ITC Q2 Results: Why Did Profit Fall 20% Despite Strong FMCG Growth?

ITC's biscuits, snacks and other everyday products are doing well. Yet the company's quarterly profit fell by more than ₹1,000 crore. How can both happen at the same time?

The answer is in its cigarette business. Cigarettes still earn much more profit for ITC than its other businesses. In the September 2026 quarter, the drop in cigarette profits was so large that growth in FMCG, agriculture and paper could not make up for it.

How Did ITC Perform in Q2 FY27?

ITC reported the following standalone results for the quarter ended September 30, 2026. Standalone means ITC Limited's own accounts, without adding the results of its subsidiaries:

Source: ITC Q2 FY27 investor presentation.

ITC's net revenue increased, but it earned much less profit. Net profit was about ₹1,039 crore lower than a year ago. This wasn't because every business was struggling. Most of ITC's non-cigarette businesses actually earned more.

Which ITC Business Caused the Profit Decline?

The clearest way to find the answer is to compare how much profit each business earned before company-wide adjustments.

Source: ITC Q2 FY27 standalone segment results.

The cigarette business alone lost about ₹1,427 crore in profit compared with last year. All the other segments together improved by around ₹263 crore, cushioning only part of the fall.

This is why ITC's overall profits declined even as several businesses grew. Segment profit is not the same as final net profit, because company-wide costs, other income and taxes are also involved.

Why Did ITC's Cigarette Business Struggle?

The main change was a sharp increase in cigarette taxes from February 1, 2026. When the GST compensation cess ended, the government increased GST and central excise duty on cigarettes. This also changed how ITC's reported revenue appears in its accounts.

Source: ITC Q2 FY27 investor presentation.

At first, the 78% increase in gross cigarette revenue looks like strong growth. But that would be the wrong conclusion. Excise duty is included in reported gross revenue, so the higher tax makes this figure rise sharply. Net cigarette revenue actually fell 21%.

Management also said that cigarette sales volumes across the legal industry remain under pressure. Higher taxes can make legal cigarettes more expensive compared with smuggled or illegal alternatives. ITC warned about this risk and pointed to increased seizures of smuggled cigarettes. The company did not disclose its own exact cigarette volumes or a volume-growth percentage for this quarter.

To protect its business, ITC has been changing its cigarette range, introducing new variants and carefully adjusting prices. These steps are meant to keep customers while dealing with higher taxes and competition.

There was one improvement: cigarette segment profit rose from ₹3,341 crore in Q1 FY27 to ₹3,813 crore in Q2 FY27, a rise of about 14% from the previous quarter. But it was still 27% below the same quarter last year. So a full recovery has not yet been established.

How Did ITC's FMCG, Agriculture and Paper Businesses Perform?

ITC's other major businesses performed better, particularly packaged consumer goods.

Source: ITC Q2 FY27 standalone segment results, page 5; investor presentation, slides 16, 23 and 25.

In FMCG - Others, products such as biscuits, noodles, snacks, salt and notebooks helped drive sales. The business earned more profit from that growth, too: its EBITDA margin improved from 9.9% to 10.4%. In simple terms, it kept a slightly larger share of sales as operating earnings despite higher costs.

Agriculture benefited from value-added products and leaf tobacco exports, though shipping disruptions linked to West Asia affected parts of the business. Paper also grew strongly, helped partly by the acquisition of Century Pulp and Paper in August 2026. Excluding that acquisition, paper revenue grew 10% and segment profit rose 52%, according to ITC.

Still, cigarettes contributed roughly 74% of ITC's total standalone segment profit in Q2 FY27. That is the important difference: the other businesses are growing, but they are not yet large enough in profit terms to absorb a major cigarette slowdown.

Author's Take: What Should ITC Investors Watch Next?

I would watch cigarette volumes first. Management has said legal cigarette industry volumes are under pressure, but ITC has not given an exact figure for its own quarterly sales volumes. Future management commentary - and any volume data it shares - will help show whether demand is stabilising.

The second check is whether ITC can improve cigarette profits without losing more customers. Higher prices may help protect profit on each cigarette sold, but they can also make cheaper or illicit alternatives more attractive. I would read cigarette net revenue and segment profit together rather than judging a recovery from profit growth alone. The quarter-on-quarter improvement is a useful early sign, not proof that the problem is over.

Finally, FMCG needs to keep turning higher sales into higher profits. Its improving margins matter because cigarettes still provide most of ITC's segment earnings. For investors following ITC shares, the key question is whether cigarette earnings stabilise while FMCG becomes a steadily larger source of profit.

Reporting basis: Standalone financials throughout. Figures are rounded.