Aided by a favourable business mix, portfolio premiumisation and supply chain agility, ITC has reported a healthy performance for its non-cigarette FMCG segment during the fourth quarter of last fiscal. Despite inflationary headwinds, the segment reported around 70 bps year-on-year Ebitda margin expansion at 9%.
The non-cigarette FMCG business had posted an Ebitda margin of 8.1% in Q4 of FY19-20, the pre-pandemic year. Ebitda grew 46.5% to `375 crore during January-March 2022 against `256 crore in the same period of 2020. The y-o-y Ebitda growth of 22.5% for Q4FY22 was also much ahead of peers.
ITC’s non-cigarette FMCG segment is now large-scale, delivering structural growth and improving margins, HSBC Global Research said in a note on Tuesday. “We think this trend will be sustained and further improve the appeal of FMCG-Others in ITC’s overall value creation,” HSBC said in its note. During Q4FY22, the non-cigarette FMCG business registered a 12.32% y-o-y growth in revenues to `4,141.97 crore, while operating profit registered a 25% y-o-y growth at `235.99 crore. HSBC said the non-cigarette FMCG business is “a growth engine” for the cigarette-to-FMCG-to-hotel major. “We remain bullish on this segment,” it added.
According to Kotak Institutional Equities, the conglomerate offers decent earnings’ growth visibility, led by recovery in cigarettes and relatively steady performance in FMCG. Kotak, in its report, said strong FMCG margin growth in Q4 notwithstanding inflationary pressure was due to strong growth in discretionary/Out Of Home (OOH) categories, resilient performance in staples and convenience foods, driven by robust growth in Aashirvaad, Sunrise spices, and Bingo snacks. YiPPee (instant noodles) witnessed normalisation of demands.
Though there was demand volatility in the hygiene portfolio, it was still significantly above pre-pandemic levels. However, recovery in stationery, aided by reopening of schools and colleges, was still below pre-pandemic levels.
For the fourth quarter last fiscal, the company’s revenue from the cigarette business rose 9.96% y-o-y to `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. The cigarette segment’s operating profit increased 12.21% y-o-y to `4,114.27 crore.
“Cigarette volume growth was at ~9% (2% three-year CAGR) and, with a stable demand environment, we expect this trajectory to improve in the coming quarters,” HDFC Securities said in its recent report.
The company said after a challenging FY20-21, and despite repeated disruptions during the last financial year, the cigarette business “progressively recovered” on the back of improved mobility and easing of restrictions, surpassing pre-pandemic levels in the latter half of the year. “The business effectively leveraged institutional strengths, digital technologies and learnings from previous waves to respond with agility across all nodes of operations,” the cigarette major said, adding that it realigned supply chain operations to service market requirements through strengthening direct reach in target markets across all traditional trade channels and augmenting the stockist network to service rural and semi-urban markets efficiently.
HSBC Global Research, however, said its scenario analysis suggests, even with a bull case cigarettes scenario (which is fraught with volume risks and regulatory uncertainties), overall upside still looks very limited. “Barring the current rebound, cigarettes volumes are on a structural decline which we think is unlikely to change,” it said, adding that even price in elasticity (after years of incessant price increases to fuel EPS growth) has waned, constraining cigarettes EBIT growth makes cigarettes (85% of overall earnings) a drag on overall multiples, creating the illusion of value.
Notably, the diversified conglomerate grew its Ebit margins by around 80 basis points y-o-y at 74.2% for its cigarettes business during the fourth quarter of last fiscal.