ITC: Cigarettes continue to remain company’s main stay

The stock of FMCG company - ITC has gained 11% in the last six trading sessions on reports that the company has raised the price of its cigarettes. A report from Sharekhan has pegged the average price increase at 14%.

According to this report, the company has increased the prices of its key cigarette brands by 11-20%. It has increased the price of Gold Flake - regular size cigarette (the key contributor to the company’s cigarette sales volume) by around 15% to Rs 55 for a pack of 10 cigarettes.

Sharekhan, in an earlier report, had estimated that the company would have to implement a price increase of over 15% to maintain its earnings before interest and tax or EBIT margin in the range of 31-32%.

The company had raised prices to pass on the increase in excise duty on cigarettes announced in this year’s Union Budget. The reports of the price increases vaulted the company’s stock to a new 52-week high ofRs 316.35 on Thursday.

This market action just reinforces the fact that for investors and analysts, it is ITC’s cigarette business which counts matters, despite the company’s diversification to other un-related sectors such as FMCG, hotels, paper & paperboard and agri-products.

And justifiably so, since the cigarettes business, while contributing over 40% of the company’s revenues, accounts over 80% of the company’s EBIT.

All the remaining segments, while earning 60% of the company’s revenues, are not able to contribute more than 20% of the company’s EBIT. The company continues to earn its bread and butter from cigarettes.