(Naveen Kumar Saini/Mint)
(Naveen Kumar Saini/Mint)

ITC’s March quarter results fail to give its investors a high, yet again

  • ITC shares fell even though its profits beat estimates, with all segments posting strong growth
  • The cigarette biz reported 10% growth in earnings before interest and tax, the highest in 12 quarters

For ITC Ltd’s investors, reaching a high after a quarterly results announcement remains elusive. Shares fell 3% inexplicably after the company announced results for the March quarter.

While the results were better than expected, investors seem worried that higher costs and taxes would crimp profit growth in the future. This shouldn’t be surprising—you never know what danger lurks around the corner with cigarette companies. “A tax hike post the elections remains a key monitorable; we are building in 10% tax hike in FY20," analysts at Jefferies India Pvt. Ltd said in a note to clients.

Of course, none of this impacted ITC’s March quarter results. The company’s net profit increased by 19% over the same period last year to 3,482 crore, higher than the Street’s consensus estimate of 3,241 crore in profit.

What’s more, earnings before interest and taxes (Ebit) grew 10% in the mainstay cigarette business, the highest in 12 quarters. Volume growth is estimated at around 7.5% by analysts with average price realizations rising by about 3%. The company took two price hikes in recent months, resulting in an effective 3% price increase, analysts at Jefferies India said in a post-results note.

It’s important to note here that the cigarette division’s profit growth of 10% was slightly below revenue growth of 11.1%. As such, margins are under pressure, which analysts point out is due to an adverse product mix as well as cost pressures.

Despite forays into other businesses, the cigarette business remains crucial for ITC and accounted for as much as 84% of its total Ebit for the March quarter.

ITC’s fast-moving consumer goods (FMCG) division delivered a strong performance with its operating profit rising 31% year-on-year after adjusting for one-offs. But like other FMCG firms, ITC sounded a note of caution on growth, especially in rural India.

ITC’s other segments: paper, agri- business and hotels all delivered strong growth as well, both in revenues and profits.

Overall, the company’s operating profit increased by a little more than 10% in the March quarter on a year-on-year basis. Strong other income growth and a lower effective tax rate resulted in relatively faster net profit growth.

ITC shares have lagged peers in the past one year owing to worries about costs and regulatory risks. As a result, the shares trade at 25 times estimated earnings for FY20, much lower than other consumer goods stocks.

Some analysts believe the worry about higher taxes may be overdone. “We like ITC’s focus to revive volumes in the base cigarette business with calibrated price hikes amidst a relatively softer taxation regime (no tax hikes since July 2017). Hence any tax hike in the future can be easily absorbed by consumers without impacting volumes," said analysts at Jefferies India.