ITC Navigates Flat Profits Amidst Rising Costs and Excise Duty Concerns
ITC Limited, the diversified conglomerate spanning FMCG, tobacco, and agri-business, reported a consolidated net profit of ₹4,931 crore for the third quarter of FY26 – a figure nearly unchanged from the ₹4,935 crore recorded in the same period last year. While revenue from operations saw a healthy 7.1% year-on-year increase to ₹21,577.58 crore, the bottom line was impacted by rising raw material costs and a significant one-time expense related to updated labor codes, totaling ₹354.58 crore.
The Impact of Labor Code Changes and Rising Input Costs
The one-time charge stems from adjustments to gratuity and compensated absence liabilities due to changes in the definition of wages under the new Labour codes. This highlights a broader trend: companies across India are facing increased costs associated with compliance with evolving labor regulations. Beyond this, inflationary pressures on key raw materials continue to pose a challenge for FMCG companies like ITC, squeezing margins despite increased sales volume. This isn’t unique to ITC; companies like Hindustan Unilever have also pointed to input cost volatility in recent earnings calls.
Pro Tip: Businesses should proactively assess the financial implications of new regulations and factor them into long-term financial planning. Ignoring these costs can lead to unexpected profit dips.
A Looming Threat: Increased Excise Duty and the Illicit Trade
Perhaps the most significant concern raised by ITC is the recently announced excise duty hike on cigarettes. The company warns this will exacerbate the already substantial problem of illicit cigarette trade in India. Currently, India is the fourth largest illicit cigarette market globally, with an estimated loss of ₹23,000 crore annually to the exchequer – representing roughly one-third of the legal cigarette industry’s volume.
The shift from compensation cess to an additional excise duty, ranging from ₹2.05 to ₹8.50 per stick, is predicted to further fuel this illicit market. Historically, punitive taxes on legal cigarettes in India have consistently driven consumers towards cheaper, unregulated alternatives. This creates a vicious cycle: higher taxes, increased illicit trade, reduced government revenue, and potential health risks associated with unregulated products.
Did you know? Euromonitor estimates the illicit cigarette trade in India accounts for approximately 31% of the total cigarette market.
Segment Performance: FMCG Shows Resilience
Despite the broader challenges, ITC’s FMCG segments demonstrated relative strength. Revenue from FMCG cigarettes increased by 7.9% year-on-year to ₹8,791 crore, while the ‘FMCG Others’ segment – encompassing products like packaged foods and personal care – saw an even more robust 11% growth, reaching ₹6,020 crore. The agri-business segment also performed well, with a 6.3% increase in revenue to ₹3,560 crore. Paperboards, Paper & Packaging saw more modest growth at 2.7% to ₹2,202 crore.
Dividend Announcement and Stock Performance
ITC’s board approved an interim dividend of ₹6.50 per share, with a record date of February 4th. The stock closed marginally down at ₹318.65 on the BSE ahead of the results announcement, reflecting investor caution amidst the profit stagnation and excise duty concerns.
Future Trends and Implications
Several key trends are shaping the future for ITC and the broader FMCG landscape in India:
- The Rise of Premiumization: Consumers are increasingly willing to pay a premium for higher-quality products, particularly in the FMCG space. ITC is strategically focusing on premium offerings within its portfolio to capitalize on this trend.
- Digital Transformation in Agri-Business: Technology is revolutionizing the agricultural sector. ITC’s e-Choupal initiative, connecting farmers directly to markets, is a prime example. Expect further investment in digital platforms to enhance supply chain efficiency and farmer empowerment.
- Sustainability and ESG Focus: Environmental, Social, and Governance (ESG) factors are becoming increasingly important to investors and consumers. Companies like ITC are under pressure to demonstrate a commitment to sustainability across their operations.
- Government Policy and Taxation: Government policies, particularly taxation, will continue to significantly impact the tobacco industry and, by extension, ITC’s overall performance. The recent excise duty hike underscores this point.
- Growth of Organized Retail: The expansion of organized retail channels provides FMCG companies with greater access to consumers and opportunities for data-driven marketing.
FAQ
- What was ITC’s net profit for Q3FY26? ₹4,931 crore.
- What caused the decline in Q-o-Q profit? Higher raw material costs and a one-time charge related to labor code implementation.
- What is ITC’s concern regarding the excise duty on cigarettes? It believes the hike will increase illicit trade.
- What segments performed well for ITC in Q3FY26? FMCG Cigarettes and FMCG Others.
- What is the interim dividend announced by ITC? ₹6.50 per share.
Explore more insights into ITC’s annual reports and stay updated on the latest FMCG industry trends.
What are your thoughts on ITC’s performance and the impact of the excise duty hike? Share your opinions in the comments below!
