ITC prospects hinge on being spared another excise duty hike in FY17 Budget

Years of successive hikes have made it difficult for cigarette sales to grow


The company’s packaged consumer goods business suffered because of weak rural demand, deflationary trends and the effect of the Chennai floods. Photo: Pradeep Gaur/Mint
The company’s packaged consumer goods business suffered because of weak rural demand, deflationary trends and the effect of the Chennai floods. Photo: Pradeep Gaur/Mint

In about a month, ITC Ltd’s shareholders will know if the taxes on cigarettes will be raised yet again. They will be hoping not. Years of successive hikes have made it difficult for cigarette sales to grow. In the December quarter, after two quarters of very slow growth, cigarette sales have risen by a measly 5.7% and profitability is under pressure. The cigarette segment profit fell 64 basis points (bps) sequentially and by 1.6 percentage points over a year ago. This segment contributed 85% of the December quarter’s segment profit. One basis point is one-hundredth of a percentage point.

The company’s packaged consumer goods business suffered because of weak rural demand, deflationary trends and the effect of the Chennai floods. Still, its sales grew by 7.1%, which is better when compared with Hindustan Unilever Ltd’s sales growth of 3.2%. This segment posted a slender profit during the quarter but that cannot be expected to sustain. ITC continues to be in the investment stage in this business. Its agri-trading business sales, the company said, got affected by weak export demand, causing both sales and profits to decline.

Overall, ITC’s sales rose 3.4%, with the agri-business pulling down sales growth, and its operating profit margin widened by 55 bps from a year ago but fell by 70 bps sequentially. A decline in cigarette business margin was the chief culprit.

ITC’s results reflect the stress on the cigarettes business, and that’s why the budget becomes a crucial point for the company. Yet another hike in duties will lead to higher cigarette prices and a sharp decline in volume. But if it is spared a hike, the pressure on volumes will ease up a bit.

Since early December, shares of ITC have been under pressure and declined 11.5%. Still, it trades at about 25 times its annualized FY16 earnings per share. Its earnings per share in the December quarter rose just 0.7%. That’s the kind of growth you normally don’t associate with a stock that trades at these valuations. The next big trigger for the stock will be in the Union budget.

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