ITC's September Quarter: Cigarette Profit Fell ₹1,427 Crore, and Everything Else Added Back ₹263 Crore

ITC's cigarette segment result fell 27.2% to ₹3,813.45 crore in July–September 2026 (standalone), against ₹5,240.66 crore a year earlier, after the Government raised GST and Central Excise duty on cigarettes from 1 February 2026. Every other segment together rose 24.4% (our arithmetic), but that is ₹263 crore added against ₹1,427 crore lost. Measured per rupee of revenue after excise, the cigarette result fell by only about three points (our arithmetic, on an assumption stated below), which suggests the profit fall mostly came from a smaller revenue pool rather than a thinner margin. The filings give no volume or price, so they cannot say whether that pool shrank because smokers left or because ITC chose not to pass the tax on in full.

MoatSCORE: 5.62 (MoatSCORE 6.0, deep dive, provisional; Moat Screener, 3 Nov 2026)

The idea in one sentence

A moat is tested hardest when someone else raises your cost: the question is whether the franchise kept its customers and its margin per unit, and ITC's filings say more about the second half of that question than the first.

The fact that breaks the assumption

The headline number in the filing looks like growth. Gross revenue from sale of products and services rose 46.6% to ₹28,152.21 crore, and the cigarette segment's revenue rose 78.1% to ₹15,536.13 crore ([RS], standalone). The filing itself warns that this is not a real rise: GST is excluded from gross revenue but "Excise duty is not excluded", so the revenue lines "are not strictly comparable" with earlier periods ([RS], note 7). The excise charge in expenses went from ₹1,360.74 crore to ₹9,916.65 crore (standalone), 7.3 times (our arithmetic). The company's own deck puts the cigarette business on three lines: "Gross Revenue: +78%", "Net Revenue: -21%", "Results: -27%" ([MS], deck slide 13). A business whose revenue is up 78% and whose profit is down 27% is not growing; it is collecting a tax.

One concrete thing, followed: the cigarette row

Standalone cigarette segment result: ₹3,813.45 crore against ₹5,240.66 crore in the same quarter last year (down 27.2%, our arithmetic) and against ₹3,341.23 crore in the June quarter (up 14.1%, our arithmetic). The media statement calls this "improvement in QoQ performance" ([MS], media statement p.1). For the half-year, the result is ₹7,154.68 crore against ₹10,385.94 crore (down 31.1%, our arithmetic). Consolidated, the cigarette result is ₹4,044.49 crore against ₹5,462.10 crore (down 26.0%, our arithmetic).

Cigarettes were 74.0% of total standalone segment result this quarter and 82.9% a year earlier (our arithmetic).

The mechanism: what the profit fall is made of

Segment revenue includes excise, so it cannot be used for a margin. To get closer, we subtracted the whole standalone excise line from the cigarette segment's revenue. This assumes all the excise is cigarette excise, which the filing does not say. It is our assumption, though note 7 ties the duty increase to cigarettes.

Revenue after excise fell 23.7% year on year (our arithmetic), close to the company's own "Net Revenue: -21%" ([MS], deck slide 13); the filings do not explain the gap. The result fell 27.2%. So the result per rupee of post-excise revenue went from 71.2% to 67.9%, a fall of 3.3 points, while the pool of post-excise revenue shrank by about a quarter. Against the June quarter, the pool grew 5.1% and the ratio rose from 62.5% to 67.9% (our arithmetic).

Our reading, labelled as such: if ITC's margin per unit sold had been crushed by the tax, the ratio would have fallen much further. It did not. The profit loss came mainly from a smaller revenue base. What the filings do not show is why the base is smaller. The company says "Legal industry volumes remain under pressure due to unprecedented increase in tax" ([MS], media statement p.2), which points to volume. But a smaller post-excise revenue figure could also arise if ITC held its retail prices below the full tax pass-through, and no price or volume is filed to separate the two.

What the company says it is doing about it: a "Calibrated response to mitigate the risk of disproportionate volume shift to illicit trade and protect consumer franchise", "introduction of new variants and own trademarks with international appeal", and it points to a "Sharp increase in seizures of smuggled cigarette consignments by enforcement agencies across the country" as a sign of the "widening tax arbitrage opportunity" ([MS], media statement pp.2, 4). That is the company's description of the threat: the tax gap between legal and smuggled product. It is a claim about the market, with no figure behind it in the filings.

The non-cigarette build: how much did it cover?

