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Cigarettes pull ITC off growth plateau

Saturday, 19 January 2013 - 10:00am IST | Place: Mumbai | Agency: DNA
ITC, which is 30.8% owned by British American Tobacco, makes four out of every five cigarettes sold in India, but does not reveal cigarette volumes.

After four quarters of stagnant growth, conglomerate ITC, the country’s largest cigarette-maker which also runs hotels and is an FMCG and paperboard major, beat street estimates as its October-December profit jumped 21% up on-year to Rs2,050 crore on sales of Rs7,630 crore (up 23% on-year).

Four key factors explain the better-than-expected performance: pan-India launch of smaller (64mm) and cheaper cigarettes during the quarter; welcome growth in cigarette sales volume after a sluggish July-September quarter; a 7% price hike on its mass-selling Gold Flake brand which accounts for about 35% of ITC’s cigarette sales; and pruning of administrative and other costs.

ITC, which is 30.8% owned by British American Tobacco, makes four out of every five cigarettes sold in India, but does not reveal cigarette volumes. Well-informed analysts, however, estimated a 1.5-3% rise. Cigarette margins being as high as 35-50%, additional volumes must have boosted profit significantly, they said.

That performance came against a backdrop of higher taxes and tighter anti-smoking regulations in several Indian states which impacted ITC’s sales from a long-term perspective.
“The cigarette industry in India continues to be impacted by a discriminatory taxation and regulatory policy framework,” said ITC.

Net sales from ITC’s non-cigarette consumer business grew 30% on-year to `1,780 crore. The FMCG segment’s loss narrowed by 49% on-quarter to `24 crore (from `47 crore), suggesting that in spite of the economic slowdown, sales of wheat flour, biscuits and snacks recorded a robust 34-36% growth, said an analyst with a foreign brokerage said.

Naveen Kulkarni, analyst at Phillip Capital, said “If the ITC tries hard, the FMCG loss can be stemmed in a couple of quarters.”

Analysts have been estimating that ITC’s FMCG business will break even by the end of next fiscal.
ITC’s agri business grew 43% on-year, but hotels continue to be a drag with no signs of a turnaround. V Srinivasan, analyst at Angel Broking, said ITC’s paperboard business has been under pressure as well due to rising costs of raw material, particularly wood.

Impressive successive quarterly shows have earned the ITC stock a ‘buy’ rating from most analysts. Shares gained about 0.67% to close at `287 in Mumbai on Friday.


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