ITC’s third-quarter net profit rose 5.7% to Rs. 2,646.7 crore, as demand for its fast-moving consumer goods including packaged foods was affected by the withdrawal of high-value banknotes and taxes crimped margins at its main cigarettes business.
“The operating environment was extremely challenging during the quarter,” Kolkata-based ITC said in a statement.
“FMCG sales were adversely impacted as a result of lower consumer offtake and reduction in trade pipelines particularly in the immediate aftermath of the government’s decision to withdraw specified high denomination currency notes. While the impact was felt across all operating segments, sales of biscuits, snacks, noodles, personal care products and branded apparel were impacted the most.”
Change of guard
ITC’s Board also approved the elevation of chief operating officer Sanjiv Puri as chief executive officer to succeed Y.C. Deveshwar with effect from February 5. Mr. Deveshwar will relinquish his executive duties after 21 years to play a mentor’s role, as chairman and non-executive director.
The Board also approved the inclusion of ‘healthcare’ in the memorandum of association, signalling that the company may be mulling a future foray into the sector. ITC, however, provided no other details.
Sales rose 4.7% in the quarter ended December to Rs. 13,569.9 crore. ITC said revenue at the hotels business increased by 7%, aided by higher average room rates and growth in food and beverages sales.
Paperboards, paper and packing segment revenue was affected by subdued demand in FMCG and the legal cigarette industry, zero duty imports under FTAs with ASEAN countries, and imports from China. Savings in input costs and improved product mix, however, helped bolster profitability, it said.
“The performance of the cigarette business during the quarter was subdued on account of tight liquidity conditions prevailing in the market and continued regulatory and taxation pressures,” the company said.
Over the last 4 years, the incidence of excise duty and VAT on cigarettes, at a per unit level, had gone up cumulatively by 118% and 145% respectively thereby exerting severe pressure on legal industry volumes, it said.
“The operating environment for the legal cigarette industry in India was rendered even more challenging in the wake of a further increase of 10% in excise duty announced in the Budget 2016 and introduction of the new 85% graphic health warnings on cigarette packages,” it said.
Even as segment revenues remained flat, segment results improved with higher pre-tax profits, ITC said.
Recovery of momentum
The company had implemented several initiatives towards mitigating the demonetisation impact including increasing the service frequency of grocery outlets, enhancing its presence in modern trade and other measures.
“These initiatives, coupled with progressive easing of the liquidity situation, led to substantial recovery of sales momentum towards the end of the quarter,” according to the statement.