ITC: Cigarettes continue to disappoint

Fall in cigarette volumes, slowing FMCG business are key worries

Weak revenue growth and a minor margin expansion in the cigarettes business hit ITC’s results for the September quarter.

Cigarette volumes declined 13-14 per cent, say analysts at Motilal Oswal Securities. This is the fourth straight quarter of falling cigarettes volumes. Analysts expect this trend to improve in the second half of FY16.

Growth in fast-moving consumer goods (FMCG) revenue, too, fell to single-digit levels due to continued disruption in the instant noodles category. This segment’s revenues have grown in healthy double digits every quarter since June 2011 quarter. Even if one excludes the instant noodles business, FMCG business sales have grown at 10 per cent, a multi-quarter low. Slowdown in consumption demand has impacted the FMCG business. Continued volatility in quarterly earnings before interest and taxes (Ebit) of the FMCG segment is also a concern.

ITC attributed these losses to its continuous investments in newer categories such as juices and dairy, among others, and brand-building steps to reinstate consumer confidence in instant noodle brand Yippee noodles. Consequently, ITC’s revenues as well as net profit came in below Street expectations. The company’s net sales fell 1.4 per cent year-on-year to Rs 8,805 crore versus the Bloomberg consensus estimate of Rs 9,349 crore. The net profit remained flattish and inched up 0.3 per cent year-on-year to Rs 2,431 crore. Healthy Ebitda margin gains were offset by higher tax rate in the quarter. Net profit, too, missed the Bloomberg consensus estimates of Rs 2,597 crore.

While ITC eyes much larger scale in its FMCG business, analysts await sustained improvement in profitability. Cigarettes business continues to form a substantial chunk of ITC’s Ebit (90 per cent), but might not witness any rise in core business in the foreseeable future. Owing to the dismal performance in the quarter, the stock fell 4.3 per cent to Rs 334.7 on Friday.

The hotels business witnessed better revenue growth in the quarter, aided by higher room occupancy and better momentum in revenues from food and beverages segment. This segment’s margins, though, were impacted by gestation costs of new property in Gurgaon as well as change in depreciation policy. Agri business performance was impacted by weak exports of wheat, coffee and soya.

Paper business, too, witnessed falling revenues as well as operating profits hit by slowing demand for cigarettes and FMCG segments. Higher imports from China also posed increased competition for this segment.