Weak cigarette volumes, margins in Q2 weigh on ITC, stock sheds 5.5%

Decision by the panel on tobacco tax remains the key trigger

The stock of ITC was the biggest loser among Sensex constituents shedding over 5.5 per cent in trade on Thursday. Weak cigarette volumes in the September quarter, pressure on margins in the consumer business and overhang on cigarette taxation is weighing on the stock sentiment.

With cigarettes accounting for just under 80 per cent of operating profits, the operational metrics in the business is a key trigger for the stock. Estimated volumes in Q2 were up 9 per cent though this was on a base of 12 per cent dip in the year ago period. The company indicated that exit volumes in the quarter are pre-pandemic levels with growth being broadbased across the country except in some pockets in Kerala and the eastern markets.

Analysts led by Krishnan Sambamoorthy of Motilal Oswal Research believe that continued sub-par growth in segment profits of the mainstay cigarettes business and tepid underlying cigarette volumes act as a deterrent against a valuation rerating.  

Revenue growth for the second largest segment (consumer) by sales of ITC came in at just under 3 per cent though the same was on a higher base. The company, on the back of higher in-home consumption and demand for hygiene products, had recorded a growth of 19.3 per cent in the year ago period. While sales of staples, convenience foods and hygiene products came off the high base of last year, out-of-home portfolio and discretionary products saw a sharp recovery on the back of easing restrictions.

The positive in the FMCG or consumer segment results was the margin performance. The company posted an operating profit margin of 10 per cent up 30 basis points y-o-y with gains coming despite higher raw material costs. Cost management, premiumisation and price increases helped offset the cost inflation headwinds.

The agri-business saw a 7 per cent decline in revenues due to lack of shipping containers, port congestion and inclement weather. The external business within this segment saw good growth momentum on the back of wheat, rice and leaf tobacco exports.

In addition to financials, what could have a major impact on the stock is the decision of the expert panel on tobacco tax. Given the overhang, investors should await clarity on the same before considering an investment.