Street not convinced with ITC post decent Q4, cigarette biz faces headwinds

Topics ITC Q4 results | Q4 earnings | FMCGs

Though cigarette business has reached near 100 per cent levels after lockdown was eased in mid-May, some analysts are cautious
ITC put up a decent showing in the March quarter (Q4), with earnings beating estimates, but fell short of exciting the Street.

The firm reported good performance in its non-cigarette FMCG business (Aashirvaad, Sunfeast, Bingo!), and announced a higher dividend payout (80 per cent against 68-69 per cent according to the new distribution policy). However, these failed to enthuse investors.

Consequently, the stock gave up gains at close on Tuesday, following the 1 per cent rise on Monday. This was despite the attractive valuation of 16x its FY21 earnings — half of the 35x for peers. Uncertainty over its cigarette business remains the major challenge.

 Covid-led disruptions led to a decline in revenue across segments during Q4. Therefore, gross revenue fell 6.3 per cent year-on-year (YoY) to Rs 11,300 crore — lower than consensus estimates of Rs 11,832 crore. Profit before tax declined by 8.9 per cent YoY to Rs 4,512 crore but beat expectations of Rs 4,455 crore.
Motilal Oswal Securities says: “Even though valuations appear inexpensive, the narrative on ITC has changed over the past year with ESG (environmental, social, and governance) concerns regarding cigarettes picking up pace. Consequently, tobacco firms have witnessed sharp contraction in their multiples globally.”

 

 
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.



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