A tax hike in the Budget is the main worry for cigarette maker ITC Ltd, with its main businesses expected to do well in an improving economy.
Analysts will be watching the Budget to see if duties are raised on cigarettes, a key concern for ITC. In the past, the company has responded to tax hikes by passing them on to the customer, and price hikes have rarely hit demand.
ITC’s December quarter numbers reveal a slight slowdown in cigarette sales growth, compared with the first half of the fiscal. Cigarette sales grew 17% during the quarter to Rs2,332 crore compared with the year-ago period, and a 20% sales growth during the first nine months of the fiscal.
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Consumer product companies are seeing a slowdown in the market in value terms. But one quarter does not mean it is a trend, especially since cigarette sales have risen on a sequential basis.
ITC’s non-cigarette consumer business has done quite well, with sales rising by 23.5%. This segment’s loss was lower at Rs85 crore, virtually unchanged from the preceding quarter, and 32% lower from a year ago. Rising wheat prices and volume growth led to Aashirwad brand flour sales rising by 34%.
ITC’s objective in this business is market share and to be present in a wide range of segments. An improvement in the business environment may prompt it to ramp up investments behind its relatively newer brands, which may lead to higher losses.
The company’s paper and paperboard business is benefiting from the upturn both in demand and prices, and sales rose by 29% in the quarter and profits by 81%. Its focus on value-added products is paying off with sales growing 50%.
The agricultural export business has been a particularly strong contributor in this quarter, with sales rising by 46% to Rs905 crore and segment profit nearly doubling to Rs104 crore. Higher tobacco sales were a key reason for the growth. This is an opportunistic business whose performance can widely fluctuate during the year, depending on commodity prices and export market conditions.
Overall sales grew by 18% while net profit rose by 26%. Operating profit margin improved to 37.3% from 35.7% in the year-ago quarter. Paper and agri-export businesses were the key contributors. The hotels business was an under-performer, but better economic growth and improving tourist arrivals could benefit this business segment.
ITC’s share price has fallen by 2.5% in a month and discounts its fiscal 2011 earnings per share by about 20 times. If the Budget leaves cigarette taxes untouched, it will be business as usual for the firm.
Graphics by Yogesh Kumar/Mint
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