Tobacco major ITC, which sells cigarette brands Goldflake, Classic, and Bristol, is seeing a slowdown in revenue growth. Revenue growth for ITC’s cigarette segment has slumped from 29 percent in Q1FY23 to 8.5 percent in Q2FY24. Should this be a cause of worry for investors?
After ITC's July-to-September earnings, brokerages said that volume growth for ITC's cigarettes was lower than expected. Motilal Oswal had estimated a volume growth of six percent, but the actual growth was four percent in Q2FY24.
Analysts Moneycontrol spoke to said that ITC’s revenue growth from cigarettes has been moderating since Q1FY24, albeit on a higher base. The growth rate was higher in the last one year on account of factors like moderating taxation, growing out-of-home consumption, and weak competition from other listed cigarette peers, said analysts. A high base in the last financial year is causing a lower growth rate this financial year, although growth levels this year are comfortable, say analysts.
One of the reasons for high growth in the last fiscal is a moderation in taxes. Excise duty had increased at a CAGR of 16-18 percent over FY13-18 and it moderated with a 3-5 percent increase over FY19-23, said an analyst. “An increase in taxes on cigarettes over FY13-18 made cigarettes expensive, which in turn lowered volumes of listed players like ITC,” said a consumer analyst. The period of FY22 had seen a recovery in cigarette volumes. So, FY22 and FY23 was the period where cigarette consumption picked up and boosted revenues for ITC.
Excise revenue collection fell sharply as excise duty on cigarettes reduced in that period.
In the previous budget, the government increased the NCCD (National Calamity Contingent Duty) on cigarettes by 16 percent, but this did not have much of an impact, with cigarette prices increasing by a mere 7-12 paisa per stick. NCCD is levied as a percentage of excise on certain manufactured goods, including cigarettes.
Secondly, in FY23 illegal cigarette players and some other larger players were facing challenges that diluted competition in the market and benefited ITC, said Preeyam Toila, FMCG and retail analyst at Axis Securities.
After the pandemic, the sales of cigarettes saw a significant rise due to the increased out-of-home consumption, said Vishal Gutka of Phillip Capital. He mentioned that in FY23, people returning to offices contributed to the noticeable increase in cigarette sales during the same period.
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Volume growth is estimated to be in mid-single digits over the next two quarters, while revenue is estimated to be in double digits, said an analyst.
Emkay Global Financial Services, in a report on the sector, estimates that cigarette volumes will grow 3-5 percent over FY24. “From the core cigarette business perspective, we expect rational tax hikes ahead, given a higher share of the ad-valorem component leading to a build-up of volumes, which, along with an improving mix, would aid high-single-digit EBIT growth,” said the brokerage firm.
Analysts say that even though the growth rate for the cigarette business is slowing, it does not pose a concern for ITC.
Post Q1FY24 earnings, brokerages have maintained add/buy ratings on the stock. HDFC Institutional Research has an 'Add' rating on the stock with a target price of Rs 450 per share. Motilal Oswal has a buy rating on the stock with a target price of Rs 535 per share.
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