Cigarettes puff up ITC’s Q3 as sales cross pre-Covid levels

ITC posted a strong performance in the third quarter as its mainstay cigarettes crossed per-COVID sales and registered growth. The company reported a net revenue of Rs 6,244 crore for its cigarettes segment in the quarter ended December, a jump of 13.6 percent year-on-year (y-o-y) compared to Rs 5,498 crore reported in the corresponding period last year. Sequentially, too, revenue for the cigarettes segment jumped 11 percent versus Rs 5,642 crore registered in the year-ago period. The segment contributed 35 percent to the company’s overall revenue in the said period.

“ITC reported a strong Q3 led by a beat in four out of five segments. Cigarette volume growth at 12 percent was a surprise, with two-year-CAGR (compound annual growth rate) at over 2 percent—this is the first positive print after seven quarters and should also allay concerns on consumer behavior,” said a note by brokerage firm Jefferies.

The company also posted a 14 percent growth in cigarette EBIT (earnings before interest and taxes) to Rs 3,950 crore, its highest ever in a quarter.

“Cigarette volumes were back to pre-Covid levels after nearly two years. Management pointed to a robust recovery seen across markets, aided by increase in mobility and improved market servicing,” the Jeffries report added.

ITC’s management in a statement indicated that the cigarettes category saw robust recovery across markets aided by an increase in mobility and agile supply chain and market servicing. The company also said the introduction of several new products and variants of existing ones during the quarter accelerated the recovery.

“Recent launches include differentiated offerings anchored on the vectors of filters, variants and packaging formats—Classic Connect, Gold Flake Neo SMART Filter, Gold Flake Kings Mixpod, American Club Smash, Wave Boss and Flake Nova,” ITC said.

“New variants of Flake Excel, Wills Navy Cut Filter, Berkeley Hero were launched in the focus market, while Player’s Chase (multiple variants), Wills Protech, Capstan Excel were launched in line with evolving consumer preferences,” it added.

ITC had witnessed a steady drop in cigarette volumes since the fourth quarter of FY20 (January-March 2021) as the pandemic struck, raising concerns over consumer behaviour towards its mainstay business. In Q4 of FY20, cigarette volumes dropped by 11 percent y-o-y, as shown below. While the largest decline came in the first quarter of FY21 at 37 percent, sequentially, Q2 and Q3 also saw 12 percent and 7 percent drops, respectively. Since the last quarter of FY21, the company has been clocking a stable improvement in cigarette volumes. In the fourth quarter of FY21, it registered 7 percent growth, followed by a 31 percent climb and 9 percent rise in Q1 and Q2 of FY22. The high growth of 31 percent in Q1FY21, however, came on a low base of the corresponding period in FY20 and the volumes still remained below pre-Covid levels.

Analysts are upbeat on ITC’s performance, and not just in cigarettes.

“ITC reported a good quarter with strong performance across segments. We expect ITC (stock) to benefit from (1) expectation of value (on current FCF profile basis) to outperform growth/expensive basket, (2) potential price hikes in cigarettes in the current inflationary environment (better consumer acceptance likely), (3) good underlying performance in the FMCG business along with higher profit (& EVA) focus, and (4) improving outlook for the hotels business (likely cyclical upturn). Besides, focus continues on augmenting (overall) distribution. We see (1) potential market share gains in cigarettes, (2) FMCG scale-up and profitability improvement to continue and (3) potential to accelerate cost savings through a supply chain recast,” said a note from ICICI Securities.

Edelweiss upgraded ITC to ‘buy’ with a revised target price of Rs 285 given its overall limited downside and in the light of i) there being no tax hike for the second consecutive year, making cigarettes more affordable and helping ITC win share from illegal players; ii) stock correction by 11 percent from its peak; iii) 4.5-5 percent dividend yield; and iv) reduced abatement in chewing tobacco, making them more pricey and benefitting cigarettes.

ITC on February 3 reported a 12.7 percent jump in its standalone net profit for the third quarter to Rs 4,156.20 crore compared with Rs 3,687.88 crore posted a year earlier. Its standalone net revenue stood at 15,862.32 crore, 32.5 percent higher than Rs 11,969 crore in Q3FY21.