ITC Q2 preview: Earnings may take a hit on weak cigarette biz, but FMCG could remain strong

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Cigarette-hotel-to-FMCG major ITC is expected to report a decline in earnings on all parameters for the quarter ended September 2020, on the back of weak performance in cigarettes, hotels and stationery products segments due to local lockdowns. However, FMCG, other segments could report strong growth during lockdowns.

Brokerages expect the adjusted profit to decline around 20 percent YoY with 5-7 percent fall in revenue from operations YoY, though sequentially earnings may remain strong with double-digit growth on a low base in Q1 FY21.

"Cigarette - sales were weak in July and August due to local lockdowns while September saw some normalisation. In the FMCG segment, health and hygiene portfolio is expected to continue to report strong growth while stationery products segment will remain weak. Hotels business will see modest sequential pick-up," said Kotak Institutional Equities which see adjusted profit falling 19.6 percent and revenue 5.5 percent YoY.

The brokerage sees about 1 percent YoY decline in cigarette segmental sales (gross) led by 10 percent decline in volumes and 9 percent price/mix (net sales decline would be marginally higher than volume decline mix change). "We forecast 15.4 percent YoY decline in cigarette EBIT," it said.

According to Kotak, FMCG segment may see 9 percent growth and hotels segment 60 percent YoY decline due to COVID-19. The brokerage expects margin expansion in FMCG (up 135 bps YoY to 4.1 percent PBIT margin) and operating loss in hotels segments.

Motilal Oswal also expects a 19.6 percent decline in Q2 adjusted profit and 7.5 percent fall in revenue YoY. "We expect cigarette volume decline of 7 percent/ EBIT decline of 5 percent YoY."

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Key things to watch out for would be update on share loss/gain in capsule cigarettes, commentary on demand trends post unlock and further price hike in cigarettes, and demand outlook for 'other-FMCG' business.

The stock remained under pressure for the calendar year so far, while the recovery seen from March low was also not so sharp like others. It fell 26 percent year-to-date (2020) and 12 percent in September quarter.