ITC disappoints: Cigarette EBIT growth at 27-quarter low

ITC posted a weak set of numbers for the March 2015 quarter largely due to a fall in volumes and weak EBIT growth in the cigarette business. Segment revenue of cigarette business increased by a mere 3.2 per cent to Rs 4,211 crore and was driven by price hikes of about 15-16 per cent given that volumes fell by an estimated 13 per cent. This is the second straight quarter of double-digit fall in cigarette volumes for ITC. Stringent regulations and continuous increase in taxes on cigarettes have impacted volumes. As a result, cigarette volumes have fallen for 8 quarters in a row beginning June 2013 quarter. This segment's EBIT growth was at a multi-year low of 6 per cent to Rs 2,706 crore. Even though cigarettes' EBIT margin expanded 170 basis points to 64.3 per cent, it was the lowest quarterly number in FY15.

Subdued show by Agri and Paper businesses (28 per cent of revenues) also impacted its performance-their revenues were down 29 per cent and 5 per cent year-on-year, respectively. ITC's overall revenues, thus, grew by a mere 0.5 per cent year-on-year to Rs 9,188 crore and were 5.6 per cent below Bloomberg consensus estimate of Rs 9,738 crore. And, net profit at Rs 2,361 crore, though up 3.7 per cent year-on-year, was also 6.3 per cent lower than estimate of Rs 2,521 crore. Notwithstanding a marginal uptick in EBITDA margin (up 30 basis points to 35.3 per cent), higher other income (up 38.9 per cent to Rs 370 crore) aided net profit in the quarter.

There were, however, some silver linings. FMCG sales (27 per cent of revenues) grew at a healthy 11 per cent year-on-year to Rs 2,567 crore -- in-line with growth witnessed in recent quarters, while its EBIT at Rs 49 crore was up 12.6 per cent year-on-year. After many quarters of sluggish topline, hotels, too, witnessed improvement in revenue growth-up 8.1 per cent to Rs 346 crore. Hotel business' margin, however, contracted 654 basis points to 12.1 per cent on account of higher depreciation led by revision in useful life of fixed assets, weak pricing scenario and gestation costs of new hotels, offsetting the profit gains seen in agri and paper segments. But, will these be enough?

The results came post market hours on Friday. The stock which closed at Rs 328 could react to the weak numbers. Valuations though at 24 times FY16 estimated earnings are close to its historical average one-year forward PE of 23.

Although the full impact of price hikes in cigarette business will reflect in June'15 quarter, analysts could trim their earnings estimates to factor in the weak March quarter numbers. The view is still divided with some expecting a revival in its cigarettes business and others being more cautious. While uptick in cigarettes business will be a key trigger, regulatory overhang (higher taxes, potential ban on sale of loose cigarettes, etc) could keep the stock under check in the near future.