Diversified conglomerate ITC reported a muted financial performance for the December quarter (Q3FY24), with its core cigarette business that contributes around 40-45% to revenue and 80% to the profit witnessing a subdued growth. Revenue from cigarettes grew 3% year-on-year to Rs 8,295.18 crore. The pre-tax profit rose 2.13% year-on-year to Rs 4,966.57 crore and earnings before interest and tax margins declined 75 basis points YoY to 62.6%.
The weak performance prompted a wave of target price cuts by brokerages on Tuesday, even as the stock declined 2.67% to close at Rs 438 on the BSE. Of the 38 analysts tracking the company, 35 have a ‘buy’ rating, two recommend a ‘hold’, and one suggests a ‘sell’, according to Bloomberg data. The 12-month consensus price target implies an upside of 13.2%, Bloomberg said.
ITC’s cigarette volumes, in particular, saw a decline of 2% for the December quarter, against analysts’ expectations of a 2-3% growth. While the cigarette volumes grew in single digits in the June and September quarters of FY24, at 9% and 6%, respectively, thanks to a high base effect kicking in, a volume decline was not expected, analysts said.
Sector experts say the company had to contend with dealer destocking ahead of the vote on account on February 1. Typically, dealers tend to stock up on cigarettes ahead of the Union Budget in anticipation of tax shocks, which helps prop up volumes. But since tax shocks are unlikely in a vote on account, destocking by traders was witnessed.
Analysts at global brokerage Jefferies said ITC’s cigarette segment consolidation on a high base will continue to play out in the quarters ahead. “For Q4FY24, we are now building a 2% volume growth and see a 3% growth over FY25 and FY26. Positive volume growth outlook can be attributed to better execution, market share gains, and sustained innovation,” Jefferies said in a post-result analysis on Tuesday.
Jefferies also said the premium segment of cigarettes for ITC is doing better than the mass segment. For perspective, ITC derives around 20-25% of its volumes from the premium segment (cigarettes above 64 mm in size), while the mass-market segment (cigarettes less than 64 mm in size) accounts for more than 70% of volumes.
Motilal Oswal analysts Naveen Jindal, Pratik Prajapati and Tanu Jindal said ITC’s premium portfolio is performing well and will serve as a growth driver in the quarters ahead. “The value segment of cigarettes is seeing pressure and is a point of concern. In the medium term, cigarettes volumes can sustain low-to-mid-single-digit growth, driven by the premium portfolio,” the analysts said on Tuesday.
Brokerage Centrum said the value growth took a hit as ITC stayed away from hiking prices despite a rise in prices of raw materials within cigarettes. The volume growth, too, remained weak in Q3. “We expect that with stable prices, the cigarette business will be in a good position to capture further market share,” the brokerage said in a note on Tuesday.