ITC reported better-than-expected earnings in the April-June (2014-15) quarter, aided by strong demand for cigarettes that contributes about 45% to its total sales, thereby shrugging off the adverse tax increase on cigarettes with its pricing power.
During the quarter under review, ITC clocked 25% jump in quarterly sales to Rs 9,164.4 crore and 15.60% rise in net profit to Rs 2,186.39 crore, which may keep investors in good stead when the market opens today.
The impressive numbers were largely contributed by a strong 18.85% growth in cigarette business at Rs 4,201 crore with profit growing at 21% helped by price hikes undertaken by ITC to compensate the growing tax burden.
But for how long the diversified major be able to hold on to its pricing position?
For one, most of the growth in cigarette volumes came from smaller and cheaper cigarettes, or those below 65 mm length that were moderately taxed against the regular sizes and also spared from a hike in the FY14 budget.
The share of the small cigarette segment, according to The Tobacco Institute, grew three-fold last year and accounts for 16% of industry volumes.
But that tax benefit was taken away in the current budget of FY15, which came after the quarter ended, and the segment was subjected to an excise duty hike of a steep 72% while tax on other varieties were raised by 11% to 21%.
The September quarter could be a challenge for ITC and show how the company has dealt with the tax blow, and also know whether retailers managed to bring down the inventory to what level after stocking up in June in anticipation of the much publicised proposal to hike tax on cigarettes in the budget.
"The sharp increase of 72% in the excise duty rate applicable for filter cigarettes of 'length not exceeding 65 mm' will make it extremely difficult for the legitimate industry to counter the menace of illegal cigarettes which continues to grow unabated in the country," a worried ITC said while announcing the quarterly earnings.
While ITC's customers have so far been taking on regular price hike, there is a clear shift in consumption to cheaper illegal cigarettes that would also weigh on ITC in near future.
Share of tax paying cigarettes now contribute just 12% of total tobacco consumption.
Beyond cigarettes, ITC's other FMCG businesses including packaged foods and personal care products, grew at 11% at Rs 1,934 crore compared with 13% sales growth notched up by its rival Hindustan Unilever which has a much broader base.
Losses of the company's hotel division came down marginally to Rs 15.59 crore during the quarter from Rs 18.93 crore.
The loss was due to Rs 14.30 crore of additional depreciation charges due to revision in the useful life of fixed assets, ITC explained
"Hospitality sector continued to be adversely impacted by the weak economic conditions and high levels of room inventory in key Indian cities leading to a relatively weak pricing scenario," it said.
Paperboards, paper and packaging segment revenue were up 10.8% at Rs 1,288.48 crore aided by higher capacity utilisation of recent capacities while profit rose 9% to Rs 274.90 crore.
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