Pricier cigarettes slow ITC net growth in Q3

Missing Street expectations the tobacco-to-hospitality giant ITC reported a net profit growth of 10.4 per cent at Rs 2,635 crore in the December quarter against Rs 2,385 crore in the year-ago period.

The below-par performance was a consequence of slow growth in the cigarette business. Revenue in ITC's cigarette segment grew 0.6 per cent year-on-year to Rs 4,142 crore. Analysts said ITC's decision to increase prices of cigarettes after the excise duty on these was raised pulled down sales volume by 15 per cent year-on-year. The market reacted negatively to the results, with the ITC scrip closing five per cent down to Rs 352.60 on the BSE exchange on Wednesday.

ITC said the quarter's performance reflected the higher excise duty announced in the Union Budget last year and increases in value-added tax by Tamil Nadu, Kerala and Assam during the quarter. "The cigarette segment revenue, as a consequence, remained flattish during the quarter," ITC said.

Cigarettes account for more than 80 per cent of ITC's pre-tax profits. "ITC's cigarette segment profit growth has registered a nine per cent year-on-year growth, a rare instance in several years," Ritwik Rai, consumer goods analyst with Kotak Securities, said. Analysts added the price increase's effect on sales challenged the belief that demand for cigarettes was 'inelastic' (doesn't go down as prices rise). The outlook for the segment remains gloomy.

"With the Budget over a month away, and potential for changes in regulations pertaining to tobacco, we believe the ITC stock shall remain under pressure. We remain negative on ITC in light of potential structural headwinds that cigarette companies face," Rai said.

A recent government notification, effective April 1, requires larger graphic health warnings covering 85 per cent of cigarette packs. A potential ban on sale of loose cigarettes also looms.

ITC's other businesses, too, have disappointed. "Other than the operating margin, which the company has been able to maintain, there are no significant positives from this result," an analyst said. Revenue from ITC's paper and packaging division fell 4.6 per cent to Rs 1,199 crore and the agriculture business slipped 10.5 per cent to Rs 1,598 crore in the third quarter. The agriculture revenue was hurt by lack of trading opportunities in soyabean.

"The paperboards, paper and packaging segment was impacted by the slowdown in the fast-moving consumer goods and cigarette industries. Consequently, segment revenue and profit were impacted during the quarter," ITC said.

Revenue from hospitality grew 4.6 per cent to Rs 330 crore. "The hospitality industry continues to be impacted by a weak pricing environment," ITC said.

The non-cigarette consumer goods business, comprising packaged foods, clothes, education, stationery and personal-care products, however, reported a profit of Rs 11.5 crore on revenue of Rs 2,314 crore. ITC said launches in this segment saw good response.