ITC dips 2% as Maharashtra bans sale of loose cigarettes

ITC was trading lower by 2.3% at 10:40am to Rs 325 levels on the National Stock Exchange (NSE) after reports suggested that Maharashtra has banned sale of loose cigarettes.

"The state health department on Monday announced a ban on the sale of loose cigarettes, on the grounds that there was no way to warn such buyers of the dangers of smoking. On May 28, Chandigarh, the capital city of Punjab and Haryana, became the first region in the country to ban the sale of loose cigarettes," suggests a news report by Mumbai Mirror.

Meanwhile, ITC posted yet another weak quarter led by exceptionally weak demand. Analysts say that steep tax increases in the past few years plus an overall weak consumption cycle have impacted demand in the cigarettes segment.

For the recently concluded quarter, ITC reported 3.6% increase in its net profit at Rs 2,361 crore, compared to Rs 2,278 crore in the year-ago period. Bloomberg had estimated the net profit to be at Rs 2,521 crore.



Revenues in cigarette segment grew by 3.2% on a year-on-year basis to Rs 4,211 crore. The growth was mainly on the account of a steep price increase as cigarette volumes continued to decline. In March, ITC had effected a price increase to the tune of 15%, the sharpest hike at one go. Cigarettes account for nearly 80% of ITC's pre-tax profit.

“FMCG revenues grew 11% year-on-year, in line with our estimates but below historical growth rates, as demand environment in the industry remained sluggish. However, the company has gained market share in nearly all its packaged foods categories. Given risks to rural consumption, we believe revenue growth could remain muted and forecast it to grow around 12% in FY16E,” point out Rajasa Kakulavarapu and Poornaa Venkatesan, analysts at Jefferies in a post results note.

Analysts at JM Financial recommended a hold rating on the stock with a 12-month price target of Rs 350 in their result analysis note.

"We expect the stock to remain under pressure for some time, given that operating environment for 1HFY16 could be even more challenging (FY16 volumes could be as low as FY05 level). Even though the stock currently quotes at a sharp 35%+ discount vs sector average (ex-ITC), there is perhaps no near-term catalyst in sight to drive a decisive narrowing of the same, in our view," said Richard Liu and Vicky Punjabi of JM Financial in a report.