Supreme Court diktat on pictorial warning may mar ITC’s prospects

Smokers were back with a vengeance in the March quarter helping ITC post a 10.2% growth in cigarette volumes to Rs 4,639 crore from Rs 4,211 crore a year ago.

But with stringent pictorial warning kicking in on April 1, it’s doubtful if the tempo in cigarette sales would continue in the current year’s first quarter and beyond.

Total income from all businesses including food FMCG and apparel, agri commodity, hotel and paper rose 9.43% on year to Rs 10,168.73 crore. Net profit for the quarter ended March grew 5.68% to Rs 2,495.20 crore over the previous year, though it was down 5.94% from the previous quarter.

A major feature of its tobacco business was a significant improvement in profits by 11.5% to Rs 3,018.56 crore from Rs 2,706.15 crore a year ago.

“The cigarette business which forms about 50% of the total revenue reported a growth of 10.2%, indicating an uptick in cigarette volume. During the quarter, the Ebit (earnings before interest and taxes) margin in the cigarette business improved by 79 basis points (bps, one bps is equivalent to one-hundredth of a percentage) to 65.1%. The surprise element is the Ebit growth of 11.5% where the company was reporting low single digit of Ebit growth in the past few quarters,” IIFL said in a note post earnings announcements.

Hotels revenue grew 4.8% to Rs 363 crore with Ebit margin improving by 54.4 bps to 16.4%.

Significant improvement in business volume was seen in agri-business to an extent of 25.6% at Rs 1,806.80 crore over Rs 1,427.90 crore year ago though Ebitd (earnings before interest, tax and depreciation) rose by just 6% signifying a decline in Ebit margin by 186 bps during the quarter.

ITC attributed this improvement to factors like significant scale up in sourcing of wheat for ‘Aashirvaad’ atta.

The impact of shutting of cigarette production in the wake of stringent regulation didn’t impact quarterly results.

The factories were initially shut from April 1 for 15 days demanding clarity with respect to rules prescribing the 85% pictorial warnings on packages of tobacco products.

The Supreme Court then on May 4 passed an order transferring to the Karnataka High Court all writ petitions pending in various courts challenging the rules observing that tobacco companies should endeavour to follow the rules. The cigarette factories were again shut from May 4 and production progressively resumed from May 8.

“The legal cigarette industry in India will be hard pressed to counter the menace of illegal cigarettes as they will be perceived by the consumer to be safer in the absence of the statutorily mandated health warnings. Coupled with the fact that illegal cigarettes are available at a fraction of the price of legal cigarettes, the new graphic health warning will provide a further fillip to the growth of illegal cigarettes in the country,” ITC said.

A better-than-expected performance made ITC come out a bonus issue in the ratio of one share for every two shares held.

ITC last issued bonus shares in 2010 in a generous ratio of 1:1.

The cash-rich company also announced a dividend of Rs. 8.50 per ordinary share of Rs 1 each face value.