Home >Markets >Mark To Market >ITC’s pickup in FMCG business not enough, as cigarette revenues dip

ITC Ltd’s fast-moving consumer goods (FMCG) business is picking up well, but may not be good enough to lift the company just yet. FMCG delivered a decent sales growth of 15.4% year-on-year (y-o-y), one of the highest among peers, but cigarette revenues disappointed, falling about 3.9% y-o-y in Q2. The ITC stock, which is hit by global environmental, social and governance norms in its cigarette business, is down 29% from its pre-covid highs.

ITC’s revenue growth of about 25% in the essential category of atta and personal wash among others is quite good even as discretionary sales declined 2%. This shows ITC’s FMCG business is able to push itself in the competitive market. Its FMCG Ebitda margin stood at about 8.7% in the first half of FY21. This also brings the firm closer to its target of achieving 10% Ebitda margin by FY23. Ebitda is earnings before interest, taxes, depreciation and amortization. One basis point is one-hundredth of a percentage point.

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Cigarette’s slow recovery after the re-opening post covid has been a disappointment, with volumes down about 12%. The Street was expecting better volumes. The fall is due to localized lockdowns that continue in some geographies with both mix and sales realizations hit. Cigarette’s volume decline could be lower than peers in the coming months, but it could still take a while before it reaches pre-covid levels.

That’s likely to keep cigarette margins subdued in Q3. “Strong FMCG provides some upsides, but overall estimates are marginally cut due to more conservative assumptions on cigarettes. With continued month-on-month recovery, cigarette Ebit should see steady growth from Q4," said Emkay Global Financial Services in a client note.

ITC’s hotels business has been hit due to covid-19, with revenues down 81% y-o-y. While costs reductions and improving occupancy lately is good, a turnaround here is still a few quarters away. Paper board revenues declined by 6.8% y-o-y.

However, ITC’s agri-business is showing resilience. This division’s sales were up 12.8% as value-added business growth has been good. ITC launched several variants of its frozen snacks and vegetables. After the farm bill, this division holds some promise. “The success of frozen snacks and vegetables and benefits of supply chain post farm bill will significantly accelerate the growth rate of this segment over coming few years," said analysts at Prabhudas Lilladher.

Overall, revenues fell during the quarter, squeezing Ebitda margin by about 280 basis points over the year-ago period. Nevertheless, dividend yields remain good at 4-5%. Even so, short-term hiccups are likely to continue. “Global ESG concerns persist on cigarettes, while there is an overhang of GST on cigarettes, and earnings trajectory would continue to be weak," said Motilal Oswal Financial Services analysts in a client note.

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