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Business News/ Markets / Mark To Market/  ITC earnings light up on tax cuts, but growth triggers still missing
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ITC earnings light up on tax cuts, but growth triggers still missing

ITC's stock is up 2.2% in early trade on the BSE
  • In its core business of cigarettes, revenues have improved by about 6.8% year-on-year to ₹5,842 crore
  • Net profit received a boost after the firm switched to the new tax regime (Mint file)Premium
    Net profit received a boost after the firm switched to the new tax regime (Mint file)

    ITC’s consolidated earnings were largely weaker than expected, but gains from the corporate tax rate cuts seem to be the saving grace. Reflecting this, the stock rose over 2% in trade on Friday.

    Its core cigarettes business saw a decent growth with revenues improving 6.8% year-on-year to 5842 crore. While this also implies that cigarette volumes have increased about 3% on key operating metrics, the growth may have disappointed investors. Besides, competition is nipping at the heels of ITC and may limit its pricing power.

    “The cigarette division’s sales growth was similar to Q1 at 6%, indicating 3% volume growth and continuing loss in market share. We note that after the steep price hikes in the deluxe filter segment (64mm filter sticks) and several brand exits from Rs5 per stick price point, ITC’s cigarette volume growth has been impacted," said Emkay Financial Services in a note to clients.

    In its other important FMCG businesses, which account for about 26% of revenues, sales grew about 4% year on year. While this is comparable to other FMCG companies, operating margins are still quite low, implying that ITC has not been able to make the desired improvement in costs.

    Its hotels business has seen a healthy revenue growth of 17% year-on-year. ITC’s new properties are beginning to pay off. However, operating performance here has been weak.

    Overall, Ebitda margin has improved by about 110 basis points to 38.4% in Q2 largely due to better product mix and operating leverage in its cigarettes business. Ebitda is earnings before income, tax, depreciation and amortization.

    Besides, its net profit was boosted as the firm switched to the new corporate tax rate structure, which has led to substantial savings in cash. Net profit increased by about 36% year-on-year. However, profit before tax grew about 10% year-on-year.

    Investors looking for a bigger puff in the earnings story may not find many positives. However, as the stock undershot the broader market over the last one year, valuations may seem fair. Going ahead, much of the growth will have to come from its profitable cigarettes business, otherwise the stock may not have much room for improving its price-earnings multiple.

    “The stock has underperformed significantly and at current valuations of 19x FY21EEPS (earnings estimate per share), downsides appear limited. However, growth triggers are still missing and a possible increase in cigarette taxes remains a near-term risk to earnings," said Emkay in the note.

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    Published: 25 Oct 2019, 10:39 AM IST
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