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Business News/ Market / Mark-to-market/  Q4 results: Slowdown gets the better of ITC
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Q4 results: Slowdown gets the better of ITC

The cumulative impact of rising duties has affected cigarette sales volumes, and FY16 is expected to see this continue

Cigarette sales rose by 3.2% which is better than the preceding period. And the cigarette segment margin was also higher than a year ago, though it fell sequentially. Photo: AFPPremium
Cigarette sales rose by 3.2% which is better than the preceding period. And the cigarette segment margin was also higher than a year ago, though it fell sequentially. Photo: AFP

ITC Ltd’s sales growth for the March quarter got skewered, rising by a mere 0.5% because of slow growth in sales of cigarettes and consumer products, but the main culprit was its agricultural commodity exports business. Excluding these exports, growth was 4.4%, better than the December quarter’s 2.8% figure.

Is 4.4% sales growth good enough for ITC? Note that this sales figure includes inter-segment transfers (such as sales from its paper division to the cigarettes business), but is useful as an indicator of segment performance. To answer the question, cigarette sales rose by 3.2% which is better than the preceding period. And the cigarette segment margin was also higher than a year ago, though it fell sequentially.

ITC’s consumer products business grew by 10.7%, which is decent considering that volume growth would have played a major role in it. This segment’s profit was level from a year ago, which is surprising since material costs have been declining, but may be explained by expenses incurred on launches of products such as juices. The hotels and paper board divisions both turned in disappointing performances.

ITC’s financials show material costs declined by more than sales did, compared with a year ago. But employee costs and other expenses (including advertising and promotions) rose by much more. That restricted the growth in operating profit to 1.2%, and the operating margin held steady from a year ago but declined by 3.8 percentage points sequentially.

As a result, ITC’s net profit rose by just 3.6%, which is likely to disappoint investors. But their reaction will be visible only on Monday, as its results came after the markets closed on Friday.

While these results could cast a shadow on valuations in the near term, ITC faces a tough task in keeping investors interested in its story further down the road too. Its packaged consumer goods business is what can drive sales growth, while its cigarettes business may continue to feel the pressure of sharp price increases. The exports business may continue to be a drag as globally commodity prices are under pressure and the rupee’s relative strength has dented the competitive edge of exporters. Barring a sustained recovery in economic growth, ITC’s performance may remain under pressure.

The writer does not have positions in the company discussed here.

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Published: 23 May 2015, 12:26 AM IST
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