ITC Ltd shares of Cigarettes industry Cigarettes share ITC

At 38.4%, the operating profit margin improved by a modest 124 bps. Raw material costs - a key concern - have eased for the company as input costs as a proportion of net sales fell to 35 % from 37% (in the December quarter last year). However,this benefit has been largely negated because of other expenses which rose 20% - higher than the growth in net sales. Growing competition may well have forced the company to spend more on advertising and promotion of products.

In the next few quarters, a rising base year effect will make it difficult for ITC to maintain revenue growth rates in excess of 10-12%. This is going to be significantly lower than the average growth rates of 15-20% reported by the company in the past two years.

ITC Ltd (updated - 24 Jan 2012)
After a consistent run-rate over the past several quarters, the strain is finally showing at one of India’s top fast moving consumer goods, or FMCG, companies - ITC. That was reflected in its performance for the quarter to December 2011 when the company reported its lowest sales growth of 14.2% in the last 10 quarters. The volume growth of ITC’s cigarettes business was lower than expected. However, the overall growth of the segment was aided by the price rises taken by the company during the quarter. The non-cigarette FMCG business continued to boost profitability, posting a growth of 24% in its revenues among all the business segments, which is a new high.

ITC’s hotels business continued to report an almost flat growth in sales for the second consecutive quarter - adversely impacted by the weak global economic environment and a slowdown in the domestic economy. Its agri-business registered a modest growth of 10% each in revenues and profits, with no YoY improvement in segment margins. Thanks to a favourable product mix, the paper businesses grew in double digits - both in revenues and earnings.

Further, competition in the non-cigarette FMCG segment is likely to warrant higher spending on advertising and promotion.

The upcoming budget in the current quarter will also be critical for ITC’s cigarette business, given the possibility of an increase in excise rates. While last year was an exception, it has become normal to raise excise duty on cigarettes annually in the budget. Considering all these, ITC may not be the best bet in the FMCG segment at least until after the next two quarters.
Source - Economic Times

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