Unlike most consumer companies that have reported relatively weak top line numbers, ITC has not come up with any negative surprises, not even in the cigarette business. After the steady rise in excise duty for consecutive years, the Street was expecting cigarette volumes to dip. However, these went up 3.5 per cent because of a bunching of demand before the Union Budget. Cigarette volumes are expected to grow 2-2.5 per cent in FY14, believe analysts.
Typically, in years when excise duty hikes are steep, volumes take a hit. However, thanks to the rollout of the 64mm cigarette, the impact of higher taxes this year would be partially negated, as these attract lower taxes compared with 69mm, 74mm, 78mm and 84mm sticks. Though the company rolled out the 64mm cigarette nationally, it is yet to pick up momentum. The cigarette division clocked a revenue growth of 17.5 per cent, while segment profit grew 20.2 per cent. The segment's operating margins expanded 60 basis points year-on-year.
The surprise element in ITC's Q4 numbers is not limited to the cigarette business. The market was so far discounting the consumer division becoming profitable. In this quarter, the fast-moving consumer goods (FMCG) business has turned in a maiden profit of Rs 12 crore. ITC's FMCG business grew 26 per cent, equally driven by volume and value. Most other FMCG players have seen their volumes dip to single digits but ITC has managed to increase its market share in this space through new launches. Varun Lohchab, managing director and co-head of research, Religare Capital Markets, says this is a key positive. In the biscuits segment, the company says its 'Dark Fantasy' brand emerged as the clear market leader in the highly competitive premium cream biscuits segment. In the instant noodles category, ITC's Yippee Noodles is the second largest brand. While the personal care business has seen some slowdown, the company's steady launch of new products has helped it grow ahead of the industry. ITC forayed into the deodorant segment with its Aqua Pulse Deo Spray under the Fiama Di Wills Men franchise.
Apart from these two businesses, the company's agri-business grew 30 per cent, paper at eight per cent and the hotel business at 10 per cent. The profitability of the hotel business continues to be under pressure, due to the current slowdown. Despite this performance, FMCG stocks are perceived to be expensive. Though ITC is cheaper than other consumer stocks, it is still expensive, says Sanjay Manyal of ICICIDirect. What can give it momentum is the profitability in its FMCG business, as the market had discounted that, he adds.