The quarter's performance was characterised by a notable 9.27% sequential revenue decline to ₹19,501.63 crores, whilst year-on-year growth remained subdued at just 2.67% for net profit. Operating margins excluding other income contracted to 34.70% from 37.05% in the year-ago quarter, highlighting persistent cost pressures despite the company's diversified business model and market leadership position in multiple segments.
The quarter's results come against a challenging backdrop for the FMCG sector, with ITC's stock underperforming the broader market significantly over the past year. The company's shares have declined 26.38% over the past 12 months, underperforming the Sensex's 7.88% gain by a substantial 34.26 percentage points. The stock currently trades at a price-to-earnings ratio of 17.00x, in line with the sector average, but has witnessed sustained selling pressure from foreign institutional investors.
| Quarter | Net Sales (₹ Cr) | QoQ Growth | Net Profit (₹ Cr) | QoQ Growth | Operating Margin |
|---|---|---|---|---|---|
| Sep'25 | 19,501.63 | -9.27% | 5,126.11 | -2.25% | 34.70% |
| Jun'25 | 21,494.79 | +14.55% | 5,244.20 | -73.42% | 31.89% |
| Mar'25 | 18,765.00 | -0.13% | 19,727.37 | +299.76% | 35.12% |
| Dec'24 | 18,790.17 | -6.00% | 4,934.80 | -1.16% | 34.24% |
| Sep'24 | 19,990.36 | +12.45% | 4,992.87 | -1.94% | 33.02% |
| Jun'24 | 17,777.81 | +4.34% | 5,091.59 | -0.57% | 37.05% |
| Mar'24 | 17,037.80 | — | 5,120.55 | — | 37.32% |
Financial Performance: Margin Compression Overshadows Revenue Volatility
ITC's Q3 FY26 financial performance reveals a company grappling with sequential revenue contraction and margin pressures across its diversified portfolio. Net sales declined 9.27% quarter-on-quarter to ₹19,501.63 crores from ₹21,494.79 crores in Q2 FY26, whilst year-on-year comparison shows a modest 2.44% decline from ₹19,990.36 crores in Q3 FY25. This sequential volatility in revenue reflects seasonality effects and demand fluctuations across the company's multiple business segments.
The company's net profit for Q3 FY26 stood at ₹5,126.11 crores, representing a 2.25% decline from the previous quarter's ₹5,244.20 crores. On a year-on-year basis, net profit grew 2.67%, indicating modest profitability growth despite top-line challenges. The profit after tax margin improved to 26.88% in Q3 FY26 from 25.00% in Q2 FY26, though it remained below the 28.82% achieved in Q2 FY25, highlighting ongoing margin pressures.
Operating profit before depreciation, interest, and tax (excluding other income) stood at ₹6,694.69 crores in Q3 FY26, translating to an operating margin of 34.70%. Whilst this represents a sequential improvement from 31.89% in Q2 FY26, it remains significantly below the 37.05% margin recorded in Q3 FY25. The year-on-year margin compression of 235 basis points is particularly concerning, suggesting structural cost pressures that the company has struggled to mitigate through operational efficiencies or pricing power.
Employee costs rose to ₹1,654.49 crores in Q3 FY26 from ₹1,464.87 crores in the year-ago quarter, representing a 12.95% year-on-year increase that outpaced revenue growth. This suggests either wage inflation pressures or business expansion requiring higher headcount. Other income declined to ₹584.40 crores from ₹610.87 crores year-on-year, whilst depreciation increased marginally to ₹434.80 crores from ₹416.18 crores, reflecting ongoing capital investments across the diversified business portfolio.
Margin Pressure Alert
Operating margin (excluding other income) has compressed by 235 basis points year-on-year to 34.70%, the lowest in recent quarters. This margin erosion, coupled with revenue volatility, suggests the company is facing significant headwinds in maintaining pricing power and controlling costs across its diversified business segments. The inability to pass through cost increases to consumers remains a key concern requiring close monitoring in upcoming quarters.
Operational Excellence: Strong Capital Efficiency Amid Flat Financial Trend
Despite near-term challenges, ITC continues to demonstrate strong operational fundamentals that underpin its market leadership position. The company's return on equity (ROE) stands at a healthy 27.82%, reflecting efficient deployment of shareholder capital and strong profitability relative to equity base. This ROE, whilst lower than some premium FMCG peers, remains well above the sector average and demonstrates ITC's ability to generate attractive returns despite operating in mature, competitive markets.
