Cigarette volume flat to bit negative: Analyst on ITC Q3

Aggarwal said he is not too worried about the agri business, but it’s the cigarette segment which is not delivering the way it was expected to do.

Naveen Kulkarni, Co-Head of Research at Phillipcapital, said the fear of ban on loose cigarettes and volume growth are worrisome for the company. He expects ITC to continue to remain under pressure and prefers HUL over it.

Below is the transcript of interview on CNBC-TV18.

Reema: Your reactions on topline growth of 2.5 percent?

Jain: That is definitely disappointing considering they have been growing pretty strongly over the last couple of quarters. We witnessed about a 15 percent growth even last quarter so this is definitely a disappointment. However, on the margin front it is playing out as we expected in terms of strong margin growth mainly contributed by the cigarette segment.

Sumaira: What was your estimate of what range volumes could end up in?

Jain: We were expecting cigarette volumes to be pretty flat to slightly negative. However, overall in terms of value growth we were expecting a positive number because they have taken several price hikes to pass on most of the taxes.

Reema: Walk us through your key takeaways from ITC as well as the implications?

Aggarwal: I have not looked at the numbers in detailed but broadly they are not very exciting.

Reema: This time around the big disappointment has come through in the cigarette business where the revenue as well as the EBIT growth is roughly about 1 percent so how would you read ITC cigarette business performance?

Aggarwal: Performance has been under pressure last quarter also the volumes were down but apparently in this quarter the full impact of that excise increase in budget, consequent price increases and a value added tax (VAT) increase in two-three states in the last quarter that has now materialise so definitely the trend is not very healthy.

Pragya: In the hotels business the company is reported 5 percent revenue growth, agri is a decline of about 11 percent in revenues and even paperboards is 5 percent decline in the revenues. It is not just a cigarette but the other businesses of the company also seem to be under a lot of pressure that we are seeing in this quarter. What is your take on this kind of slightly dismal revenue performance of this quarter?

Aggarwal:  Agri is more like a cyclical business if you have got some bunching up of revenue which happens from quarter to quarter to that extent you can say weak agri business is not a big surprise at all as far as the topline is concerned. Paper business also you see, paper supply is a lot to the other fast-moving consumer goods (FMCG) businesses as well as a cigarette business. I am not much worried about the agri and all but having said that the major thing is that cigarette business is not delivering the way it was expected to do.

Q: With a stock like ITC which has given so much return to shareholders what do you do now do you buy it in this dip or do you think now the trend is turning at least for the near term?Kulkarni: We believe is major profitability of the company is driven by the cigarettes business and that business has been under considerable pressure for quite some time. Consistently there the news flow has been pretty negative. If we look at the volume growth for this quarters it is in double digit negative. This might continue for some more time and probably next quarter also it will trickle down to that quarter also and it is going to be a negative volume growth. More importantly this negative volume growth is on a much lower base as in the base of Q3 FY14 was minus 2.5 percent. So, I feel that overall going ahead this kind of negative trend is going to continue for quite sometime. Apart from that the regulatory environment has continued to remain extremely harsh. So, ban on loose cigarettes if that happens over the next three to four months then volumes might dip further and it all depends now on the Budget also. If in this Budget again if government sees that volumes are negative and they hike the excise duty by a significant numbers because hiking of excise duty is leading to curb in consumption then we might see the stock will continue to remain under pressure for another one year.

Q: Between ITC and Hindustan Unilever (HUL) if you had to advise some thing to buy because both these stocks have given huge returns, both these stocks are now falling post earnings. Where is the more lucrative opportunity? A: We still continue to believe that HUL is better place than ITC because again some thing which is impacted by regulations is very difficult to gauge. There is no proper visibility on earnings and revenue growth.In case of HUL there is a visibility on earnings and revenue growth. The problem with HUL right now is the kind of valuations that it is trading that cap the upside a little bit. On the other hand considering if you are looking at multier compounding story then HUL definitely offers one.