Sales grew just 2% on higher cigarette prices; other segments too post laclustre numbers
Is cigarette finally turning price elastic for ITC? Long riding the supposed inelasticity of demand despite rising taxes pushing up prices, cigarette sales now appears to be succumbing to inflation.
The diversified conglomerate that still derives majority of its revenues from cigarettes on Wednesday reported a poor 2% sales growth at Rs 8,800.22 crore during the third quarter as against Rs 8,623.11 crore a year ago. mainly on the back of just 0.6% growth in cigarettes sales at Rs 4,142 crore, which ITC described being largely due to higher prices.
"Muted growth in cigarettes segment revenue and profit was due to steep increase in excise duty and VAT," ITC said in a release post announcement of its results.
Post the steep increase in excise duty in the Union Budget, Kerala, Tamil Nadu and Assam, which together accounted for nearly 30% of its cigarette sales, have significantly raised value-added tax between October and November.
Since the Budget, ITC has hiked cigarette prices by around 22%, which has now taken a toll on demand.
Even sequentially, cigarette revenues have performed poorly, dropping marginally from Rs 4,250 crore reported in the second quarter, when interestingly, segment sales grew as much as 14.15%.
The market, however, was unrealistically hopeful about ITC's performance during the third quarter, predicting an overall sales growth upwards of 10%.
Expectedly, the stock took a drubbing, falling by 5% to close at Rs 352.
Going forward, ITC has to cope up with two other dampeners.
Effective April, cigarette packs should display larger, and repulsive graphic health warnings covering 85% of both sides of the pack as compared to the current requirement of just 40%.
"The proposed graphic health warnings are amongst the most stringent in the world and far larger than the top 5 cigarette markets viz China, Russia, Indonesia, USA and Japan. This would lead to a spurt in sale of illegal cigarettes which will not carry the new warnings," ITC said.
Also, the government is mulling ban on sale of loose cigarettes, which might also have an impact if implemented although some analysts are of the view that companies can effectively get around that scenario by coming up with smaller sized packs of twos or threes.
Most of the overall profit growth of ITC came from 49% jump in other income to Rs 582 crore.
Other FMCG businesses revenue that includes personal care and snack foods and also garments registered a healthy growth of 11.4% amidst continuing weakness in discretionary demand.
"The personal care business continued to make steady progress in the personal wash and deodorants categories," the company said.
In the bakery segments, ITC is currently engaged in a fierce marketing battle with Britannia in the premium cookies segment where both are upping the ante in product innovation and packaging.
The agri-business suffered a steep de-growth of 10% at Rs 1,598 crore on poor trading in soya.
Hotels didn't have much to show either in performance where earnings before interest costs dropped 54% to Rs 28.71 crore and EBIT margin crashed 1,130 bps to 8.7%.
"Hospitality industry continues to be impacted by weak pricing environment. Results were impacted by additional depreciation charge for the quarter due to revision in the useful life of fixed assets," said the company.
The paper division also disappointed, adversely impacted by general slowdown in consumer spending as well as in cigarette consumption, with sales dropping 4.6% to Rs 1,199 crore while EBIT dropped 7.6% to Rs 214 crore.
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