India: ITC Sales Growth Slows to 4-Year Low on Higher Cigarette Prices

Source from:  Bloomberg  10/29/2013

ITC Ltd. (ITC), India's biggest tobacco company, posted the slowest pace of sales growth in four years after an increase in the price of its cigarettes damped demand at its biggest business. Shares fell.

Net sales rose 8.8 percent to 77.8 billion rupees ($1.3 billion) in the three months ended September, the Kolkata-based company said yesterday. That was the smallest jump since the quarter ended June 2009 and missed the 81.1 billion-rupee median of 31 analysts' estimates compiled by Bloomberg.

ITC raised prices of some brands of cigarettes by as much as 10 percent in September, helping lift net income 21 percent in the second quarter. The company's strategy of boosting its profits by charging more for its best-selling products is not sustainable in the long term as the slowing growth suggests the company is losing smokers at a rate "that's a cause for concern," according to Sanjay Manyal, an analyst at ICICI Direct.

"Slower sales growth is very much visible in almost all the segments," Mumbai-based Manyal said in a phone interview. Volume of cigarette sales likely fell by at least 7 percent in the last quarter, he said. "This could well be the sharpest drop in cigarette volumes in about 5 years."

ITC fell 0.8 percent to 340.05 rupees in Mumbai yesterday. The stock has climbed 19 percent this year, while the benchmark S&P BSE Sensex has gained 6.5 percent.

Profit Jumps

Net income rose to 22.3 billion rupees in the quarter from 18.4 billion rupees a year earlier, the soaps-to-hotels conglomerate said. That compared with the 21.2 billion-rupee median of 31 analysts' estimates compiled by Bloomberg.

Cigarette gross sales grew 11 percent from a year earlier. In the past one year, ITC raised prices of its cigarettes by an average 18 percent to compensate for higher excise taxes levied by the government, Manyal said.

As a result of these repeated price increases, some consumers smoking its Gold Flake and Classic Milds cigarettes are either switching to cheaper products made by rivals, or substitutes like hand-rolled Indian cigarettes called bidis or chewing tobacco, Naveen Vyas, Kolkata-based analyst at Microsec Capital Ltd. said in an interview.

Profit before tax at its hotels business fell 43 percent to 87.2 million rupees. "The hospitality sector continued to be adversely impacted by the weak economic conditions prevailing in major international source markets and India on the one hand, and significant additions to room supplies in key Indian cities," ITC said.

Soaps and Shampoos

Sales at its agriculture business unit, which exports soyameal, shrimps and prawns also fell 12 percent to 17.7 billion rupees.

"The agri business has also disappointed by posting negative sales growth," Vyas said in a telephone interview. "There is a trend of the company's topline growth slowing down and that's a matter of concern."

The consumer goods business, which includes Bingo packaged snacks and Fiama di Wills shampoo, narrowed its loss to 127 million rupees, from 303 million rupees a year earlier. ITC introduced new variants of soaps and bath gels during the quarter, the company said.

Earnings before interest and tax "margin for cigarette business came at a hefty 65 percent," Rakesh Tarway, an analyst at Motilal Oswal Securities Ltd., said in e-mailed comments. "Any volume growth in cigarettes during the coming quarters will bring in huge EBIT growth for the cigarettes business." Enditem