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Informist, Tuesday, Jan. 14, 2025

 

By Avishek Rakshit

 

KOLKATA – Strong cigarette sales, both in volume and value, a price increase-led revenue growth in the non-cigarette consumer goods portfolio, and better performance of the agricultural trading division are likely to help diversified conglomerate ITC Ltd. to stave off the blues of low consumer demand in terms of revenue growth. However, it may not benefit the company's profits and margins.

 

Despite the muted demand, the country's second-largest fast-moving consumer goods company in terms of market capitalisation is estimated to report revenues of INR 182.3 billion in the December quarter, up 3.3% from a year ago, but down 11.2% sequentially, according to an average of estimates from 16 brokerages. The profit after tax is seen at INR 51.5 billion, down 7.5% on year, but up 1.5% from a quarter ago.

 

Among the brokerages, the highest revenue estimate is by Motilal Oswal Financial Services Ltd. at INR 192.2 billion and the lowest is by Centrum Broking Ltd. at INR 172.8 billion. For the net profit, YES Securities (India) Ltd. has given the highest estimate at INR 53.4 billion and Nuvama Wealth Management Ltd. the lowest at INR 49.4 billion.

 

ITC reported revenues of INR 176.5 billion in the December quarter of the last financial year and INR 205.4 billion in Jul-Sept. The profit after tax was INR 55.7 billion in the year-ago quarter and INR 50.8 billion in the preceding quarter.

 

ITC has not detailed the date for announcing its financial results for the December quarter.

 

Although a diversified conglomerate, with businesses in consumer goods, agricultural trading and exports, paper and paperboard manufacturing, and hotels, ITC relies heavily on the cigarette business both for revenue and profit growth. The cigarette business accounts for about 47% of ITC's annual revenue and 74% of its pre-tax profit.

 

Most brokerages estimate that ITC will likely report a 3-4% growth in cigarette volume. Such sales volume growth in cigarettes is considered good on account of the various statutory requirements and high tax the cigarette industry is subject to, as well as the influx of illegal low-priced cigarettes, which are mostly imported.

 

If the premium portfolio grows better, revenue growth at 5% could outpace the growth in cigarette volumes, according to Centrum Broking. JM Financial Institutional Securities Pvt. Ltd., which has estimated a volume growth of 3%, has projected a revenue growth of 7%. Given that cigarette sales are the primary determinant of ITC's financial performance, it will directly help ITC improve its revenues for the December quarter.

 

Having a dominant market share of the cigarette market at around 72-75%, ITC has been focusing heavily on premiumisation and increasing sales of the 'Kings' cigarettes portfolio. The 'Kings' size - 84 mm in length – is priced at a premium and has higher margins. On the other hand, the 'Mini Kings' – 69 mm in length – is the volume driver. Over the past few quarters, ITC has been striving to premiumise the 'Mini Kings' portfolio mostly via brand extensions.

 

The non-cigarette consumer goods portfolio – the second-most important revenue generator – comprising mostly of food products, office and school stationery, personal care products, incense sticks, and others, could face weak sales and profit growth, Nuvama Wealth Management said in a report. The brokerage has estimated a 3% sales growth in the segment.

 

Axis Securities Ltd., which estimates a 5% revenue growth for ITC for the non-cigarette consumer goods division, said most consumer goods companies, including ITC, are expected to report a continued slowdown in volume growth despite the festive season. Revenue growth is likely to be impacted due to continued subdued demand in urban markets owing to food inflation, lower wage growth, and deterioration in savings, amongst other factors.

 

Comparatively, brokerages have maintained that rural markets will continue to see a gradual recovery and will outpace growth in the urban markets.

 

The third-most important growth vertical for ITC is commodities trading led by tobacco leaves and wheat. Brokerages said tobacco leaf prices are expected to remain strong, as in the case of the September quarter, which will help ITC's agricultural division register good revenue growth. Centrum Broking as well as Nuvama Wealth Management have predicted a 20% revenue growth in the segment.

 

Although tobacco leaf prices rose by 20% on year in the December quarter, which would aid ITC's agricultural division, the same could adversely affect ITC's cigarette division by pushing up costs and haemorrhaging margins for cigarettes. At the same time, despite lower consumer goods sales volumes, ITC did not slow down its spending on advertising and marketing. To some extent, these two primary factors explain why brokerages are not bullish on ITC's profits and operating margins.

 

The paper and paperboard division, which has been reeling under pressure from competition from low-priced Chinese imports, could see a 2% year-on-year growth in sales, Nuvama Wealth Management said. The hotels division, which has been demerged with effect from Jan. 1, could report 15% year-on-year revenue growth, Axis Securities said.

 

At a company level, ITC's earnings before interest, tax, depreciation, and amortisation, could increase by 4.6% on year and remain flat sequentially at INR 63.3 billion, according to the average of estimates from 15 brokerages. In the year-ago quarter, ITC posted an EBITDA of INR 60.2 billion and had missed the consensus of INR 64.2 billion.

 

Nuvama Wealth Management has projected the gross margins to expand by 325 basis points from a year ago to 55.2% and the EBITDA margin to fall by 235 basis points to 34.2%. Centrum Broking has also projected the EBITDA margins at 34.2%.

 

Following are the Oct-Dec earnings estimates of ITC based on reports compiled by Informist from 16 brokerage houses:

 

Broker Name	Net Sales (in INR million)	Net Profit (in INR million)	EBITDA (in INR million)
Axis Securities Ltd	1,77,130.00	51,500.00	62,310.00
Centrum Broking Ltd	1,72,819.00	49,838.00	59,056.00
Elara Securities (India) Pvt Ltd	1,76,034.00	52,591.00	62,747.00
Emkay Global Financial Services Ltd	1,84,109.00	51,926.00	62,522.00
HDFC Securities Ltd	1,80,775.00	49,754.00	61,557.00
JM Financial Institutional Securities Pvt Ltd	1,89,716.00	52,540.00	68,677.00
Kotak Institutional Equities	1,77,633.00	51,640.00	61,590.00
KR Choksey Research	1,89,716.00	52,540.00	68,677.00
Motilal Oswal Financial Services Ltd	1,92,184.00	52,942.00	68,185.00
Nirmal Bang Equities Pvt Ltd	1,88,454.00	51,895.00	63,697.00
Nomura Equity Research	1,75,173.00	50,620.00	59,675.00
Nuvama Wealth Management Ltd	1,77,944.00	49,419.00	60,857.00
Prabhudas Lilladher Pvt Ltd	1,82,964.00	52,403.00	63,122.00
Sharekhan Ltd	1,77,520.00	49,710.00
Systematix Shares and Stocks (India) Ltd	1,87,809.00	51,051.00	62,798.00
YES Securities (India) Ltd	1,86,382.00	53,360.00	64,558.00
Average	1,82,272.63	51,483.06	63,335.20

 

At 1415 IST, shares of ITC traded 0.5% lower at INR 436.85 on the National Stock Exchange. End

 

IST, or Indian Standard Time, is five-and-a-half hours ahead of GMT

 

Edited by Saji George Titus

 

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