ITC: A waiting game
ITC’s cigarette business is under pressure, but not for the reasons most assume. The demand dip is not structural. It is a direct result of the sharpest cigarette tax hike India has seen in years, announced in the Union Budget and effective from February 1.
January saw unusually strong volumes as trade channels front-loaded purchases ahead of the hike. March saw a sharp reversal as that pre-bought inventory worked through the system. The net effect: Q4 cigarette volumes are expected to be roughly flat, with negative net pricing because the tax cost has not yet been fully passed through to consumers.
The bigger worry is illegal cigarettes gaining market share. When legal cigarette prices spike sharply, smuggled products become far more attractive to price-sensitive buyers. Roy expects 4% to 5% volume decline in cigarette for the first half of FY27 as a result.
The silver lining? ITC’s FMCG business is expected to post 10% revenue growth. Tobacco raw material costs are easing after a year of inflation. The stock has already corrected from above Rs 400 to around Rs 300, making valuations comfortable. Roy calls it a one-to-two year call, not a one-quarter trade. A good dividend yield and a defensive profile make it worth holding, but a meaningful re-rating trigger is only likely in the second half of FY27 once pricing normalises and volume trends improve.
Paints: Short-term pain, second-half recovery
Paint companies are taking the sharpest hit from the Hormuz crisis because roughly 40% of their raw materials are crude-linked. Asian Paints has already taken a 6% to 8% price hike, with Berger, Akzo, Kansai and Pidilite following suit.
Roy expects this geopolitical disruption to be temporary. If crude stays elevated through May or June, Asian Paints may need another round of price increases. In the near term, Q1 FY27 could see 100 to 200 basis points of EBITDA margin compression across most consumer companies as cost inflation hits before pricing fully adjusts. However, companies are expected to cut advertising and discretionary costs to cushion the blow. A margin recovery is expected in the second half of FY27.
Where Roy is buying now
Within staples, Roy’s top picks are Nestle, Marico and Tata Consumer — all relatively insulated from the cigarette tax shock and crude volatility.
In retail, he favours Titan, where gold price tailwinds drove strong Q4 sales. Avenue Supermart (DMart) is another pick, backed by exceptional store expansion of 85 new outlets in FY26 including entry into Uttar Pradesh. VMart also makes the cut on the back of strong growth numbers.
QSR: Approach with caution
Quick service restaurants face a triple headwind: higher LPG costs hurt Jubilant Foods in March, post-election fuel price hikes will raise delivery costs, and packaging costs are rising. On top of that, the QSR space is increasingly fragmented, giving consumers more choices and limiting pricing power. Roy is currently underweight on the segment.
The broader message from Roy is clear: in a volatile macro environment, stick to companies with pricing power, low raw material exposure, and earnings visibility. Right now, that list is shorter than usual.