Non-cigarette business accounts for 60% of ITC’s gross revenue

Amnish Aggarwal, head of research at Prabhudas Lilladher says cigarette is a high margin business and when its share is coming down, its profit contribution will not come down to that extent.

ITC limited
During the fourth quarter last fiscal, the diversified conglomerate's Ebit margin for cigarette business stood at 74.2%, while that of the non-cigarette FMCG was at 5.7%.

Evolving from a tobacco company into a diversified business conglomerate, ITC now has over 60% of its gross revenue from non-cigarette segments, up from around 48% five years ago. However, operating profit has not been able to match the pace of growth, with non-cigarette segments accounting for 19% of the overall figure at the end of the last fiscal from around 14% in 2017-18.

Amnish Aggarwal, head of research at Prabhudas Lilladher says cigarette is a high margin business and when its share is coming down, its profit contribution will not come down to that extent. And, when the other businesses are growing, their profit contribution will not increase that much because their margins are lower than that of the cigarette business.

“Non-cigarette business’s Ebit (earnings before interest and taxes) contribution has increased from 14% to 19% during the period (FY18-FY22). The government had increased taxes during the period. If the excise duty on cigarette goes up, then gross revenue also increases for the cigarette business. Now, if I look at cigarette contribution to net sales, then over the same period that has actually come down from around 42% to around 34%. That means it has come down by 8%, where as non-cigarette contribution to Ebit has gone up by around 5%,” said Aggarwal.

During the fourth quarter last fiscal, the diversified conglomerate’s Ebit margin for cigarette business stood at 74.2%, while that of the non-cigarette FMCG was at 5.7%. During fourth quarter of FY22, Ebit margin for cigarette business and non-cigarette FMCG business grew around 80 basis points (bps) and 60 bps, respectively. Significantly, the company has improved Ebitda margin by 650 bps over the last five years for its non-cigarette FMCG businesses.

At the end of FY18, the contributions of the company’s non-cigarette FMCG business —hotels, agri business, paper-boards, paper & packaging — to the gross revenue had been around 25%, 3.58%, 11.60% and 9.52%, respectively.

According to Abneesh Roy, executive director, Institutional Equities, Edelweiss Securities, the rise in contribution of non-cigarette business to ITC’s operating profit has been less than that of the company’s gross revenue as during the pandemic, its hotels, paper, stationery and other businesses were impacted.

“The Indian hospitality industry was significantly impacted during the year due to severe restrictions on domestic and international travel and heightened sensitivity around hygiene and social distancing norms (due to Covid). Domestic air passenger traffic declined by over 50% and international tourist arrivals degrew by 97% during the April-December, 2020 period, leading to low room demand. Consequently, several hotels had to either temporarily close down or scale down operations especially in the first half of the year,” the diversified conglomerate had said in its annual report for FY21.

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