ITC's cigarette business growth is disappointing: Suruchi Jain, Morningstar India

In an interview with ET Now, Suruchi Jain, Morningstar India, gives her views on ITC's earnings. Excerpts:



ET Now: How do you look at ITC numbers, top line is up 10%, bottom line above 16% estimate, clocked in 20%?

Suruchi Jain: Bottom like looks healthy but we were expecting a better top line. Overall for the whole year, we are expecting bottom line to increase by 24% year on year and top line to increase 15% year on year.

ET Now: There was an expectation of decline in cigarette volumes. Do you think that could have impacted overall top line numbers?

Suruchi Jain: Yes. Globally as well, taxation is a concern for cigarette manufacturers. Governments across the globe are always looking to reduce cigarette intake as a health concern for the public. Historically, we have also seen cigarette volumes go down a little bit with tax increases.
ET Now: ITC has clocked in 3.5% growth in gross sales in the cigarette business. Is that a disappointment?

Suruchi Jain: Yes, that is a little disappointing. How are the margins doing? Because we are expecting overall improvement in margins within the cigarette business.

ET Now: The EBIT margins have come in at 69% for the cigarette business. How would you react to that?

Suruchi Jain: Those sound very very good.

ET Now: What was your benchmark?

Suruchi Jain: Our benchmark historically has been closer to the 35-40% range and this is much higher.

ET Now: This is for the cigarette business.

Suruchi Jain: Yes and cigarette is their strongest business and their highest margin business. Looking at cigarette volumes will be important but the other number we look at is the margins from the cigarette business and the overall business as well. Overall on a consolidated basis, we are expecting the margins to expand by 10 basis points over the year.

ET Now: Top line sub-10%, volumes in cigarette less than 4% but bottom line good and margins expansion by almost 700 bps in the cigarette business, what is your take?

Suruchi Jain: I would be a long term buyer of ITC stock. Even though it is trading at fair value currently, over the longer term the value of the stock is going to appreciate because it is a narrow economic moat company. It has significant competitive advantages and the company over the long haul will generate strong free cash flows. If you have a long term horizon in mind, you should buy the stock and just sit tight. For short term traders, unfortunately, I don’t have a view to share.
ET Now: 37% odd EBITDA margin gross margins for the cigarette business, is that an impressive number or not quite?

Suruchi Jain: It is quite an impressive number.