The company's return on capital employed (ROCE) is even more impressive at 44.26%, indicating exceptional efficiency in generating profits from the capital deployed in operations. This high ROCE reflects ITC's asset-light business model in key segments, strong brand equity enabling premium pricing, and effective working capital management. The company's ability to maintain such elevated ROCE levels over time speaks to sustainable competitive advantages across its diversified portfolio.
ITC's balance sheet strength remains a cornerstone of its investment appeal. The company operates with virtually zero long-term debt (₹0 crores as of March 2025), making it a net cash company with substantial financial flexibility. This debt-free status provides significant strategic advantages, including the ability to weather economic downturns, pursue growth investments without financial constraints, and maintain consistent dividend payments to shareholders. The company's interest coverage ratio stands at an exceptional 100.00 times, effectively eliminating financial risk from the equation.
Working capital management has shown some strain, with current assets of ₹43,893.28 crores against current liabilities of ₹14,334.11 crores as of March 2025. The company's debtors turnover ratio declined to its lowest level at 12.97 times on a half-yearly basis, suggesting slower collection cycles or extended credit terms to distributors and retailers. This bears monitoring as it could indicate competitive pressures or changing channel dynamics requiring more favourable payment terms.
Financial Trend Classification: Flat
ITC's short-term financial trend is classified as "Flat" as of December 2025, indicating stable but uninspiring performance. The company achieved its highest quarterly PBDIT at ₹6,882.52 crores and highest PBT (excluding other income) at ₹6,534.62 crores, demonstrating operational scale. However, the flat classification reflects concerns about sustained growth momentum, with the company unable to demonstrate consistent improvement in key financial metrics. The debtors turnover ratio reaching its lowest point adds to concerns about operational efficiency deterioration.
The Diversification Advantage: Multi-Segment Portfolio Under Pressure
ITC's diversified business model, spanning cigarettes, FMCG (packaged foods, personal care, stationery), hotels, paperboards, and agribusiness, has historically provided earnings stability and growth optionality. However, this diversification is currently being tested as multiple segments face headwinds simultaneously. The cigarette business, which contributes the lion's share of profits, faces regulatory pressures and declining volumes, whilst the FMCG portfolio battles intense competition from established multinationals and nimble startups.
The company's FMCG segment, including packaged foods, personal care, and other consumer products, has been a key growth driver in recent years as ITC leverages its extensive distribution network and brand-building capabilities. However, this segment operates at significantly lower margins than cigarettes and requires sustained investment in marketing and distribution to build scale. The margin compression visible in recent quarters likely reflects the changing business mix as FMCG contributes a larger share of revenues.
ITC's hotels business, whilst recovering from pandemic lows, continues to face challenges from overcapacity in key markets and changing consumer preferences. The paperboards and packaging segment benefits from growing e-commerce demand but faces raw material cost volatility. The agribusiness, whilst providing backward integration for the FMCG portfolio, operates in commoditised markets with thin margins and high working capital requirements.
| Metric | ITC Performance | Assessment |
|---|---|---|
| 5-Year Sales CAGR | 10.71% | Healthy growth |
| 5-Year EBIT CAGR | 10.27% | Consistent profitability |
| Average ROCE | 44.26% | Excellent capital efficiency |
| Average ROE | 27.82% | Strong returns |
| Net Debt to Equity | -0.26 | Net cash position |
| Dividend Payout | 51.68% | Consistent shareholder returns |
Industry Leadership: How ITC Compares to FMCG Peers
ITC's valuation and financial metrics present an interesting contrast when compared to pure-play FMCG peers. The company trades at a price-to-earnings ratio of 16.80x, significantly below premium peers like Nestlé India (83.03x), Britannia Industries (59.48x), and Hindustan Unilever (52.24x). This valuation discount reflects the market's view of ITC as a conglomerate with exposure to the declining cigarette business rather than a pure-play FMCG company with consistent growth visibility.
