ITC's cigarette sales smoky, FMCG lags too: ICICI Direct

FMCG major ITC which today reported significant (nearly 250 basis points) growth in operating margins, failed to impress street with its numbers as net sales came nearly Rs 400 crore lower than market expectation. The stock plunged nearly 4 percent post disappointing sale numbers.

The Kolkata-based company’s first quarter numbers clearly shows signs of a slowdown in cigarette sales volumes, Sanjay Manyal, Research Analyst, ICICI Direct pointed.
“Sales growth have been lower probably because there is a degrowth in the cigarette volumes and that’s a signal what we got when the management took second time price hike subsequently when it was not required to improve margins,” Manyal explained.
Aggressive hike in excise duty since past two years and the subsequent price hike have taken a toll on the cigarette volumes. Manyal stressed that market always believed that ITC’s cigarette business was not impacted due to price hikes, but it now seems that it is being impacted.
ITC's first quarter net profit rose 18 percent on-year to Rs 1,891 crore and  net sales rose at 10 percent on-year to Rs 7,339 crore.
ITC’s FMCG business was also clearly showing signs of deceleration due to slowdown in demand. The business, which was expected to grow at more than 20 percent per annum is now in its early teens, Manyal said.
The only savior is company’s agri business which is growing at more than 20 percent as compared to expectations of 10 percent. Manyal maintained cautious stance on the stock with a target price of Rs 328.   

 

Below is the verbatim transcript of the interview

 

Q: We have just read out the main numbers to you. The margins are the big positive, almost 250 basis point (bps) higher than what they did last year and 200 bps better than what the street expected, 37.1 percent, but disappointment on the sales front, Rs 7,338 crore is what they have reported against our poll of Rs 7,800 crore, your first thoughts?

A: It is certainly disappointing on the sales front as well as on the profitability front. Sales growth have been lower mainly because probably there is a degrowth in the cigarette volumes and that’s a signal what we got when the management took second time price hike subsequently when it was not required to improve margins or to pass on this excise duty hike. So, it probably would have been because of either volumes degrowth or very low volume growth from the cigarette segment and that is probably one of the reasons we can see the disappointment in the sales growth.

 

Q: So, you would say that the several rounds of value added tax (VAT) and excise duty increases, more of VAT increases and the company daring to pass it on is affecting demand?

A: No, I would rather say that they have taken a price hike immediately after the excise hike and after that subsequently they have taken another price hike, which is not required to maintain their margins. So that is probably because the volume growth was not there or there probably would have been a degrowth in the volumes of cigarette segment.

 

Q: You don’t think the street will look kindly to the fact that they sacrificed volumes in favour of margins?

A: More certainly not, even if we look at the sales volume number for the cigarette business specifically, almost last 10 years have shown a three percent kind of a volume growth every year. So, obviously the two years continuous aggressive excise hike and the subsequent price hike have taken a toll on the volumes. We used to say that cigarette business does not really have impact because of the price hike; it is having an impact now.

 

Q: What about the agri business? Over there the sales have come in at Rs 2,188 crore. So that’s a gain of about 29 percent, the margins for the agri business seem to have come in at about nine odd percent or so. How would you react to that?

A: Specifically agri number is much better than what we were expecting. Last year we have seen they have exported huge quantities of wheat and probably this year it has been replaced by some other commodity, but certainly this numbers seems pretty good. We were expecting around 10 percent odd growth in agri business, which is now more than 20 percent.

 

Q: Non-cigarette fast moving consumer goods (FMCG) has risen from about Rs 1,479 crore to Rs 1,750 crore, I think that would be a little less than 15 percent growth. Does that look like an inline with expectation performance?

A: No, we were expecting around 22 percent kind of growth in the FMCG business. I think the management has indicated earlier also that they are witnessing a slowdown in the demand in the FMCG segment. They used to do mid teens volume growth in FMCG business; now last quarter it was around early teens and probably I think the same has been impacted this time also. So, there is a clear visible signs of slowdown in the FMCG.

Q: So, your first thoughts would be that you may want to relook your price targets and your rating on the stock?

A: No, our price target was Rs 328 and I think we were cautious in last quarter also and I think we maintain our stance.