Home >Markets >Mark To Market >Cigarette sales soar but ITC stock fails to light up

ITC Ltd’s shares rose 2.6% on Friday on the National Stock Exchange, ahead of its June quarter (Q1) FY22 results. But just like the stock, the firm’s Q1 results flattered to deceive.

At first look, it seems ITC’s mainstay cigarettes business had a decent recovery last quarter, with year-on-year (y-o-y) revenue growth at 33%. But this needs to be seen together with the sharp decline in volume and revenue in the year-ago period.

“Cigarette sales volume rose around 30% year-on-year on a low base, but was still around 15% below that in Q1FY20 as cigarette was one of the worst-affected FMCG categories during the pandemic’s second wave," wrote Kunal Vora of BNP Paribas Securities India Pvt. Ltd in a report on 25 July.

Earnings before interest and taxes (Ebit) from cigarettes increased 37% y-o-y, contributing 84% of the firm’s total Ebit. But again, cigarette Ebit was 16% lower than Q1FY20.

High and low
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High and low

ITC saw severe disruptions in the month of May. There has been week-on-week improvement since mid-June with most markets returning to normalcy and witnessing faster recovery compared with the first wave, according to the company. Even so, some markets such as Kerala, Odisha and the North-east remain partially impacted.

ITC’s fast-moving consumer goods (FMCG) division saw revenue growth of 10% y-o-y. The company said its hygiene portfolio bounced back after normalizing in H2FY21 at elevated levels. Further, discretionary/ ‘out‐of‐home’ consumption products witnessed strong growth on a favourable base. While the FMCG Ebitda increased by 16% y-o-y, higher input costs pose a risk, going ahead. Ebitda is earnings before interest, tax, depreciation and amortization.

Further, the paperboards, paper & packaging business outshined last quarter with revenues and Ebit increasing by 54% and 145%, respectively, on a y-o-y basis. “Paper-board operating margin touched an all-time high of 24.8%," pointed out Vora.

Profitability was helped by richer product mix and higher realizations due to surge in global pulp prices. On the other hand, the recovery witnessed in the hotels business in the second half of FY21 was expectedly stalled owing to the second wave of the pandemic.

Overall, ITC’s Ebitda in the June quarter rose as much as 50% y-o-y to 3,990 crore, although compared to Q1FY20, earnings were lower by 12.5%. Meanwhile, ITC’s shares gave up some of its gains, declining by 0.6% post results to 211 apiece. The stock is 13% lower than its pre-covid highs seen in January 2020 but is finding few takers.

As Motilal Oswal Financial Services Ltd report points out, “Despite valuing ITC at a 10% premium to the global peer average and rolling forward to Sep’23 multiples (targeting 15 times Sep’23 estimated earnings per share), the upside on our target price of 225 per share is limited."

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