ITC’s cigarette biz lit up in Dec qtr

A stable tax environment is helpful for ITC’s cigarette business volume outlook. The segment is a big contributor to ITC’s profits and investors are, therefore, excited.

View Full Image

Five of the previous six budgets witnessed negligible or no tax increase on cigarettes, wrote Nomura Financial Advisory and Securities (India)’s analysts Mihir P. Shah and Anshuman Singh in a report on 2 February. “ITC’s predictability premium is increasing with a pragmatic tax structure, which will not only act as fodder for cigarette volumes but also improve the overall business outlook, with its key hurdle now behind,” they said.

Against this backdrop, on Friday, just before the company released its December quarter results (Q3FY23), ITC’s shares closed at an all-time high of ₹380.65 apiece on NSE. The good news is that ITC’s Q3 results are strong with cigarette volumes estimated to be better than foreseen. ICICI Securities’ estimates Q3 cigarette volumes to have grown by 15% year-on-year (y-o-y). According to ITC, “Stability in taxes on cigarettes, backed by deterrent actions by enforcement agencies, enable continued volume recovery from illicit trade.” Cigarettes Ebit growth was 17%, aiding ITC’s overall profitability.

The fast-moving consumer goods (FMCG) business also performed well, clocking 18% y-o-y revenue growth. The FMCG segment’s Ebitda margin was up by 90 basis points y-o-y to 10% led by premiumization and cost efficiencies. Meanwhile, the hotels business too performed well, with revenues rising by 50%. ITC said revenue per available room is well ahead of pre-pandemic levels. But the agri business put up a weak show on the revenue front (down 37%).

The upshot is that ITC’s overall Ebitda margin rose by 618 basis points to 38.4%. This led to Ebitda growth of 22% to ₹6,223 crore in Q3 at the time when net revenues increased by 2%.

To be sure, ITC’s stock price returns suggest investors have taken note of the company’s improving prospects. After all, the stock has gained by nearly 15% in CY23 so far, after appreciating as much as 52% in CY22.