Higher profitability in ITC Ltd’s cigarettes business is a bright spot offset by dull sales growth in the June quarter. Excluding its agri-trading business, ITC Ltd’s net sales in the June quarter rose by 6.1% from a year ago, just a shade below the March quarter’s 6.4% figure.
Note that the current June quarter numbers are based on the new IND-AS accounting standards, so comparisons may not be wholly accurate.
The company’s cigarettes business contributes 86% of total segment profit, making it a critical ingredient in profit growth. It did well in the June quarter, although this quarter did see some disruption in operations due to the introduction of bigger graphic warnings. Cigarette sales rose by 6.4% from a year ago, but are not comparable with the March quarter’s growth numbers, as ITC has shifted segment sales reporting to gross sales. Earlier, it was reporting net sales. On a net sales basis, the March quarter had reported a 10.2% increase in sales.
While sales growth appeared slower, the cigarette segment’s profit increased by 8%, and its margin improved both sequentially and over a year ago. The increase in excise duties was less harsh in the FY17 budget, which may partly explain this improvement. More of the price increases thus went into its profit than to pay higher excise duties.
The company’s consumer products business saw gross sales increase by 9.5%, which appears decent given slow market growth. It reported a small loss but this is understandable given its objective of driving scale in this business. The company said that its branded packaged foods and personal care categories did well during the quarter. Although lower commodity costs would have resulted in better margins in individual categories, investing in its newer categories could have taken those savings away. The company’s hotels and paperboard business did not contribute much during this quarter.
Overall, ITC’s operating profit margin declined by 2 percentage points sequentially and by 43 basis points over a year ago. A basis point is one hundredth of a percentage point. The main reason for this is the 20.2% increase in its agri-trading business revenue, which is a low-margin business, and this segment’s profit rose by only 1.5%. But then, it also kept the reported net sales figure at a more respectable level of 9.7%.
ITC’s net profit rose by 10.1%, which is better than the 5.7% growth in profit reported in the March quarter. That number is in line with what analysts have been forecasting and should not disappoint the market.
In the near term, investors will be watching whether its cigarette sales pick up, as margin has improved, and that combination can deliver a kicker to earnings growth. In the medium term, the effect of bigger graphic warnings on cigarette consumption will matter more.