ITC Results Preview: Cigarette price hike to make up for volume decline

ITC's non-cigarette business expected to drive profitability

Even as cigarettes’ sales volume is likely to decline by 2-5 per cent during October-December period of the current financial year, increased revenue from other segments is likely to result in ITC Ltd posting an eight per cent growth in its topline at around Rs 99-100 billion. The company’s net profit is expected to hover around Rs 26-28 billion. 

In the third quarter (Q3) of the last financial year, the company had posted a Rs 26.40 billion bottom line and a Rs 97.64 billion topline.

The EBIT (earnings before interest and tax) growth, as per HDFC Securities, Edelweiss Securities and Prabhudas Lilladher is expected to increase anywhere between 5-8 per cent but on account of projected decline in other income, analysts expect the adjusted net profit to either remain flat or increase by a single digit in the Q3 period of the 2017-18 financial year. 

Given the low base in the Q3 period of 2016-17, Abneesh Roy, research analyst with Edelweiss Securities expects the non-cigarette FMCG business to grow by 15 per cent as the momentum of consumption in the market has picked up. He expects the paper and paperboards business segment to post a 25 per cent increase in segment revenue.

“The overall paper and packaging business is looking good and as FMCG sales pick up, so does the paper and packaging segment”, he reasoned.

The hotels and agro business verticals are likely to post a 10 per cent growth each.

Backed by price hike of cigarettes after the government increased taxes in the Budget by six per cent as well as under the GST regime by 11 per cent, HDFC Securities has pegged revenue growth from cigarettes to hover around seven per cent on a year-on-year basis. The projected decline, however, on a sequential basis, will be lower by three per cent.

Currently, although the cigarette segment contributes around 47 per cent to its consolidated annual sales, its overall contribution to the company’s EBIT is 85 per cent.

Sector analysts project a soft‐to‐moderate tax hike in cigarettes in the forthcoming budget.

A report released last week by HDFC Securities stated that the cigarette industry contributed Rs 284 billion to the exchequer in the 2016-17 fiscal year with ITC accounting for 75 per cent of the collected tax amount. The cigarette industry contributed three per cent to indirect taxes and two per cent to the total taxes.

ITC Ltd is the fourth largest company in the country in terms of market capitalisation.

At the opening bell, the ITC scrip opened at Rs. 273.95 apiece on the BSE.