Standalone segment results, ₹ crore:

The four non-cigarette lines together rose from ₹1,080.06 crore to ₹1,343.10 crore, up 24.4% (our arithmetic), or ₹263.04 crore, which covers 18.4% of the ₹1,427.21 crore lost in cigarettes (our arithmetic). The company's deck headline for the same table is "Robust growth of 24%" ([MS], deck slide 32). Both statements are true; they are the same fact seen from the percentage and from the rupee.

FMCG-Others, the main build. Revenue ₹6,967.17 crore against ₹6,023.52 crore, up 15.7%; result ₹558.30 crore against ₹436.85 crore, up 27.8% (our arithmetic). The segment's EBITDA, which the company gives in a note, is ₹722.86 crore against ₹593.45 crore, a margin of 10.4% against 9.9% (our arithmetic; the deck shows the same two margins, [MS], deck slide 18). The result per rupee of revenue went from 7.3% to 8.0% (our arithmetic). For the FMCG segment as a whole, the company attributes the margin expansion to "Sharp input cost escalation across categories mitigated through portfolio mix enrichment, cost management initiatives & calibrated pricing actions" ([MS], media statement p.1). The segment result is struck "after considering significant business development, brand building and gestation costs of Branded Packaged Foods businesses and Personal Care Products business" ([RS], consolidated segment note 3), so the margin is after the cost of building. The media statement's FMCG revenue growth, 19% consolidated, comes with a company-stated like-to-like figure of 17.3% ([MS], media statement p.1); the consolidated [RS] note 5 says Sproutlife is included from 1 April 2026 and the results "are not comparable with previous periods".

The scale comparison is what matters for the moat. FMCG-Others result is 14.6% of the cigarette result this quarter and was 8.3% a year ago (our arithmetic). The ratio has risen from 8.3% to 14.6%, but mostly because the denominator fell. In rupees, FMCG-Others added ₹121 crore against a cigarette fall of ₹1,427 crore. On the filings, the non-cigarette businesses are growing and are profitable after their brand spending; they are not yet a replacement for the cigarette profit pool.

The two acquisitions inside the build

Century Pulp and Paper. ITC completed the purchase of the pulp and paper business of Aditya Birla Real Estate "on 1st August, 2026" ([RS], note 4). The Paperboards, Paper & Packaging segment's revenue rose 35.9% to ₹3,015.85 crore and its result rose 47.6% to ₹281.93 crore (our arithmetic), but the company says like-to-like (excluding Century) the segment's revenue rose 10% and its result 52%, with the margin "expands 320 bps" ([MS], deck slides 12 and 32). Put those rounded figures together and the acquired business contributed roughly ₹560–585 crore of revenue and a segment result close to zero, between about -₹9 crore and -₹7 crore, in its first two months (our arithmetic, from rounded percentages; the filings give no Century figure). On the reported numbers, the segment's margin rose from 8.6% to 9.3% (our arithmetic), well short of the 320 bps the company reports like to like. Our reading: the purchase has not yet added profit to the segment, and the filing says the fair values are "provisionally determined" ([RS], note 4), so the result may carry purchase-accounting effects it does not describe.

The seller's filing states the price: the transfer was completed "for a consideration of Rs.3,476 crore" with a "gain on disposal of Rs.868.12 crore" ([CP], note 3). ITC's own cash flow shows "Payment towards business combination, including cash and cash equivalents assumed" of ₹3,366.75 crore standalone in the half-year ([RS], cash flow); the filings do not reconcile that line to the ₹3,476 crore, and it is not labelled as Century. The standalone segment assets for Paperboards, Paper & Packaging were ₹14,026.51 crore at 30 September against ₹9,899.53 crore at 30 June (up ₹4,126.98 crore, our arithmetic).

Sproutlife (Yoga Bar). ITC acquired the right to nominate a majority of the board from 1 April 2026, and recorded a gain of ₹405.88 crore on remeasuring its existing interest, in the June quarter's exceptional items ([RS], consolidated notes 5 and 6). It took full ownership on 28 September 2026 by buying 13,445 more shares, and the board approved on 2 November the merger of Sproutlife into ITC, effective 1 April 2026 and subject to approvals, with no new ITC shares issued ([RS], note 5; [SP], items 5 and 6). Sproutlife's audited FY26 turnover was ₹451.71 crore and its net worth ₹5.22 crore ([SP], item 1). The ₹405.88 crore gain is therefore a write-up of a brand-led business with very little book equity, which, in our reading, is a statement about what ITC paid for, not about what it earns. The deck groups Yoga Bar, Prasuma and Mother Sparsh (digital-first) with 24 Mantra (organic) as a "Digital-first & Organic portfolio" up "70+% YoY", with an annual revenue run rate the deck puts at over ₹1,800 crore ([MS], deck slide 10).

