ITC has underperformed its closest FMCG peer, Hindustan Unilever, and the BSE FMCG index in the last six months as its steep cigarette price hikes in response to excise duty hike of 20% in the last Union Budget and rise in VAT rate across various major states affected the company adversely.
The company had witnessed flat growth in cigarette volume (1.5% according to Motilal Oswal preview report) in June 2012 quarter, which is expected to continue in September 2012 quarter results which will be announced on October 19. Gautam Duggad, analyst, Motilal Oswal expects one% increase in cigarette volumes but Nikhil Vora, co-head of research, IDFC Securities estimates a one% decline. Consequently, the cigarette division (58% of overall revenues) will report a 12-13% growth, similar to what it was in previous quarters.
Even the hotels business could disappoint thanks to macroeconomic pressures and overcapacity situation in the industry though it does not contribute much to the sales. However, non-cigarettes or other FMCG business (around 14.5% of sales) will continue to report robust sales growth (around 20%) due to strong underlying demand for the company’s products and support from new launches. Other businesses namely agri and paper will also continue to meet expectations. Analysts expect overall sales growth in the range of 13-16% mainly helped by other FMCG and the average estimate is Rs 6,900 crore.
Price hikes undertaken by the company in the past have always ensured that profit before interest and tax (PBIT) margin in cigarettes remains unaffected. This trend will continue even in Q2. This, along with further reduction in losses by other FMCG businesses estimated by most analysts and stable segment margins in agri and paper, will help improve operating margin. But there is a downside risk on account of slowdown in hotels business and higher advertisement costs incurred for other FMCG products. Net profit growth is estimated to be in the range of 16-17% backed by stable taxation to about 1,750 crore.
In short, there are no great expectations from the company in terms of any fireworks in Q2. The company’s comment about the progress of its venture into 64mm cigarettes category (entry level) with five-six brands, which is currently being test marketed (launch expected in the current quarter), will be crucial for driving volume growth.
The stock touched a 52-week high of Rs 290.8 on Thursday.
