ITC Q1 Preview: Will cigarette tax shock drag profit lower despite FMCG strength?

ITC is expected to report a weak June quarter, with cigarette earnings likely to take a sharp hit from the transition to a new tax structure, even as its FMCG business is seen holding up well. Brokerages expect the company’s headline numbers to be dragged down by lower cigarette volumes, weaker cigarette profitability and pressure in the agri business. The key debate is how much of the tax impact has already been absorbed in Q1 and whether the cigarette business starts recovering from the September quarter.

Kotak expects ITC’s net sales, EBITDA and profit after tax to decline 17.5%, 27.5% and 24% year-on-year (YoY), respectively. Nuvama expects consolidated revenue to fall 10% YoY . YES Securities expects revenue to decline 14.3%, while Motilal Oswal expects cigarette revenue to fall 18%.

The cigarette business will be the main pressure point.

Cigarette volumes seen falling

ITC’s cigarette segment was hit by the first full-quarter impact of the new taxation structure. The tax change forced the company to take sharp price hikes, which affected volumes and product mix.


Kotak expects cigarette volumes to decline 9% YoY and cigarette net sales to fall more than 20%. It expects cigarette EBIT to drop 32% YoY because price hikes were not enough to fully protect profitability.

According to Kotak, ITC took a blended price hike of around 25% in Q1, while a 35-40% price increase would have been required to fully offset the tax increase, volume loss and downtrading.

Nuvama expects cigarette volumes to fall around 8% YoY, cigarette net revenue to decline 18% and cigarette EBIT to fall 25%. It said April and May were especially weak as trade channels continued to clear lower-cost inventory. Trends improved gradually through the quarter, but Q1 remained disrupted for both volumes and product mix.

Motilal Oswal expects cigarette volumes to decline 11% and cigarette revenue to fall 18% YoY . It also expects cigarette EBIT to decline 25% because price hikes were not enough to offset the tax impact.

YES Securities expects cigarette volumes to decline 7% YoY.

The cigarette segment remains ITC’s biggest profit engine, so even a contained volume decline can have a large impact on overall earnings if margins fall sharply.

Price hikes, mix to decide recovery

Brokerages will watch ITC’s commentary on further price hikes and the pace of demand recovery.

Nuvama said price hikes are underway across select categories, with more actions still pending. It also said Kings saw the sharpest decline, RSFT remained weak, while DSFT performed relatively better.

Kotak expects the Q2 cigarette EBIT trajectory to improve, possibly showing a smaller decline of around 20%, helped by recent calibrated price hikes in RSFT and higher thrust on EBIT-neutral alternatives such as Longs, premium DSFT variants and new products.

The concern is downtrading. If consumers shift to cheaper packs or lower-margin products after price hikes, ITC may protect volumes but still lose profitability. That is why the market will focus not just on cigarette volume growth, but also on segment margin and mix.

Tobacco cost will also be watched. Nuvama said tobacco costs are down around 20% YoY , but lower farmer realisations have slowed arrivals in Andhra Pradesh and Karnataka. That means the actual cost benefit may be lower than reported.

FMCG business likely to stay strong

The non-cigarette FMCG business is expected to be the bright spot.

Kotak expects FMCG revenue to grow 12% YoY, with growth momentum from the March quarter largely sustained. It expects EBIT margin at 8%, up 110 basis points YoY, though down 30 basis points sequentially.

Nuvama expects the FMCG business to grow around 14% YoY , with EBIT rising 25% on a favourable base and improving margins. YES Securities also expects other-FMCG revenue to grow 14%, while Motilal Oswal models 15% revenue growth and 30% EBIT growth, with 90 basis points of margin expansion.

The FMCG performance will be important because investors have been looking for stronger profitability in ITC’s non-cigarette portfolio. Better margins here can partly offset the cigarette pressure, but it may not be enough to fully protect overall earnings in Q1.

Agri drag, paper recovery in focus

The agri business may remain volatile.

Kotak expects agri revenue to decline 50% YoY , significantly hit by West Asia issues that led to vessel shortages. It expects the EBIT margin to remain stable at around 5%.

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Nuvama is less negative and expects agri revenue to fall around 10%, with profit down 8%. YES Securities expects agri revenue to decline 15%.

The paperboards business may offer some support. Kotak expects paperboards revenue to grow 11% YoY , helped by realisations, as demand gradually stabilised. It expects margin to improve 100 basis points quarter-on-quarter to 12%. It also said the recent anti-dumping duty on virgin multi-layer paperboard imports should help the division in the coming quarters.

(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of The Economic Times)