ITC derives 85 per cent of its operating profit from the cigarette business. It enjoys a premium valuation over global peers like Phillip Morris and British American Tobacco, which, according to Motilal Oswal Securities, trade at less than 14x their one-year forward earnings.
There is also the possibility of a further increase in taxes. In February, too, tax on cigarettes was hiked. This partially weighed on Q4 volumes, though the bigger hit came from the Covid-19 disruption, which led to a 10-11 per cent fall in volumes, according to analysts. February’s price hikes, however, contained the fall in cigarette revenue to 6.5 per cent.
Though the cigarette business has reached near-100 per cent levels following easing of the lockdown in mid-May, some analysts remain cautious.
Vishal Gutka, vice-president of PhillipCapital, says: “Recovery in the cigarette business could be attributed to shrinking illegal trade on account of travel restrictions, as well as business disruptions faced by competitors (Godfrey Phillips and VST). Once they revive, maintaining good momentum in the cigarette business would become difficult for ITC.”
ITC added that persistent weakness in demand, coupled with growth in illicit cigarette trade, weighed on its FY20 volumes. While sales in its FMCG business fell marginally by 3 per cent, operating profit rose 12 per cent and prospects, too, remain strong. However, recovery in other businesses like hotels will take time.
If revival in the FMCG and cigarette businesses remains short-lived and taxes on cigarettes head north, further gains for the stock are likely to be limited.