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Informist, Friday, Apr. 11, 2025

 

By Avishek Rakshit

 

KOLKATA – Volume-driven growth in its mainstay cigarettes business, growth in the non-cigarette consumer goods portfolio and the agricultural trading business could propel revenue growth for diversified conglomerate ITC Ltd. However, overall muted market conditions and stress in the paperboards and packaging business could lead to falling financial metrics in Jan-Mar. 

 

India's second-largest consumer goods company by market capitalisation is expected to report a 3.2% on-year decline in its revenues for Jan-Mar to INR 171.8 billion, while the net profit could dip by nearly 2.0% to INR 49.2 billion, according to the average of estimates from nine brokerages. 

 

Sequentially, which is a comparison of the company's financial performance in winters vis-a-vis the festival season, the revenue could dip by 6.1% and the net profit could go down by 12.7%. ITC reported revenues of INR 177.5 billion in Jan-Mar last financial year, and INR 182.9 billion in Oct-Dec. It posted a net profit of INR 50.2 billion in Jan-Mar and INR 56.4 billion in Oct-Dec. 

 

Among the brokerages, the highest revenue projection has been made by IIFL Capital Services Ltd. at INR 185.8 billion, and the lowest was made by Morgan Stanley at INR 164.2 billion. In terms of profit after tax, Prabhudas Lilladher Pvt. Ltd. gave the highest estimate at INR 51.6 billion, and Morgan Stanley gave the lowest estimate at INR 47.3 billion. 

 

The company is yet to declare when it will announce its financial results for the quarter and year ended Mar. 31.

 

Although a diversified conglomerate having businesses in consumer goods, agricultural trading and exports, and paper and paperboards manufacturing, ITC continues to rely heavily on its cigarettes business both for revenue and profit growth. The cigarettes division feature as the largest revenue and profit contributor for ITC. Usually, cigarettes make up for 47% of ITC's annual revenue and around 74% of its pre-tax profit. It, thereby, becomes the determining factor of the company's financial performance. 

 

Most brokerages estimate that ITC could report a 3-6% volume growth in cigarettes due to stability in taxes resulting in stable prices and its ability to regain its market share, which it earlier lost to lower priced illegal imports. Although the projected sales volume growth may appear muted, it is considered good by brokerages and the industry as the legal cigarette trade in India is burdened with steep taxes, various statutory requirements, and influx of illegal low-priced cigarettes, which are mostly imported. 

 

Brokerage Kotak Institutional Equities estimated that a 4.5% volume growth could translate into a 7% gross revenue growth in the cigarettes business. During Jul-Sept, a 3% volume growth had led to a 6.8% revenue growth, and in Oct-Dec, a 6% volume growth had led to a 7.8% value growth for ITC in the cigarettes business. The extent till which ITC could outdo the volume growth in cigarettes with revenue growth depends largely on the performance of its premium portfolio and the pricier King-sized cigarettes which typically are 84 mm in length. 

 

Having a dominant market share in the country in cigarettes at around 72-75%, ITC has been focusing heavily on premiumisation and increase sales of the Kings cigarettes portfolio. The Kings size is priced at a premium and garners more margins. At the same time, ITC has been driving sales of its Mini Kings sized cigarettes, which is 69 mm long and priced much lower than the Kings size, by innovating and launching new products and brand extensions. 

 

The non-cigarettes consumer goods portfolio -- comprising majorly of food products, office and school stationery, personal care products, incense sticks, and several others -- could face weak sales growth, Nuvama Wealth Management, which forecast a 4.2% sales growth in this segment, said in a report. 

 

The consumer goods sector has witnessed subdued demand for around a year now, primarily induced by urban inflation, increasing cost of living resulting from lower salary hikes, and as rural market is showing initial signs of recovery. Consumer goods companies primarily depend on urban markets for value and volume growth, while rural markets are primarily volume driven. Lower uptick in urban sales also leads to lower sales of premium products which bolster the top line and margins. 

 

The commodities trading and sourcing vertical, led by leaf tobacco and wheat, is expected to report healthy growth. Sales in this segment are likely to surge 20% on year on a soft base of a 13.4?cline in the year-ago period, according to Nuvama. This strong growth is due to higher leaf tobacco and value added exports. Brokerages said that leaf tobacco prices remained strong, up by 20% on year which will help ITC's agricultural division register a good revenue growth. 

 

The paper and paperboards division, which has been reeling under pressure from competition from low-priced Chinese imports for some time now, could see muted sales growth as well, brokerages said. 

 

Although leaf tobacco prices increased by 20% on year, which would aid ITC's agricultural division, the same could boomerang for ITC's cigarettes division by inflating costs and haemorrhaging margins and profits from cigarettes. Kotak Institutional Equities said that ITC may report a 195-basis-point decline in its earnings before interest and tax margins due to higher leaf tobacco and other input costs. Given that cigarettes continue to drive ITC's profitability despite its several diversification ventures, the margin impact on cigarettes could have a substantial bearing on the company's overall profitability.

 

At the same time, despite lower consumer goods sales volume, ITC did not step down on its advertising spends and marketing activities to maintain its hold in the market. To some extent, these two primary factors explains why brokerages are not bullish on ITC's profit and operating margins. 

 

Nuvama said that ITC's overall gross margin is likely to decline by 500 basis points to 54.9%, whereas earnings before interest, taxes, depreciation, and amortisation margin may decline by 237 basis points to 34.8%. Centrum Broking Ltd. as well forecast the EBITDA margin to decline by 326 basis points to 34.3%.

 

At a company level, ITC may report a 2% on-year decline, and a 2.6% sequential decline in its EBITDA, which is pegged at INR 60.4 billion, according to the average of estimates from nine brokerages. The highest estimate has been given by Motilal Oswal Financial Services Ltd. at INR 64.7 billion, and Morgan Stanley priojected it the lowest at INR 56.8 billion. 

 

Although ITC's Jan-Mar financial performance is projected to be muted, brokerage Prabhudas Lilladher Pvt. Ltd. feels that ITC is attractively priced at current level. It reasoned that the consumer-centric businesses have a positive outlook as lower income tax rates will increase demand for both cigarettes and other consumer goods, and no increase in excise duty on cigarettes will further foster volume-led strategy. Down the line, ITC is also expected to benefit from the recent acquisition of Century Papers. 

 

On Friday, shares of ITC closed 1.3% higher at INR 421.60 on the National Stock Exchange. 

 

Following are the Jan-Mar earnings estimates for ITC Ltd based on reports from nine brokerage firms in descending order of the estimate of net profit:
 

Broker Name	Net Sales (in million rupees)	Net Profit (in million rupees)	EBITDA (in million rupees)
Prabhudas Lilladher Pvt Ltd	1,69,113.00	51,619.00	63,415.00
Motilal Oswal Financial Services Ltd	1,83,455.00	50,941.00	64,723.00
IIFL Capital Services Ltd	1,85,811.00	50,172.00	64,719.00
PhillipCapital (India) Pvt Ltd	1,67,985.00	49,034.00	59,126.00
Centrum Broking Ltd	1,70,528.00	48,934.00	58,284.00
Elara Securities (India) Pvt Ltd	1,68,474.00	48,402.00	58,898.00
Kotak Institutional Equities	1,66,519.00	48,367.00	58,318.00
Nuvama Wealth Management Ltd	1,69,960.00	48,244.00	59,146.00
Morgan Stanley	1,64,185.00	47,284.00	56,845.00
Average	1,71,781.11	49,221.89	60,386.00

 

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

 

Edited by Deepshikha Bhardwaj

 

 

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