ITC: No Levy on Cigarettes Next Fiscal is What the Doctor Ordered

Source from:  Livemint 01/20/2014

ITC Ltd's flagship cigarettes business is facing a decline in volume sales as rising cigarette prices appear to be hurting demand, especially coming during a period of slow economic growth. On the flip side, price hikes and a favourable product mix appear to be having a positive impact on the margins.This quarter saw the company's fast moving consumer goods (FMCG) business report a profit after two quarters of losses.

In the December quarter, ITC's net sales rose by 13.1% to Rs.8,623.1 crore, better than the 8.8% sales growth in the September quarter. Cigarette sales rose by 12.5% and all of it was due to the price hikes and product mix, as cigarette volumes declined by 2%, according to Edelweiss Research.

ITC's FMCG business continues to see healthy sales growth of 16.4%, almost the same level as in the preceding quarter. The slowdown that FMCG firms have been talking about does not appear to have hurt ITC's business. That should be welcome news for its shareholders. Among its other businesses, the hotels business saw low sales growth; the paper and paperboard business did better, with a smart 18% sales growth.

Cigarettes continue to drive ITC's profitability, with this segment's margin rising by 3.4 percentage points over last year's quarter. The FMCG business reported a slender profit of Rs.10.4 crore, which the company attributed to growing scale and better profitability.

Earlier, too, ITC had reported a profit in this segment, to only report losses in subsequent quarters. It will be prudent to wait for a few quarters of sustained profitability before pronouncing a turnaround for the FMCG business.

Overall, the company's operating profit margin rose by 57 basis points over the corresponding quarter last year to 37.6%. Net profit rose by 16.3% to Rs.2,385.3 crore, a figure that should keep investors happy for the moment, although the company has seen better days. A broad economic recovery and better consumer confidence is what ITC needs to ensure a revival in demand for its cigarettes, FMCG, hotels and paper businesses.

It also needs a cessation of tax hikes on cigarettes in the forthcoming fiscal year. Though the Union Budget will be delayed because of the national election, more than a postponement ITC will gain if it is spared a tax hike. Another trigger could be a rising trend of profitability in its FMCG business, for that will mark a shift of strategy from focusing mainly on building scale to one that also focuses on returns. Enditem