Where this breaks

• We cannot see volume. The one thing a cigarette moat claim needs, how many cigarettes legal ITC sells and at what price, is not in the filings. The ratio of result to post-excise revenue holding up is consistent with pricing power, and also consistent with ITC selling fewer, higher-margin packs while smokers trade down or leave to untaxed product. The company's own language on volumes is the second reading.
• Our post-excise revenue rests on an assumption. If part of the excise line is not cigarettes, the post-excise revenue is larger and the margin ratios are lower than shown. The direction of the conclusion (the pool shrank much more than the margin) depends on the excise share being close to all of it.
• The quarter may flatter or hide. Q2 FY26 was before the duty change; Q1 FY27 was the first full quarter after it. The QoQ gain from 62.5% to 67.9% is one quarter of recovery, which the company calls improvement but does not explain beyond "calibrated" action.
• Leaf tobacco is hit too. The company says "Lower domestic demand due to unprecedented tax increase on Cigarettes continues to affect overall leaf tobacco business" ([MS], media statement p.2). Agri Business still grew its revenue 12.0% to ₹4,451.69 crore and its result 11.2% (our arithmetic), but part of that is export and value-added products, not the cigarette chain.
• Paper depends on wood and trade policy. The company says "Wood prices remain elevated due to lower-than-expected harvest and demand from competing industries" and that the minimum import price on virgin multi-layer paperboard runs till 31 March 2027 ([MS], media statement p.2). Both are outside ITC's control.
• The strongest case against our reading. The company's case is that the franchise is intact: its own trademarks and new variants are the response, and QoQ performance is improving. If that is right, the 27% fall is mostly a one-time reset of the tax base and the franchise will rebuild. We cannot refute that from these filings; one improving quarter is not a trend.
• Review, not audit. The results are limited-reviewed and the company states the auditors issued an unmodified report; a limited review does not test why a segment's margin moved.

Why it costs the reader something

A reader who sees gross revenue up 47% is reading a tax. A reader who sees profit down 27% and concludes the brands lost their grip has not yet seen the data that would show it. What the filings support is narrower: the cigarette segment kept most of its result per rupee of post-excise revenue, lost about a quarter of that revenue, and the rest of ITC grew by about a fifth of what was lost. The next two or three quarters of segment results will show whether the pool stabilises. A moat is a claim about the long run, and a tax shock is where it gets measured.

What to watch

1. Cigarette segment result and the ratio to post-excise revenue in the December quarter, against ₹3,813.45 crore and 67.9% (our arithmetic).
2. Whether the company ever files a cigarette volume or price figure.
3. FMCG-Others result against ₹558.30 crore, with the EBITDA margin against 10.4%.
4. The Paperboards, Paper & Packaging segment's reported margin against 9.3% (our arithmetic) as Century is in for a full quarter, and any Century figure the company discloses.

The concrete thing, again

The cigarette row reads ₹3,813.45 crore against ₹5,240.66 crore. On its face, a franchise that lost more than a quarter of its profit in a year. Underneath, the result per rupee of post-excise revenue barely moved (67.9% against 71.2%, our arithmetic) while the revenue pool shrank by about a quarter. That is consistent with a tax shock; the filings cannot show whether customers were lost, and ITC itself says legal industry volumes are under pressure. Whether it stays that shape depends on a number ITC did not file.

Sources

• [RS] ITC Limited, results for the quarter and six months ended 30 Sep 2026, notes and review reports (NSE)
• [MS] ITC Limited, media statement and Q2 FY27 results presentation (NSE)
• [SP] ITC Limited, Scheme of Amalgamation of Sproutlife Foods Private Limited (NSE)
• [CP] Aditya Birla Real Estate Limited, results and board outcome of 26 Oct 2026 (NSE)
• Earlier on FMCG pricing power: HUL's September quarter: price, volume and margin

Educational research, not investment advice. Every figure above is drawn from ITC's and Aditya Birla Real Estate's own filings, read from the primary documents on 3 November 2026; derived figures are our arithmetic, labelled as such. MoatSCORE: 5.62 (MoatSCORE 6.0, deep dive, provisional; Moat Screener, 3 Nov 2026). No buy/sell recommendations, no price targets, no share prices. Moat & Margin is not a SEBI-registered Research Analyst or Investment Adviser.