ITC's return on equity of 27.82% positions it favourably against Godrej Consumer Products (14.97%) and Tata Consumer Products (6.78%), but well below Nestlé India's exceptional 87.72% and Britannia's 74.67%. This ROE differential partly justifies the valuation premium commanded by these pure-play food companies, which benefit from stronger brand equity, pricing power, and operational efficiency in focused categories.
| Company | P/E (TTM) | P/BV | ROE % | Div Yield % | Debt/Equity |
|---|---|---|---|---|---|
| ITC | 16.80 | 5.62 | 27.82 | 2.04 | -0.26 |
| Hindustan Unilever | 52.24 | 11.34 | 19.90 | 1.83 | -0.13 |
| Nestlé India | 83.03 | 54.47 | 87.72 | 0.94 | 0.02 |
| Britannia Industries | 59.48 | 36.91 | 74.67 | 1.31 | 0.34 |
| Godrej Consumer | 61.04 | 9.75 | 14.97 | 1.73 | 0.12 |
| Tata Consumer | 75.48 | 5.39 | 6.78 | 0.75 | 0.01 |
ITC's price-to-book value of 5.62x sits between Tata Consumer Products (5.39x) at the lower end and Hindustan Unilever (11.34x) at the higher end, reflecting moderate confidence in the company's ability to generate returns above its cost of capital. The company's dividend yield of 2.04% is the highest amongst this peer group, making it attractive for income-seeking investors, though this also reflects lower growth expectations compared to peers.
The company's net cash position (debt-to-equity of -0.26) provides it with superior financial flexibility compared to most peers and positions it well to pursue strategic acquisitions or weather economic downturns. However, the market appears to discount this balance sheet strength given concerns about growth sustainability and the long-term viability of the cigarette business.
Valuation Analysis: Reasonable Entry Point for Patient Investors?
ITC's current valuation presents a nuanced picture. At a price-to-earnings ratio of 16.80x, the stock trades in line with the FMCG sector average of 17.00x but at a significant discount to premium FMCG peers. The company's PEG ratio of 0.94x suggests the stock is reasonably valued relative to its growth prospects, with valuations below 1.0x typically indicating potential undervaluation if growth expectations materialise.
The stock's current price of ₹318.65 represents a 32.39% decline from its 52-week high of ₹471.30, placing it near its 52-week low of ₹318.00. This significant correction has improved the risk-reward proposition for long-term investors, though it also reflects genuine concerns about near-term growth challenges and margin pressures. The company's enterprise value to EBITDA multiple of 14.44x appears reasonable given the quality of earnings and strong cash generation capabilities.
ITC's valuation grade has fluctuated between "Expensive" and "Very Expensive" in recent months, currently settling at "Expensive" as of January 6, 2025. This classification suggests that despite the recent correction, the stock is not yet in "cheap" territory based on historical valuation metrics and peer comparisons. The company's fair value estimate would need to factor in the declining cigarette business, competitive pressures in FMCG, and capital allocation towards lower-margin growth segments.
Valuation Perspective
ITC trades at a 68% discount to Hindustan Unilever's P/E multiple and a 79% discount to Nestlé India's multiple, reflecting the market's concerns about business mix and growth sustainability. However, the company's superior dividend yield, net cash balance sheet, and improving FMCG portfolio provide some valuation support. For investors with a 3-5 year horizon, the current price levels may offer reasonable entry points, though near-term volatility should be expected given weak momentum and bearish technical indicators.
Shareholding: Institutional Confidence Waning
ITC's shareholding pattern reveals a concerning trend of institutional selling that has accelerated in recent quarters. Foreign institutional investor (FII) holdings declined to 36.11% in December 2025 from 40.17% in December 2024, representing a 406 basis point reduction over four quarters. This sustained FII selling reflects global investors' concerns about the company's growth trajectory, regulatory risks in the cigarette business, and competitive pressures in FMCG.
Contrasting this trend, mutual fund holdings increased to 16.17% in December 2025 from 12.87% in March 2025, suggesting domestic institutional investors view the recent correction as a buying opportunity. The 330 basis point increase in mutual fund holdings over three quarters indicates growing confidence among domestic fund managers in ITC's long-term value proposition, despite near-term headwinds.
| Investor Category | Dec'25 | Sep'25 | Jun'25 | Mar'25 | QoQ Change |
|---|---|---|---|---|---|
| Promoter | 0.00% | 0.00% | 0.00% | 0.00% | — |
| FII | 36.11% | 37.39% | 37.98% | 39.87% | -1.28% |
| Mutual Funds | 16.17% | 14.30% | 13.76% | 12.87% | +1.87% |
| Insurance | 20.20% | 20.40% | 20.41% | 20.18% | -0.20% |
| Other DII | 12.56% | 12.74% | 12.78% | 12.18% | -0.18% |
| Non-Institutional | 14.96% | 15.17% | 15.08% | 14.91% | -0.21% |
Insurance company holdings remained relatively stable at 20.20%, whilst other domestic institutional investors (DIIs) held 12.56%, showing marginal sequential declines. The overall institutional holding stands at a robust 85.04%, indicating that the stock remains a core holding for most institutional portfolios despite recent underperformance. The absence of promoter holding reflects ITC's status as a professionally managed company without a controlling shareholder group.
