MUMBAI: Old habits die hard. There were worries that the lengthy nationwide lockdown starting 25 March may push some smokers to quit smoking. Naturally, if this happens, ITC Ltd’ volumes would take a beating.
However, for investors, initial trends appear encouraging. Analysts from Credit Suisse Securities (India) Pvt. Ltd said in a report on 29 June, “Cigarette sales were near zero in the month of April, and resumed in the mid of May. The initial trends in May and June are reassuring, as the level of decline does not indicate any large scale quitting of smoking.” The broking firm added, “However, it is too early to call out the trend, as May and June had an element of pipeline re-stocking in trade.”
ITC derives a lion’s share of its profits from the cigarettes business and hence, is very crucial to determine the fortunes of the company. As such, investors would track ITC’s cigarette volumes closely going ahead. With the June quarter expected to be deeply impacted owing to the lockdown, cigarette volumes are expected to decline for this financial year 2021.
For the June quarter, analysts estimate ITC’s cigarette volumes to have declined by around 10%, which is not too surprising with the covid-19 led disruptions in March end. Last quarter, cigarette revenues declined by 6.5% year-on-year. Revenues from non-cigarettes fast-moving consumer business declined by 2.7%, which doesn’t look too bad. Here, the packaged foods segment has done well helped by the increasing in-home consumption. Revenues from hotels and agri-business dropped by 8.6% and 10%, respectively.
Overall, ITC’s net profit of ₹3797 crore is better than ₹3511 crore that a Bloomberg poll of analysts had estimated.
Post results, shares of the company increased by 1.8% in early deals on Monday, a day when the Nifty 50 index was trading more 1% lower. The ITC stock trades at about 15 times estimated earnings for financial year 2022, according to Bloomberg. Motilal Oswal Financial Services Ltd analysts said, “While valuations appear inexpensive, the narrative on ITC has changed over the past year with ESG concerns over cigarettes increasing worldwide. Consequently, global tobacco peers have witnessed sharp contraction in their multiples.” ITC’s investors also need to watch out for potential changes in cigarette taxes in India.