Performance of cigarette business fails to drive strong growth: Can ITC investors breathe easy?

ET Intelligence Group: ITC’s Q1 performance was expected to provide justification for the recent uptrend in its stock. Its stock has gained 14% in the past two months — outperforming the Sensex during this period — in anticipation of uptick in cigarette volumes. However, the performance of the cigarette business failed to drive strong growth, despite the low-base effect. The June quarter show couldn’t build on the momentum in the recovery seen in the preceding quarter.

The Q1 results have been prepared in accordance with the new accounting standards. The revenues grew 8.3%— below the street’s expectation of 10%. The operating margin stood at 26.8% — flat over the year ago level. The revenues from the cigarette business grew 6.4% — lower than the 10% growth in the preceding March quarter. Sales growth of the FMCG business at 9.5% — better than the run rate seen in the preceding two quarters — provides some solace.



Raw material prices, which bottomed out in the preceding quarter, showed an uptrend this time. Input costs stood at 32.3% of revenues against the year ago level of 30.8%. Analysts had expected the company to post 2-3% growth in cigarette volumes. However, forging it seems to have been daunting for the company — with shift in tobacco consumption to lower priced products like bidi, khaini, chewing tobacco, gutkha and illegal cigarettes.

It seems to be a slow and gradual recovery for ITC’s cigarettes business. Investors cannot yet breathe easy — with regulatory headwinds (in the form of pictoral warnings on packs) as well as uncertainty surrounding the GST. The saving grace: Bloomberg data show 84% of the 43 analysts tracking the stock have a ‘buy’ recommendation.