ITC: Uptick in cigarette volumes aids Q4 show

Weakening revenue growth in FMCG business is a concern

Flattish growth in cigarette volumes, estimated at 0-2 per cent, was a key surprise in ITC’s March quarter (Q4) results, given that expectations were of a three-four per cent decline. The good show is partly attributed to the low base effect of the March 2015 quarter, when cigarette volumes fell 13 per cent, and manageable increase in excise duty over the past financial year.

Stable volumes, coupled with an estimated eight-nine per cent cigarette price hike, boosted this segment’s revenues, which grew at the fastest pace over the past six quarters. Cigarette revenues expanded 10.2 per cent year-on-year (y-o-y) to Rs 4,639 crore in Q4, compared with the 1.2 per cent decline to 5.7 per cent growth witnessed in the preceding five quarters. This segment’s operating profit grew at a healthy 11.5 per cent, leading to an 80 basis point increase in operating margin to 65.1 per cent.

However, this is the second quarter in a row that margins in the cigarette business have contracted sequentially, down from 68.8 per cent in the September 2015 quarter and 68.1 per cent in the December 2015 quarter.

Analysts believe this could be on account of some down-trending by consumers as ITC took price hikes on a regular basis to pass on increasing taxes. They believe given the low price elasticity of cigarettes, it is possible users would have switched to lower priced products. While stating that this is a seasonal phenomenon and it happens every fourth quarter, Abneesh Roy, FMCG analyst at Edelweiss Securities, says  one should not read much into it. However, this will be a key monitorable going forward given that cigarette forms 88 per cent of ITC’s operating profit. On higher pictorial warnings, most analysts believe it will have a limited impact on ITC as a large part of the cigarettes are sold in loose form. However, it brings down the scope for branding.

In sync with slowing consumption demand, ITC's FMCG segment's revenues grew at a multi-quarter low rate of 5.4 per cent y-o-y to Rs 2,704 crore. With Nestle aggressively gaining back its market share in the noodles segment, ITC seems to be losing some ground in this category, says Roy. Savings in input costs and advertising spends resulted in an operating profit of Rs 71 crore in Q4 for this segment. Revenues of agri business grew at a healthy pace this quarter. Hotels and paper revenues grew in line with recent trends. However, margins remained weak for most segments.

ITC’s overall revenues grew 9.5 per cent y-o-y to Rs 10,062 crore and was ahead of the Bloomberg consensus estimate of Rs 9,811 crore. However, a 539 basis point rise in the tax rate to 35 per cent led to a lower net profit growth of 5.7 per cent. Thus, net profit of Rs 2,495 crore was slightly below the Bloomberg estimate of Rs 2,504 crore.