Cigarettes continue to be a drag on ITC profit

Company misses Street expectations, net up by 3.6% at Rs 2,361 cr

Stung by a punitive tax on cigarettes, net profit of cigarettes-to-hotel major ITC rose by 3.6 per cent at Rs 2,361 crore in the March quarter, against Rs 2,278 crore in the year-ago period, missing Street expectations by a wide margin. Bloomberg had estimated the net profit to be at Rs 2,521 crore. Excluding expenditure on corporate social responsibilty programmes, net profit grew by 7.8 per cent.

“The muted growth in revenue and profits during the quarter reflects, inter alia, the continuing impact of the steep hike in taxation on cigarettes, sluggish demand conditions in the fast-moving consumer goods (FMCG) sector,” the company said in a statement.

Revenues in ITC’s cigarette segment grew by 3.2 per cent on a year-on-year basis to Rs 4,211 crore. The growth was mainly on the account of a steep price increase as cigarette volumes continued to decline. In March, ITC had effected a price increase to the tune of 15 per cent, the sharpest hike at one go. Cigarettes account for about 80 per cent of ITC's pre-tax profit. Cigarettes' segment Ebit (earnings before interest and tax) was up six per cent y-o-y to Rs 2,706.15 crore.

Analysts said that the cigarette category continued to show double-digit decline in volumes after a 15 per cent decline last quarter. Excise duty on sub-65mm sticks was increased by 25 per cent and by 15 per cent for cigarettes of other lengths.

ITC said, over three years, the incidence of excise duty and value-added tax on cigarettes, at a per unit level, had gone up cumulatively by 98 per cent and 104 per cent, respectively.

Net sales grew by 0.5 per cent to Rs 9,188 crore during the quarter as non-cigarette FMCG sales moderated due to soft consumption off-take in these categories. This again was lower than Rs 9,738 crore estimated by analysts. The non-cigarette FMCG segment's Ebit grew by 12.6 per cent to Rs 48.5 crore over a revenue of Rs 2,567 crore, which was up 11 per cent. Revenues from the agri business were affected as it fell from Rs 2,004 crore in the year ago quarter to Rs 1,428 crore. Revenue from hotels segment grew eight per cent to Rs 346.4 crore. But, hotels margins and profits fell.

This, however, shaved off the profit gains seen in the agri and paper business.

“Cigarette is what drives ITC’s profit, it took a hit. Apart from that the non-cigarette FMCG business performed reasonably well but should improve going forward as the economic scenario improves,” said Abneesh Roy, associate director at Edelweiss Securities.

For the year 2014-15, the company’s consolidated net profit (after minority interest and profit/loss share of associates) grew by 8.7 percent  at Rs 9,663.17 crore. Total income increased by 10 percent Rs 38,834.81 crore as compared to Rs 35,317.08 crore in the previous year.

The company’s scrip closed at Rs 328.45 crore at BSE on Friday, reflecting a gain of 0.34 per cent. The results, however, came after markets had closed. The Sensex closed with a gain of 0.53 per cent at 27,957.50 on Friday.