ITC posts healthy margin gains for cigarette, FMCG businesses when most peers face headwinds

Cigarette-to-soap maker ITC saw healthy margin expansions in its key cigarette and non-cigarette FMCG businesses during the fourth quarter last fiscal, when most of its peers witnessed margin headwinds. The diversified conglomerate grew its EBIT margins by around 80 basis points year-on-year at 74.2% for its cigarettes business and around 60 basis points year-on-year at 5.7% for the non-cigarette FMCG business during the January-March quarter this year. Given that agri-commodities constitute a large part of the company’s raw materials for its FMCG businesses, input cost pressures are relatively low. While the cigarette segment’s operating profit increased 12.21% y-o-y to Rs 4,114.27 crore, that for the non-cigarette FMCG segment registered a 25% y-o-y growth to Rs 235.99 crore during Q4FY22. Operating profit for the agri-business segment increased 28.51% y-o-y to Rs 243.98 crore, but its EBIT margins remained flat at 5.6%. “At a time when most peers witness margin headwinds, every single segment of ITC has seen stable to expanding margins in 4Q, with smart gains in cigarette & FMCG,” Jefferies said in a note. During the fourth quarter, the diversified conglomerate’s Ebitda (earnings before tax, interest, depreciation and amortisation) was up 16.8% y-o-y to Rs 5,224.36 crore. ITC’s scrip on BSE closed 3.43% higher at Rs 275.65 apiece on Thrusday, when benchmark Sensex dived 1,416.30 points or 2.61%. During the day the scrip touched 279.15 apiece, a new 52-week high. On Wednesday, the conglomerate beat street estimates, reporting an 11.81% year-on-year rise in standalone net profit to Rs 4,190.96 crore for the fourth quarter last fiscal, aided by a 15.71% y-o-y growth in its gross revenue from sale. Revenue from the cigarette business rose 9.96% y-o-y to Rs 6,443.37 crore as there was a 9% volume growth. The company said there was a “robust broad-based recovery” in cigarettes despite disruptions due to the third wave. Volumes surpassed pre-pandemic levels. “ITC continues to innovate in cigarettes to counter illicit trade and reinforce its market standing,” Edelweiss Securities said. “Stable taxation on cigarettes is expected to drive volumes, going forward. Moreover, the company has been gaining market share in cigarettes from last one year through new premium products and aggrieve trade promotion”,” ICICI Securities said in a note on Thursday. ICICI Securities said FMCG sales growth was led by strong growth in the education & stationary segment due to re-opening of schools, sustainable growth in staples and high growth in discretionary categories. Though hygiene portfolio (Savlon) sales came down from the peak, they were still significantly higher than pre-Covid numbers. “FMCG growth is led by mix of volumes, pricing growth & product mix enhancement,” the note said. The non-cigarette FMCG business registered 12.32% y-o-y growth in revenue to Rs 4,141.97 crore. Ebitda margin for the FMCG segment was up 75 bps to 9%, despite commodity inflation pressure. The company was also able to maintain full year margins at 9% (up 10 bps) despite commodity inflation and lower sales of high margin stationary business sales in earlier quarters. During Q4FY22, the company’s agri-business revenue grew 29% year-on-year to Rs 4,366.34 crore, driven by wheat, rice and leaf tobacco exports. “Notwithstanding the challenging operating environment, the business leveraged market opportunities and delivered strong growth with wheat exports expanding three-fold and rice exports doubling over FY21,” Motilal Oswal Financial Services said in a report. The hotels business posted a 35.39% y-o-y increase in its revenue at Rs 389.64 crore, and an operating loss of Rs 34.22 crore against Rs 40.10 crore in the fourth quarter of the previous fiscal. “Hotels witnessed recovery led by focus on domestic leisure and weddings segment,” Edelweiss Securities said in its note. “Hotels saw third wave impact in January/ February, although exit occupancies surpassed pre-pandemic levels. ARRs improved q-o-q, although remain below-pre-pandemic levels. Management highlighted improvement in business travel and a nascent revival of international travel,” Jefferies added in its note.