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Business News/ Market / Mark-to-market/  ITC puffs away the blues
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ITC puffs away the blues

Though ITC's profit growth may not be record-breaking, the meat in June quarter results is the sales growth of cigarettes

The stock has risen by 13.3% since end-June and may already have discounted the good news that this quarter’s results bring. Photo: Indranil Bhoumik/MintPremium
The stock has risen by 13.3% since end-June and may already have discounted the good news that this quarter’s results bring. Photo: Indranil Bhoumik/Mint

Has ITC Ltd turned the corner in its cigarette business? Investors may ponder over this rather exciting prospect, which comes in the backdrop of yet another hike in duties. Successive steep hikes have seen cigarette prices zoom, affecting volume growth.

But the June quarter shows ITC’s cigarette sales rising by 18.8% to 4,201.1 crore, and this segment’s profit, too, rose by a splendid 21.4%. This is much better than the 7% growth in the year ago period—which also contributed to a low base effect—and 12.6% in the March quarter. Could this mean that cigarette sales growth is returning to more normal growth rates?

If so, that’s a positive development for ITC. One caveat is in order: the June quarter may have seen dealers stock up in anticipation of a hike in duties. That could inflate primary sales—from company to the dealer—and may even out in the current quarter.

The next quarter’s results should confirm if sales growth of cigarettes has indeed stepped up to a higher level. It has another headwind to contend with—the hike in duties on cigarettes in July’s budget. Another round of price hikes may set in motion yet another cycle of decelerating demand. For now, cigarettes maintained their supremacy on the profit front, accounting for 86% of segment profits.

ITC’s overall sales growth looks astonishingly good, rising by 24.9% to 9,164.4 crore. But this is partly attributable to its agricultural export trading business, which grew by 50.6%. But this business has wafer thin margins, and profit rose by just 1.6%.

The company’s consumer business did see slower growth of 10.9%, and even reported a loss of 15.6 crore, a reversal from the March quarter’s 43 crore profit. But this should not surprise investors, as ITC’s intention will be to grow the breadth and scale of this business. Among its other businesses, the hotels business had a bad quarter while the paperboard business did well.

Overall, ITC’s net profit rose by 15.6% to 2,186.4 crore. A higher effective tax rate pulled down profit growth, which the company attributed to the budget’s income tax provisions. Though the company did not give details, it may be alluding to the tax changes for debt mutual fund investors. Its effective tax rate for the June quarter has risen by 1.5 percentage points over the year ago period.

Though ITC’s net profit growth may not be record-breaking, the meat in this quarter’s results is the healthy sales growth of cigarettes. Investors will watch for how current hike in duties affects growth in forthcoming quarters. The ITC stock has risen by 13.3% since end-June and may already have discounted the good news that this quarter’s results bring.

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Published: 29 Jul 2014, 05:16 PM IST
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