ITC Ltd’s June quarter results give an idea of what might have been had the government not sharply hiked the cess on cigarettes. Cigarette sales rose by 6.6% from a year ago, while this segment’s profit rose by 9%. This was in a period when destocking by dealers led to most consumer companies reporting lower than expected sales growth. In the June quarter, 93% of the increase in its segment profit over a year ago was contributed by the cigarettes business.

Even under the goods and services tax (GST), under the initial cess rates for cigarettes, cigarettes were to face a lower tax burden, which could lead to lower cigarette prices (since companies are required to pass on GST savings) and drive sales. The June quarter sales reflect how a more moderate tax hike regime in the past few years has benefited ITC.

ITC made clear it is upset with the cess hike, with the first highlight in its press statement talking about higher taxes on cigarettes, and how the hike in cess was out of sync with the principle of neutral tax burden compared to pre-GST levels. It said the increase in excise duty in February and now the cess will see tax on cigarettes increase by 20%.

It has already hiked cigarette prices to compensate the higher cess but this could likely hit sales growth in the remaining quarters.

ITC’s fast-moving consumer goods (FMCG) business, however, did quite well with sales increasing by 9% over a year ago and also reported a slender profit. But this business’s objective is to scale up existing categories and diversify into new ones; profits at a division level still don’t appear to be a priority.

Considering the destocking that other companies faced, ITC appears to have done a good job of managing its supplies. The other businesses too did alright, but agri-business reported a slight decline. It attributed the decline to a lower crop output and limited trading opportunities.

Overall, ITC’s gross revenue rose by 4.2% from a year ago but higher excise led to its net sales declining by 0.8%. Its Ebitda rose by 6.2% and its Ebitda margin widened by 2.6 percentage points and by 2.8 percentage points sequentially. That is an excellent performance, and justifies the increase in its valuations seen since early-May. Its net profit increased by 7.4%, which on its own may seem low but is not when compared with nearly flat sales growth.

ITC will recover the higher GST burden from consumers and margins may still hold up. But the spike in prices may see consumption slip, which could crimp its sales and profit growth. Still, if rates remain stable then the situation should stabilize a year down the line, but that’s a big “if". The overhang of taxation uncertainty has returned to cast a cloud over ITC’s valuations. The stock is down by 15% from its high levels in early-July. The next few quarterly results will give a better picture of how its cigarettes business is doing post-GST, which could give investors better visibility on what to expect.