Stock Performance: Severe Underperformance Across All Timeframes
ITC's stock performance has been deeply disappointing across virtually all time horizons, with the stock delivering negative absolute returns and significant underperformance relative to benchmark indices. Over the past year, the stock declined 26.38% whilst the Sensex gained 7.88%, resulting in a negative alpha of 34.26 percentage points. This underperformance has been consistent, with the stock falling 2.54% over three years compared to the Sensex's 39.16% gain.
The stock's recent performance has been particularly weak, with a 20.81% decline over the past month alone compared to the Sensex's 2.51% decline. The six-month return stands at -22.00% versus the Sensex's 1.51% gain, whilst the year-to-date decline of 20.93% significantly exceeds the Sensex's 3.11% decline. This consistent underperformance reflects deteriorating investor sentiment driven by weak quarterly results, margin pressures, and concerns about the sustainability of the cigarette business.
| Period | ITC Return | Sensex Return | Alpha | Sector Return |
|---|---|---|---|---|
| 1 Week | -1.92% | 0.31% | -2.23% | — |
| 1 Month | -20.81% | -2.51% | -18.30% | — |
| 3 Months | -24.42% | -2.86% | -21.56% | — |
| 6 Months | -22.00% | 1.51% | -23.51% | — |
| YTD | -20.93% | -3.11% | -17.82% | — |
| 1 Year | -26.38% | 7.88% | -34.26% | -23.85% |
| 3 Years | -2.54% | 39.16% | -41.70% | — |
| 5 Years | 65.74% | 78.38% | -12.64% | — |
The stock's beta of 0.56 indicates lower volatility compared to the broader market, classifying it as a "low beta" stock. However, this lower volatility has not prevented significant absolute losses, with the stock's risk-adjusted return of -1.45 over the past year reflecting poor performance even after accounting for lower volatility. The stock currently trades below all major moving averages (5-day, 20-day, 50-day, 100-day, and 200-day), indicating strong bearish momentum.
Technical indicators paint a uniformly bearish picture, with MACD, Bollinger Bands, KST, and On-Balance Volume all showing bearish signals on both weekly and monthly timeframes. The stock's trend classification changed to "Bearish" on December 29, 2025, from "Mildly Bearish," reflecting accelerating selling pressure. The only positive technical indicator is the RSI showing a bullish signal on the weekly timeframe, suggesting the stock may be approaching oversold territory.
Investment Thesis: Quality Company at Crossroads
ITC's investment thesis rests on several pillars: an "Excellent" quality grade reflecting strong long-term financial performance, a debt-free balance sheet providing financial flexibility, market leadership across multiple categories, and an attractive dividend yield. The company's five-year sales CAGR of 10.71% and EBIT CAGR of 10.27% demonstrate consistent growth, whilst ROCE of 44.26% and ROE of 27.82% reflect strong capital efficiency.
However, these strengths are currently overshadowed by significant concerns. The company's financial trend is classified as "Flat," indicating stagnating performance in recent quarters. Technical indicators are uniformly bearish, with the stock in a confirmed downtrend since late December 2025. The company has consistently underperformed the benchmark over the past three years, suggesting structural challenges beyond normal business cyclicality.
The company's Mojo Score of 48/100 places it in "SELL" territory, with the recommendation to "Consider selling" and "Look for exit opportunities." This score reflects the confluence of negative factors: bearish technical trend, flat financial performance, consistent benchmark underperformance, and deteriorating investor sentiment. The only significant positive factor supporting the score is high institutional holdings of 85.04%, suggesting long-term investors have not completely abandoned the stock.
"ITC's challenge is not quality but momentum – an excellent company struggling to demonstrate growth acceleration in a changing consumer landscape."
