ITC: Cigarette EBIT grows lowest in past six years

Uncertainty about tax hikes in the coming Budget to keep the stock under pressure

A weaker-than-expected show of the cigarettes business (85 per cent of operating profits) impacted ITC’s December quarter performance, leading to a five per cent fall in its share price.

The cigarettes segment posted flattish revenues of Rs 4,142 crore, up 0.6 per cent year-on-year (y-o-y). While ITC’s cigarette volumes were expected to fall five-seven per cent in the quarter, given the rising taxes (excise duty, value-added tax), the fall was as high as 12-13 per cent, analysts say. Although ITC does not disclose this figure, cigarette volumes have been declining for the past six quarters. However, consistent price rises have enabled ITC to post healthy earnings before interest and tax (Ebit) growth in this business in these quarters, mostly ahead of Street expectations.

However, for the December quarter, this metric, too, fell short of expectations, growing 8.8 per cent y-o-y to Rs 2,886 crore, against estimates of 15-17 per cent growth. The cigarette Ebit growth has fallen to single digit for the first time since the June 2008 quarter when it grew 2.4 per cent. Some analysts believe even this 8.8 per cent growth was supported by cost savings.

On the other hand, ITC’s fast-moving consumer goods (FMCG) business (non-cigarette) was impacted by continued weakness in discretionary consumption. This segment’s sales grew 11.4 per cent to Rs 2,314 crore, at the lower-end of expectations of 11-15 per cent growth. Its Ebit at Rs 11 crore, too, was less than half the estimates of Rs 25 crore. While the hotels business was hit by soft demand scenario, paper was hit partly due to the slowing cigarettes and FMCG businesses.

As a result, ITC posted revenues of Rs 8,800 crore. While the y-o-y growth of 2.1 per cent was the slowest in 23 quarters, it was also nine per cent below consensus Bloomberg consensus estimates of Rs 9,688 crore. Net profit, which was aided by other income (up 49 per cent at Rs 582 crore), lower input costs and stable tax rate, grew 10.5 per cent y-o-y to Rs 2,635 crore and was also 1.4 per cent lower than estimates of Rs 2,672 crore. In this backdrop, Religare analysts expect ITC’s earnings estimates to get downgraded.

While some analysts say cigarettes Ebit growth will pick up, others are cautious due to the uncertainty around the coming Budget and whether or not taxes on cigarettes would be increased further. While the scrip trades at attractive valuations, regulatory overhang (higher taxes, potential ban on sale of loose cigarettes, etc) will keep it under check in the near future.