BackITC: can it kick the slow growth of FY16?
Despite ITC attempts to diversify revenue sources, notably through its entry into the packaged consumer goods business, cigarettes matter even when the going has not been good
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Getting one’s hopes up on ITC Ltd after its March quarter results may be unwise. For one, this quarter’s numbers usually witness some chaos following the budget proposals. In the 2016-17 budget, the excise duty hike was moderate. There was a low base effect helping as well, as successive years of harsh excise duty hikes have affected sales of cigarettes. This low base effect will stay for the first three quarters of FY17.
There is another reason to be cautious about extrapolating this quarter’s performance. The controversy over introducing cigarette packs with a bigger graphic health warning, covering 85% of the surface area, erupted in the June quarter. The decision was subjected to a legal challenge but cigarette companies failed to get a stay on it. ITC has begun making packs with the new warnings. But production was disrupted for some time and that could affect June quarter sales growth to an extent.
The question is if bigger graphic warnings on cigarette packs could have a longer-term adverse impact on sales growth. The fear is it might, which then explains why the industry shut down factories in protest. The theory that most cigarette sales are in the loose form and hence pack images don’t matter will now be put to test.
Despite ITC’s attempts to diversify its revenue sources, notably through its entry into the packaged consumer goods business, cigarettes matter even when the going has not been good. Cigarettes still contributed to 86% of segment profit in the March quarter. Cigarette sales grew by 10.2% and profit was up by 11.5% from a year ago. For the full year, the increase was only 4.1% and 5%, respectively.
A lot rides on ITC’s ability to sustain this upturn in growth in the March quarter. Nothing much is happening elsewhere in its portfolio. The packaged consumer goods business’s sales growth is slow, as deflation and competition are affecting growth. Its hotels, agri-export trading and industrial businesses too had nothing much to add on the profit front. If the monsoon is good as expected, then the consumer and agri-export business may look up.
Overall, ITC’s revenue grew by 9.4% in the March quarter, over a year ago, and its operating profit rose by 13.7%, which meant profitability improved. Sequentially, however, its operating profit margin narrowed. That could be a sign for concern if it continues to trend down, as the decline is chiefly because of lower margins in its cigarettes business. A higher tax incidence led to its net profit growing by only 5.7%.
Its stock has not done much in the past year, up by only 0.8% from its year-ago level. But it still fares better than the broad market, down by 6%, and its rival in the consumer goods industry, Hindustan Unilever Ltd, whose shares are down 9%. Even now, investors appear to believe ITC’s cigarettes business has the ability to scale the hurdles strewn in its path. The next few quarters’ results should give some inkling of whether they are right. Meanwhile, on 31 May, the World Health Organization is celebrating No Tobacco Day by asking all countries to get ready for plain packaging for tobacco products.
Plain packaging refers to restriction or prohibition of the use of logos, colours and brand images on packaging other than brand names and product names displayed in a standard colour and font style.
That’s the next obstacle to watch out for.
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