Old habits die hard. That was a comforting factor for ITC Ltd’s investors. But some were worried that the lockdown might have pushed some smokers to quit the habit. Were this to play out, ITC’s volumes would be dimmer.
But the early indications are encouraging. Analysts from Credit Suisse Securities (India) Pvt. Ltd said in a report on 29 June: “Cigarette sales were near zero in the month of April, and resumed in the mid of May. The initial trends in May and June are reassuring, as the level of decline does not indicate any large-scale quitting of smoking."
The broking firm added: “However, it is too early to call out the trend, as May and June had an element of pipeline re-stocking in trade."
ITC derives the lion’s share of its profits from cigarettes and the division’s performance is crucial to its fortunes. With the June quarter expected to be sorely scarred by the lockdown, cigarette volumes in FY21 are expected to be subdued.
For the March quarter, analysts estimate ITC’s cigarette volumes to have declined by around 10%, which is not too surprising because of the covid-19-led disruptions in end-March. Last quarter, cigarette revenues declined by 6.5% year-on-year. The FMCG-others business performance surprised analysts positively with revenues declining only 2.8%, which does not look too bad.
Here, the packaged foods division has done well, helped by increasing in-home consumption. JM Financial Institutional Securities Ltd said: “FMCG sales grew 5% on comparable basis (excluding Stationery and Lifestyle Retailing)—this growth rate is one of the best seen amongst Staples this quarter (Nestle India Ltd is one notable exception)." Revenues from hotels, agri-business and paper declined by 8.6%, 10% and 5%, respectively.
Meanwhile, ITC’s dividend of ₹10.15 per share for financial year 2020 translates into a dividend yield of about 5%. The dividend payout is more than 80% and in line with the company’s revised dividend policy.
Post-results, the ITC stock increased by 1% on Monday, a day when the Nifty 50 index declined by 0.7%. In 2020, the ITC scrip has recovered from its March lows, but the stock is still 19% away from its pre-covid highs. Valuations are not demanding, what with the stock trading at about 15 times estimated FY22 earnings, according to Bloomberg data.
Investors will track cigarette volumes closely in the coming days. While FMCG accounts for a small portion of ITC’s earnings currently, the category could surprise on the brighter side in the medium term. “FMCG has likely got into a trajectory where profitability improvement is now nearly on auto-pilot mode," added JM Financial.