The passing of the Tobacco Bill that seeks to limit the spread of smoking on health grounds and high state levies on tobacco and tobacco products have had an adverse impact on the companys sales income.
However, a sharp reduction in raw material prices and increased contribution from other income helped the bottomline. During the year to March 2003, the company has maintained double-digit growth in topline as well as in bottomline. While there was a 16 per cent increase in topline at Rs 6,035 crore (net of excise duty), net profit improved by 15.3 per cent at Rs 1,371.4 crore. It sold 63 billion (60 billion) cigarette sticks. Even though ITC has forayed into other areas such as paper boards, agribusiness and hotels, cigarettes continue to be a major contributor to revenue. During 2001-02, cigarettes accounted for 81.5 per cent of total revenue while their share of net profit was 46 per cent. ITCs strategy to shift towards other products has yet to yield expected results.
The Tobacco Bill that is viewed as a major drag by the tobacco industry has three key proposals - ban on public advertising, prohibition on the sale of cigarettes within 100 yards radius of any educational institution and statutory display of skull and crossbones sign on every cigarette pack.
Growth in profit was due to tough cost-cutting measures employed by ITC during the latest quarter. Raw material costs declined by 30 per cent to Rs 512 crore and its share of net sales dropped to 38.7 per cent (42.2 per cent). The decline in raw material consumption is attributed to lower agri exports. Staff cost fell 29 per cent to Rs 85.4 due to no pension liability this time around. There was one-time item of Rs 35 crore. Minus the one- time item, total operating expenses show a drop of 14.3 per cent at Rs 1,046 crore. Hence, operating profit rose 3.4 per cent to Rs 533 crore. OPM improved to 35.1 per cent .
The anti-smoking campaign makes sense but it is likely to give rise to inferior alternatives. Then there is also the question of millions of tobacco growers. Out of 230 million tobacco consumers in India, it is estimated that only 15 per cent smoke cigarettes. This is expected to drive up cigarette volumes at about 2-3 per cent during FY04. This shows that the governments anti-smoking campaign has its own limits.
The implementation of VAT may give a boost to cigarette sales.