Cigarette-to-soap maker ITC Ltd’s shares touched a new 52-week low of ₹257.65 on the National Stock Exchange on Monday. Not without reason. Its June quarter results, announced post market hours on Friday, are far from inspiring.
Volume growth of its mainstay cigarettes business, which accounted for as much as 86% of the company’s overall June quarter Ebit (earnings before interest and tax) is a key disappointing factor.
“ITC’s Q1FY20 missed slightly operationally as cigarette volumes grew 3% year-on-year (versus our 4% expectation), and cigarette Ebit grew 8% yoy (1% below estimate)," said Varun Lohchab, an analyst at Jefferies India Pvt. Ltd.
Kotak Institutional Equities’ analysts point out, “A modest volume growth despite two years of stable taxation could be due to share loss to illicit/smuggled volumes, higher competitive intensity in select sub segments and perhaps some change in consumer preferences."
Cigarette revenues increased by 6% helped by volume growth and price/product mix. On the other hand, ITC’s fast-moving consumer goods business (non-cigarettes) saw a like-for-like revenue growth of 8%, which is hardly extraordinary. However, it is in keeping with the broader trends of consumption slowdown being witnessed in the economy.
Revenue growth from other businesses—hotels, agri, and paperboards, paper and packaging— was in double digits. The paper business posted an Ebit growth of about 12%. However, Ebit growth in the other two segments lagged relatively. Agri business Ebit increased at a slower pace of 4%. Depreciation relating to new properties impacted hotels’ profitability, resulting in an Ebit decline of 21%. For better or worse, contribution from these segments to profits is relatively smaller at the moment and as such doesn’t move the needle dramatically for ITC.
Overall, the company’s net profit of ₹3,174 crore is marginally better than Bloomberg’s consensus estimate of ₹3,153.70 crore. Note that a whopping 54% growth in other income to ₹620 crore helped ITC’s June quarter net profit growth substantially.
The company’s shares eventually closed lower by 1.7% on Monday, a day when the Nifty 50 index declined 1.2%. The stock trades at about 23 times estimated FY20 earnings. Agreed, ITC’s valuations are not as demanding as that of some other consumer goods’ firms. But, the risk of an increase in cigarette taxes lingers.
“We believe that the slowdown of cigarette volumes and a possible tax hike may cause downsides to earnings. The recent stock underperformance limits downsides, but a tax increase in the near term would be negative, putting further pressure on its volumes/ Ebit," wrote analysts from Emkay Global Financial Services Ltd in a report on 4 August.