Recovering ITC cigarette volumes a positive, improvement to boost earnings

Even as ITC posted a 9.9 per cent year-on-year rise in its March-2018 quarter (Q4) net profit, living up to analysts' expectations, and its cigarettes volumes continued to decline (down an estimated 2-3 per cent in Q4) owing to high prices triggered by massive taxes, its share price closed 1.5 per cent higher in a weak market.

Cigarettes and FMCG (fast moving consumer goods) together account for 70 per cent of ITC's sales and 90 per cent of profits, and the improving prospects of these two businesses are keeping the Street positive on the stock.

Cigarettes volumes seem to be on recovery trajectory, which analysts expect to persist going ahead as the company is unlikely to hike prices with expected stable taxes.

Nonetheless, the Q4 numbers were decent, with the rise in net profit supported by a 6.4 per cent increase in earnings before interest and taxes (EBIT). This was for a 7.6 per cent rise in EBIT in cigarettes segment — contributing above 85 per cent of the overall profit - besides an improvement in the hotels and FMCG operations.

With this, ITC's EBIT margin expanded by 373 basis points year-on-year to 35.6 per cent, supported by cost-saving measures. In Q4, operating expenses as a per cent of net sales declined to 64.4 from 68.1 per cent in the year-ago period.

Improvement in FMCG and hotel revenues confined a fall in ITC's overall net sales at 4.7 per cent in Q4. Besides, hotel and FMCG businesses are also likely to play well for ITC. Improvement in rural economy and recovery in Aashirvaad atta product, which was earlier a drag, will auger well for FMCG business. Agricultural business, however, is unlikely to revive till September 2018 owing to low tobacco crop.

Going ahead, ITC's margins are likely to improve. "Even if cigarettes volumes remain under pressure, high realisation will keep cigarettes margin high. Also, FMCG business is expected to continue perform well," says Sachin Bobade, analyst at Dolat Capital. The gradual recovery expected in cigarettes volumes and optimistic margin outlook boost the earning visibility of the company, keeping analysts positive on the stock.

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