Cigarette growth halves, FMCG key for ITC

Non-cigarette business revival remains key for ITC as the growth of its cigarette business in falling.

The company's gambit to move away from highly taxed longer cigarettes to smaller 64 mm varieties that has paid off for the last five years is now tapering.

In 2012 the company started selling more of 64 mm varieties to maintain growth as well as profitability from selling a product that was till recently seen as surviving on borrowed time.

The cigarette revenue growth of the tobacco-to-hotels conglomerate halved to 4.8% at Rs 8,955 crore in the March quarter from 10.2% posted in the year-ago period.

It was down to 7% in the second quarter of fiscal 2017 and 2% in the third quarter, an analysis of the trend shows.

Interestingly, while the cigarette sales in volume terms were flat in the fourth quarter, the revenues grew on account of preemptive price hikes. But post 6% excise increase in the Union Budget, hikes in cigarette prices have been limited.

The silver lining remains that goods and services tax (GST) hasn't hurt ITC.

Effective rate of 28% plus 5% cess plus duty per stick amounts to the current rate of around 60% which means that the GST rate is neutral, Motilal Oswal Securities recently said in a GST impact report.

However, despite its efforts to grow its other business and subdued consumer sentiment following demonetization, ITC still derives a chunk of its profits from cigarettes.

The contribution of cigarettes to its overall profit before tax has remained flat at 80.5% in the March quarter against 79% a year ago.

"FMCG-other segment revenue were up 8% amidst a challenging operating environment. Overall performance impacted by cash crunch especially in third quarter, calibration of trade pipeline in education and stationery products business and lower consumer off-take and heavy discounting in apparel. Segment results reflect the sharp escalation in input prices during the year, gestation costs of new categories and sustained investment in brand building," ITC said.

Its brand building would be the key to its future growth amid growing competition and disruptions like Patanjali.

Investments were made in its new businesses like Juices, dairy, chocolates and coffee.

Many of these products are yet to reach scale and fall under premium categories including Fabelle chocolates and Sunbean coffee, which are available only in select shops and inside ITC's own hotels.

Till its new brands get traction, ITC has to battle a tough environment.