Home / Markets / Mark To Market /  ITC’s cigarette biz lit up in Dec qtr

ITC Ltd shares hogged the limelight last week, touching their all-time highs. Not without reason. Budget 2023’s proposal to raise the National Calamity Contingent Duty (NCCD) on specified cigarettes means the overall tax incidence on cigarettes is nominal. NCCD on cigarettes is proposed to be revised up by about 16%. NCCD comprises about 10-11% of overall cigarette taxes. Analysts estimate the overall hike on cigarettes to be around 2%. This increase is smaller than expected.

A stable tax environment is helpful for ITC’s cigarette business volume outlook. The segment is a big contributor to ITC’s profits and investors are, therefore, excited.

Graphic: Mint
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Graphic: Mint

Five of the previous six budgets witnessed negligible or no tax increase on cigarettes, wrote Nomura Financial Advisory and Securities (India)’s analysts Mihir P. Shah and Anshuman Singh in a report on 2 February. “ITC’s predictability premium is increasing with a pragmatic tax structure, which will not only act as fodder for cigarette volumes but also improve the overall business outlook, with its key hurdle now behind," they said.

Against this backdrop, on Friday, just before the company released its December quarter results (Q3FY23), ITC’s shares closed at an all-time high of 380.65 apiece on NSE. The good news is that ITC’s Q3 results are strong with cigarette volumes estimated to be better than foreseen. ICICI Securities’ estimates Q3 cigarette volumes to have grown by 15% year-on-year (y-o-y). According to ITC, “Stability in taxes on cigarettes, backed by deterrent actions by enforcement agencies, enable continued volume recovery from illicit trade." Cigarettes Ebit growth was 17%, aiding ITC’s overall profitability.

The fast-moving consumer goods (FMCG) business also performed well, clocking 18% y-o-y revenue growth. The FMCG segment’s Ebitda margin was up by 90 basis points y-o-y to 10% led by premiumization and cost efficiencies. Meanwhile, the hotels business too performed well, with revenues rising by 50%. ITC said revenue per available room is well ahead of pre-pandemic levels. But the agri business put up a weak show on the revenue front (down 37%).

The upshot is that ITC’s overall Ebitda margin rose by 618 basis points to 38.4%. This led to Ebitda growth of 22% to 6,223 crore in Q3 at the time when net revenues increased by 2%.

To be sure, ITC’s stock price returns suggest investors have taken note of the company’s improving prospects. After all, the stock has gained by nearly 15% in CY23 so far, after appreciating as much as 52% in CY22.

Pallavi Pengonda
Pallavi Pengonda is a financial journalist producing cutting edge commentary and analysis on companies, economy and market trends. Over her journalism career spanning more than 14 years, she has covered topics across sectors such as oil & gas, consumer, aviation and new age tech companies. She heads the Mark to Market team and joined Mint in June 2010. She lives in Bengaluru. She is an art enthusiast and likes to paint in her leisure time.
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