Despite pictorial health warnings on cigarette packs, high excise and state levies and a skewed tax structure that works against organized players, ITC Ltd’s cigarette sales continue to be in top form.
In the September quarter, the cigarettes business contributed to 72% of overall sales and 80% of profit. Revenues in the segment grew 21% to Rs2,200 crore from a year earlier.
Volumes are estimated to have grown by about 5%, with the rest being accounted for by price hikes and a change in the product mix.
ITC has reined in costs in its other consumer businesses, mainly segments such as food, personal care and retail. Though sales growth was subdued, this segment’s loss fell by 27%. The hotels business continues to be under pressure, due to the slump in business and leisure traffic, with revenues declining 24% and profit by 37%.
The paperboard business did well, partly due to lower excise duties. Agribusiness was a key contributor, with a 19% increase in sales to Rs1,028 crore and a near doubling of segment profit. This is an export trading business —mainly tobacco and agri-commodities—and revenues and profits can vary significant from quarter to quarter.
ITC’s approach to the consumer business is such that it seeks rapid growth and as a result is forever expanding its portfolio. That means, while some product lines stabilize, newer ones emerge, which eats into overall profitability of the consumer segment. This segment, therefore, would drive sales growth but will continue to be a drag on profits.
The paper and paperboard business is expected to do better, as the domestic economy is on a rebound.
ITC’s net profit growth at 25.8% was much higher than estimates, resulting in its share price rising 5% on Friday. It quotes at a price to earnings multiple of about 26 times its fiscal 2010 earnings estimate, based on Reuters data. That seems to price in an expectation that earnings growth seen during this quarter will be sustained in the second half of the year.
If growth turns out to be lower, that could be a dampener for the stock.
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