ITC’s cigarette business kicked the growth habit in fiscal 2011

Are smokers finally kicking the habit? Cigarettes remain ITC’s flagship business, but failed to deliver the customary boost to sales and profits in the March quarter.
During the quarter, cigarettes contributed to 68% of its consumer product sales, 43% of overall sales and, more importantly, 82% of profit before interest and tax. But the business grew at a relatively sedate pace of just under 13% year-on-year (y-o-y) during the March quarter, and around 14% in the full year.

The year that went by saw the full impact of price hikes taken to counter the 17% increase in excise duties in the Union budget of 2010-11. The industry was spared any excise duty hikes in this year’s budget, giving rise to hope of better sales growth in future. While price hikes have dampened growth, the March quarter cigarette sales also reflect a high base effect, as sales in the year-ago period had risen by 18%. Some of this may have been due to stocking up prior to March, when the excise duty hike was implemented.

The cigarette segment’s profitability improved, however, as the company implemented price hikes and launched new products. Profit margin improved 2 percentage points y-o-y in the March 2011 quarter to 53%.

ITC’s focus in 2010-11 in its non-cigarettes consumer business was to cut losses, which fell 14% to Rs. 68 crore in the March quarter, while sales rose by 17%. Competition has increased with firms such as P&G (Procter and Gamble Co.) and Hindustan Unilever Ltd upping the stakes for growing their share of the market. If ITC can grow sales faster in fiscal 2012, even as it cuts losses, it will send a positive signal to shareholders.

Among its other main businesses, hotels turned in a good performance with profits rising at a higher pace than its sales growth of 17%. Paper and paperboard had a subdued quarter with both sales and profits growing by 14-15%.

ITC’s overall sales rose by 14% during the quarter, and operating profit rose by around 17.5% during the quarter; but a near 70% increase in other income, only a 7% increase in depreciation, and lower tax incidence contributed to a 24% growth in its net profit.

Its share trades at around 29 times its fiscal 2011 consolidated earnings per share. With full year operating profit growth at 17%, and net profit growth of 20%, ITC will have to deliver higher growth to justify its valuation and investor faith.

Shareholders will be hoping its cigarette business rises to the occasion in fiscal 2012. If it does not, its shares are likely to underperform during the year. They fell by 2% on Friday, after the results were announced.