ITC’s cigarette business clocks recovery, albeit on a low base

A man talks on his mobile phone as he walks past an ITC office building in Kolkata (File image: Reuters/Rupak De Chowdhuri)

Better-than-expected cigarette sales lit up ITC’s first-quarter earnings for FY22 as the company reported a 37 percent jump in net revenue to Rs 12,217 crore as compared to Rs 8,911 crore reported in the corresponding period last year. Its net profit for the period stood at Rs 3,013.5 crore (standalone) -- a rise of 28.6 percent as opposed to Rs 2,343 crore in Q1FY21.

The growth in topline was largely led by the company’s cigarette, FMCG and paper segments. The second wave of COVID-19 had limited impact on the segments, especially when compared to the first wave, which coincided with the first quarter of FY21.

“Pandemic-led disruptions impacted most consumer companies but weighed heavily on ITC, which reported a sharp earnings decline in FY21. ITC enjoys a low-base benefit but the first-quarter performance has been sharply ahead, led by cigarettes (and paperboards),” brokerage firm Jefferies said in a note.

Cigarette sales recover

ITC’s revenue from the cigarette segment, its mainstay, jumped 33 percent during Q1FY22 to Rs 5,122 crore in comparison to Rs 3,854 crore a year ago. The company registered a 37 percent jump in earnings before interest and tax (EBIT) in Q1FY22 to Rs 3,221 crore.

Cigarette sales contributed 65 percent to ITC’s revenues.

The jump came on a low base as the first quarter of FY21 had witnessed a significant decline in sales due to the onset of COVID-19 and a nationwide lockdown.

“Cigarette EBIT was up 36.7 percent YoY in Q1FY22 on a weak base (38.8 percent decline in Q1FY21). However, it was still 16.2 percent lower than the Q1FY20 levels, and there is little indication of segmental EBIT growth returning to over 10 percent levels anytime soon,” Motilal Oswal Securities said in a note.

The company, however, informed that after severe disruptions in May, there has been week-on-week improvement in market conditions from mid-June, with most markets returning to normalcy and witnessing faster recovery compared to the first wave, consequent to the easing of restrictions, even as certain parts of Kerala, Odisha and the North-East remain partially impacted.

“The pace of volume recovery is better, compared to the previous wave of COVID-19, aided by improved mobility, distribution expansion, and new launches. Also, restrictions were not as severe as previous lockdowns," said Mehul Desai, Analyst, Anand Rathi Shares and Stock Brokers.

ITC introduced several new cigarette variants, such as Gold Flake Excel, Wills Navy Cut Filter and Berkeley Hero, during the quarter, in focus markets. “Gold Flake Premium and Capstan Special 5’s packs were launched in line with evolving consumer preferences,” it said.

This, too, aided growth in the category.

FMCG category remains resilient

The FMCG category, which include several essential products, has helped the company tide over a difficult year. Though ITC registered over a 10 percent growth in FMCG in Q1FY22, it came over a high base of the corresponding period in FY21. Being essential in nature, FMCG had comparatively been less impacted by the first wave. Hoarding by consumers as the government announced lockdowns also led to a sales spike for several FMCG companies in the first quarter of FY22.

Its revenue from the segment stood at Rs 3,726 crore during the quarter as compared to Rs 3,375 crore in the year-ago period (Q1FY21). The FMCG EBITDA grew 16 percent YoY while EBIT was up 38 percent.

“The modest growth has been due to a high base of last year as categories like staple/foods benefited from pantry loading coupled with disruption in the current quarter,” said the note by Jefferies.

ITC had reported a 26 percent decline in net profit in Q1FY21 over Q1FY20, but its revenue from the FMCG segment had grown 10 percent YoY in the quarter as consumers scrambled to stock up essential products.

Despite continued growth in FMCG, ITC continues to draw the highest share of its revenue from cigarettes, a matter of concern for analysts.

“With the cigarettes business likely to contribute over 82 percent to ITC’s overall EBIT even in FY23E (from 85 percent in FY20), there is no material reduction in the dependence on this segment – which is beset by concerns of a) weak EBIT growth for several years now, b) the overhang of a possible GST increase. going forward, and c) ESG-related issues over tobacco, leading to a reduction in valuation multiples,” said Motilal Oswal Securities.