What to look out for in ITC's Q3 earnings?

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What to look out for in ITC's Q3 earnings?

Cigarettes to FMCG and hotel chain major ITC’s third quarter numbers are expected to be robust, driven mainly by cigarette volumes. The Kolkata-headquartered company will be announcing its earnings on Friday.

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Cigarettes to FMCG and hotel chain major ITC 's third quarter numbers are expected to be robust, driven mainly by cigarette volumes. The Kolkata-headquartered company will be announcing its earnings on Friday.

The company has been expanding its fast moving consumer goods business, but cigarette account's for a sizeable chunk of profits. While the FMCG business will report double digit revenue growth, EBIT (earnings before interest taxes) losses in the segment are also expected to come down.

FMCG sector is one of the least affected sector amid the global economic slowdown. Analysts expect ITC will report a sales growth of 17-19% from a year ago. Its net profit growth could be around 21-22% according to Religare Institutional Research and Angel Broking.

"Led by continued strength in consumer demand, we expect cigarette volumes to grow 6.5%. Price increases in premium brands like Classic and Navy Cut in second quarter, coupled with no increase in excise duty will result in 100 basis points EBIT margin expansion to 56.3%," Amnish Aggarwal and Harit Kapoor of Motilal Oswal said in a report.

Apart from the cigarette and other FMCG businesses, its paper products and agri businesses is also expected to report strong double digit growth. However, the hotels business could see subdued growth.

Key points to watch out for:

- Cigarette volume growth and margins in the quarter. Cigarettes account for half of ITC's total sales. The full impact of price hike the company took in July-September in some premium brands will be visible in the third quarter. Some analysts say the price hikes were not enough to offset the increase in VAT (value added tax) by some states like Tamil Nadu and Andhra Pradesh.

- Losses in other FMCG business. Improving profitability in food, education and retail business is expected to lower the losses in the segment.

- Outlook going ahead. It is widely expected that the government will hike duties on cigarettes in the union budget for 2012-13. Also, some analysts expect the price hikes taken by FMCG companies across segments will hurt volumes to an extent and lead to downtrading.

ITC has outperformed the broader market in the current fiscal. Since September 30, the stock is up 6%, compared with the wider Nifty, which is up 0.25% during the same period. Religare and Motilal Oswal have a "buy" on ITC, while Angel Broking recommends "accumulate."  

Nachiket Kelkar
nachiket.kelkar@network18online.com