macroeconomic environment. The agri-business division, while growing by 12%, is facing supply chain disruptions due to geopolitical tensions in West Asia, which have led to higher freight costs and shipment delays. Additionally, concerns regarding monsoon patterns and their potential impact on agricultural output remain a monitorable risk. These factors, combined with potential inflation in raw material costs, may keep profit margins under pressure in the coming quarters.
For investors, the key area to watch will be how the cigarette segment manages the ongoing tax pressure. The balance between maintaining market share and protecting profit margins, along with the growth trajectory of the non-tobacco FMCG and paper segments, will determine the company’s financial performance in the near term.