Key Strengths & Risk Factors
KEY STRENGTHS ✓
- Debt-Free Balance Sheet: Zero long-term debt provides exceptional financial flexibility and eliminates solvency risks entirely
- Strong Capital Efficiency: ROCE of 44.26% and ROE of 27.82% demonstrate excellent returns on deployed capital
- Market Leadership: Dominant positions in cigarettes, hotels, paperboards, and growing presence in FMCG categories
- Consistent Cash Generation: Operating cash flow of ₹17,627 crores in FY25 provides resources for growth investments and dividends
- Diversified Portfolio: Multiple revenue streams across FMCG, hotels, paperboards, and agribusiness reduce dependence on any single segment
- Attractive Dividend Yield: 2.04% yield, highest amongst FMCG peers, with consistent payout history
- High Institutional Ownership: 85.04% institutional holding indicates confidence from sophisticated investors
KEY CONCERNS ⚠
- Margin Compression: Operating margin declined 235 bps YoY to 34.70%, indicating pricing power challenges and cost pressures
- Revenue Volatility: 9.27% sequential decline in Q3 FY26 sales raises concerns about demand sustainability
- Cigarette Business Risks: Regulatory pressures, taxation, and declining volumes threaten the most profitable segment
- Intense FMCG Competition: Battles with established MNCs and nimble startups in low-margin categories
- Flat Financial Trend: Recent quarters show stagnant performance with no clear growth acceleration
- Persistent Underperformance: Stock declined 26.38% over past year vs Sensex gain of 7.88%
- Bearish Technical Setup: All major technical indicators show bearish signals with stock in confirmed downtrend
Outlook: What Lies Ahead for ITC
ITC faces a critical juncture as it navigates the transition from a cigarette-dependent conglomerate to a diversified FMCG powerhouse. The company's near-term outlook remains challenged by margin pressures, competitive intensity in FMCG, and regulatory headwinds in cigarettes. However, the strong balance sheet, improving FMCG portfolio, and market leadership positions provide a foundation for long-term value creation if management can execute on strategic priorities.
Key factors to monitor include: (1) ability to stabilise and improve operating margins in coming quarters, (2) sustained revenue growth acceleration in FMCG categories, (3) successful new product launches and brand building investments, (4) regulatory developments affecting the cigarette business, and (5) capital allocation decisions including potential acquisitions to accelerate FMCG growth. The company's debt-free status provides significant flexibility to pursue transformative opportunities.
POSITIVE CATALYSTS
- Margin improvement through cost optimisation and operating leverage
- Market share gains in key FMCG categories (biscuits, noodles, personal care)
- Successful new product launches building on brand equity
- Hotels business recovery with improved occupancy and pricing
- Strategic acquisitions using strong balance sheet to accelerate FMCG growth
RED FLAGS
- Further margin compression below 34% operating margin levels
- Continued revenue decline or stagnation in coming quarters
- Adverse regulatory changes increasing cigarette taxation or restrictions
- Loss of market share in core FMCG categories to aggressive competitors
- Sustained FII selling pressure indicating loss of global investor confidence
The Verdict: Quality Company Facing Growth Headwinds
Score: 48/100
For Fresh Investors: Avoid initiating positions at current levels. Whilst ITC offers excellent quality credentials and a debt-free balance sheet, the combination of flat financial trends, bearish technical setup, and consistent underperformance suggests waiting for clearer signs of business momentum improvement. The 2.04% dividend yield provides some downside cushion but insufficient compensation for near-term risks.
For Existing Holders: Consider reducing exposure on any technical bounce towards ₹340-350 levels. The stock's inability to hold above key moving averages and sustained selling pressure indicate further downside risk before a durable bottom forms. Long-term investors with multi-year horizons may hold with reduced weightage, recognising the company's strong fundamentals but acknowledging near-term headwinds.
Fair Value Estimate: ₹340-360 (6.7% to 13.0% upside from current levels), contingent on demonstrable margin improvement and revenue growth acceleration in FY27. Current valuation appears fair but not compelling given growth challenges.
Note— ROCE = (EBIT - Other income)/(Capital Employed - Cash - Current Investments)
⚠️ Investment Disclaimer
This article is for educational and informational purposes only and should not be construed as financial advice. Investors should conduct their own due diligence, consider their risk tolerance and investment objectives, and consult with a qualified financial advisor before making any investment decisions.
