ITC Q1 net profit rises 10.07% at Rs 28.19 billion, beats estimates

Beating street estimates, diversified conglomerate ITC Ltd posted a 10.07 per cent jump in its net profit at Rs 28.19 billion for the quarter ended June 30, 2018 with its total revenue, inclusive of other income, registered at Rs 112.78 billion.

The net profit during the similar quarter of the last fiscal year stood at Rs 25.61 billion while the revenue was registered at Rs. 142.77 billion.

However, in a statement, the company said that on account of the Indian Account Standard calculations, and the resultant restructuring of indirect taxes in the GST regime, the gross revenue and excise duty are not comparable.

On a comparable basis, the gross sales value, which includes GST, GST compensation cess and other former taxes under the pre-GST regime, increased by 13.49 per cent at Rs. 181.72 billion as against Rs. 160.11 billion earned during the first quarter (Q1) of the last fiscal year.

According to Abneesh Roy, senior vice president of institutional equities at Edelweiss Securities, after four long quarters, cigarette volume grew 1.5 per cent year-on-year on a base of one per cent. Earlier, on back of high taxes, Roy had projected a dip of 1-2 per cent in cigarette sales volume.

Revenue from the cigarettes business stood at Rs. 51.27 billion as against Rs. 87.74 billion earned during the Q1 of the 2017-18 fiscal year. Nevertheless, the gross profit from this segment, which accounted for 82.74 per cent of ITC’s gross profit, rose by 8.67 per cent at Rs. 35.58 billion as against Rs. 32.74 billion registered during the first quarter of the last fiscal year. 

Asked about the profitability from this segment, Roy reasoned that cigarette prices grew by 7-8 per cent on a year-on-year basis and the 64 mm cigarette variety continues to contribute to 38 per cent to the total sales volume, which substantially led to increase in profit.

During the quarter under review, ITC launched innovative cigarette variants like the Hollywood brand which is a triple segment filter and Flake Taste Pro which is a dual segment filter. Additionally, it continued to scale up the American Club and Players brands which it launched towards the end of 2016-17.

However, on the non-cigarette FMCG front, which comprises of its branded packaged foods brands, apparel, education and stationery, personal care products, safety matches and agarbattis, ITC registered a 10-fold increase in gross profit at Rs. 501.2 million when compared to the gross profit of Rs. 54.3 million during Q1 of 2017-18. The revenue from this category grew 10.38 per cent at Rs. 28.70 billion during the period under review.

According to ITC, this segment’s EBITDA grew by 86 per cent at Rs. 1.28 billion on the back of enhanced scale, product mix enrichment and cost management initiatives, despite sustained investment in brand building and gestation costs of new categories inclusive of juices, dairy, chocolates, personal care products and several others.

Driven by higher room rates, strong food & beverage sales and high operating leverage, the hotels business registered a 11.80 per cent rise in revenue at Rs. 3.41 billion while the gross profit increased by 148.96 per cent to touch Rs. 132.2 million. The conglomerate commissioned ITC Kohenur, a 271 room luxury property at Hyderabad, on 1st of June this year and construction of other hotels in Kolkata, Ahmedabad, Guntur and Bhubaneswar are underway.

Primarily owing to lower margins on the trading business, adverse quality and leaf cost escalation pertaining to Andhra 2017 crop and lower export incentives, the company’s agri business division posted a 17.02 per cent decline in its gross profit at Rs. 1.95 billion even though revenue increased by 14.13 per cent at Rs. 31.51 billion.

A company statement noted, “The business continues to step up initiatives in the area of value-added agriculture to create new vectors of growth by leveraging its agri-commodity sourcing and processing expertise and the strong distribution network of the Company. These include the launch of packaged prawns, super safe spices, fresh fruits and vegetables and dehydrated onions under the ITC MasterChef and Farmland brands. Plans are afoot to rapidly scale up these interventions in the ensuing months”.

While there was some improvement in the order book position during the quarter, ITC’s revenue from the paper, paperboard and packaging business remained muted at Rs. 13.56 billion due to slow pick-up in demand in end user industries and unabsorbed capacity in the domestic industry. The shutdown of a paperboard machine for a part of the quarter for rebuild, had also weighed on the revenue. Nevertheless, the gross profit from this segment increased by 14.79 per cent at Rs. 2.96 billion.

Based on this performance, Roy expects the ITC scrip to be re-rated. Although the company’s performance has beaten street estimates, Roy cautions and the key risk for the company is a cess increase on cigarettes by the GST Committee.

However, in case the taxes on cigarettes remain status quo, a 3-4 per cent volume growth on cigarettes is expected for the entire fiscal year. 

The ITC scrip closed at Rs 287.15 apiece on the BSE at the end of the day’s trading, up by 0.38 per cent.