ITC: time to tap into margins for growth

It is tempting to conclude that ITC Ltd is caught in a bad situation. Its cigarettes business is barely growing, its fast-moving consumer goods (FMCG) business is no longer the growth driver it used to be, and a weak business environment has hit its paper business. Even agricultural commodity trading revenues have declined because of weak trading conditions. The hotels division has done relatively better in recent quarters, but is not a significant contributor to revenue.

ITC’s broad strategy was to let the cigarettes business be the profitability driver, while the FMCG business would drive sales growth. That plan has come apart, at the moment.

In the September quarter, its sales declined 1.4% over a year ago, with the cigarettes business growing by just 1.6% while the FMCG business sales grew 7.1%. Excluding noodles from the FMCG basket, since the Maggi noodles issue has hit sales of all instant noodles, sales growth was a bit higher at 10%. This is lower than the June quarter’s 12% growth.

There is one area, however, where ITC’s flag flies high—the cigarette segment’s profit margins. Even after all the tax hikes—the previous three fiscal years have seen excise on cigarettes increase by 98% and value added tax, or VAT, by 104% at a per unit level—this business still earned a segment profit margin of 68.7% in the September quarter. It is higher by 98 basis points over a year ago and by 1.7 percentage points sequentially. What’s better, it is much higher than three years ago; it earned a 61.4% margin in the September 2012 quarter. A basis point is one-hundredth of a percentage point.

ITC Limited