ITC non-cigarette businesses may continue to rise by 14-15%, say analysts

Though ITC’s December quarter (Q3) numbers were broadly in line with the Street’s estimates, investors were disappointed with the margin performance, caused by the lack of price hikes. The stock tumbled 4.2 per cent on Wednesday to Rs 277.7 apiece, after announcement of the results.
 
ITC’s top line grew 15.1 per cent year-on-year (YoY) to Rs 11,136 crore, and net profit (excluding exceptional items of Rs 413 crore in December 2017 quarter) rose 20 per cent to Rs 3,209 crore.
 
Analysts were expecting revenues and net profit of the cigarette maker to be Rs 10,881.2 crore and Rs 3,128 crore, respectively. A healthy rise in top line was on account of the 8 per cent volume growth in cigarette business, which accounts for 40-42 per cent of overall revenues. No major pricing action led to volume growth across the cigarette portfolio.
 
However, this dragged down margins in Q3 on account of high raw material costs (consumption of high-cost tobacco leafs), and a rise in revenue share of imported cigarette capsules that fetch lower margins. ITC has not passed on the higher cost to consumers.
 
ITC’s operating profit margin from the cigarettes segment, accounting for around 85 per cent of its overall operating profit, declined around 50 basis points (bps) YoY to 70.1 per cent. Thus, ITC’s gross profit margin and Ebitda (earnings before interest, tax, depreciation and amortisation) margin contracted 143 bps to 61.4 per cent and 127 bps to 38.5 per cent YoY, respectively.
 
The performance of its FMCG business (including packaged foods, personal care products, etc) and hotels was satisfactory.
 

ITC now needs to take up price hikes to improve its margin profile, which otherwise could take away the sheen off its stock in brokerage buy lists on account of attractive valuation (24 times its FY20 estimated earnings, at an over 50 per cent discount to FMCG leader HUL), and an expected earnings-accretive growth of the non-cigarette businesses.
 
Analysts foresee the non-cigarette businesses of ITC to continue rising by 14-15 per cent. “Limited pricing so far has been concerning, and we expect ITC to take some price hikes in the March 2019 quarter to pass on the effect of inflation in raw material costs. Without pricing, we expect margin pressure to remain,” says Nitin Gupta, analyst at SBICAP Securities.