Volume trends in cigarettes, FMCG key to ITC's recovery after weak Q3

ITC delivered disappointing results with earnings before interest and tax or Ebit margin down in cigarettes and FMCG segments. No tax hikes were announced for cigarettes in the Budget, which is a positive. The stock was the biggest loser in the Sensex on Friday falling 2.34 per cent

 

ITC reported net sales of Rs 17,050 crore in the third quarter of the financial year 2025 (Q3FY25), up 8.6 per cent year-on-year (Y-o-Y). Cigarette sales (net of tax) grew 8.1 per cent Y-o-Y, and volume rose 6 per cent. FMCG sales rose 4 per cent Y-o-Y to Rs 5,420 crore, led by staples, snacks, frozen snacks, dairy, premium personal wash, homecare and agarbatti.

 

Competitive intensity was high in noodles, snacks, biscuits and popular soaps. The salience of digital and modern trade in the FMCG segment for the first nine months of FY25 (9MFY25) grew to 31 per cent from 17 per cent in FY20.

 

Revenue from the agri business grew 9.7 per cent Y-o-Y, with growth in value-added agri exports of spices and coffee and in leaf tobacco exports. Paperboards, paper and packaging revenue grew 3.1 per cent, hit by supply from China.

 

Cigarettes and FMCG margin contracted due to inflation in input costs. The Q2 Ebit margin shrank 230 basis points (bps) Y-o-Y to 32.1 per cent. Ebit for cigarettes at Rs 4,920 crore grew by 4.1 per cent Y-o-Y, as margin contracted 210bps Y-o-Y, due to high leaf prices.

 

FMCG operating profit margin was down 250 bps Y-o-Y at 8.5 per cent, as inflation was seen in edible oil, wheat, maida, potato, cocoa and packaging inputs. The FMCG business grew only 4 per cent Y-o-Y due to urban slowdown, increased competitive intensity in noodles, snacks, biscuits, and popular soaps, and benign paper prices which led to more competition in notebooks.

 

The paper segment continues to underperform for the eighth consecutive quarter, impacted by high raw material prices and dumping from China.

 

Cigarettes face significant risk due to increased competitive intensity from Godfrey Phillips, which has been gaining market share for the last two quarters. ITC has addressed gaps in pricing and product portfolio leaving little room for further improvements. There is also a rise in smuggled cigarettes as Covid-related restrictions have eased along with penetration of smokeless devices. 

 

Cigarettes contribute 43 per cent of revenue, and 84 per cent of Ebit. Management expects cigarette margins to recover in coming quarters though commodity costs related to cigarette manufacturing are rising. CGST Act enables track and trace mechanism, which may control smuggling.

 

FMCG contributes 28 per cent of revenue and 5 per cent of Ebit. The segment grew 4 per cent Y-o-Y, with demand in rural areas, offset by urban stress. Agriculture contributes 18 per cent of revenue and 7 per cent of Ebit. Revenue grew 10 per cent Y-o-Y, boosted by strong growth in spices and coffee. Spices growth leveraged the Guntur facility, while coffee benefited from demand in key regions. High-margin leaf tobacco exports continued to grow.

 

Wheat business opportunities are constrained by export restrictions. ITC plans to initiate commercial sales in nicotine and nicotine derivatives in the US and EU, where trials are underway.

 

Paper contributes 11 per cent of revenue, and 3 per cent of Ebit. Margin contracted by 464bps YoY to 9.6 per cent, due to rising wood costs and ocean freight. Revenue grew 3 per cent Y-o-Y, driven by exports, while domestic demand was weak.

 

ITC has announced 100 per cent acquisitions of Ample Foods Private Limited (AFPL) and Meat and Spice Private Limited (MSPL). MSPL owns a 43 per cent stake in AFPL. Both the entities manufacture ready-to-cook snacks & meals, sauces & condiments, raw & deli meat, etc., under the brand names ‘Prasuma’ and ‘Meatigo’. 

 

The frozen, chilled, and ready-to-cook foods industry is valued at over Rs 10,000 crore and is poised for rapid growth. The consolidated turnover of this segment stood at Rs 1,310 crore in FY24. However, the M&A may occur in stages, with full acquisition in calendar year 2028 and initial payment of Rs 131 cr to acquire 62.5 per cent of AFPL.

 

Earnings estimates must factor in the demerger of the hotels business along with lower operating margins in FMCG and cigarettes.