ITC’s consumer business ticking amid demand revival, say analysts

A pickup in consumer sentiment, backed by stable taxation in cigarettes and the shift to branded goods from unbranded products, is aiding diversified conglomerate ITC.

The Kolkata-based major reported robust earnings in the March quarter (Q4) of FY23, led by its cigarettes, hotels and fast-moving consumer goods (FMCG) businesses. Net profit grew 23.4% year-on-year to Rs 5,175 crore, while Q4 revenue grew 7.3% versus last year’s `19,058 crore, ahead of street estimates. Commodity-led businesses such as agri-products and paper and packaging, on the other hand, under-performed amid demand and price volatility, sector experts said.

ITC derives 39%, 26% and 4% of its topline from cigarettes, FMCG and hotels, respectively, according to analysts. In terms of bottomline, cigarettes are still the big drivers, contributing to 77% of the company’s earnings before interest and tax (Ebit), followed by FMCG at 8% and paper and packaging at 7%, said analysts at Prabhudas Lilladher, based on numbers declared for Q4 and the full year of FY23.

A favourable demand environment, pickup in economic activity, buoyant tax collections and government investment in infrastructure augur well for its consumer-facing businesses such as cigarettes, hotels and FMCG, ITC said in its latest investor presentation.

Its commodity-led businesses, meanwhile, have been struggling in recent quarters on the back of a ban on rice and wheat exports and muted demand for paper boards, ITC said.

According to sector experts, ITC’s agri-business and paper and packaging divisions are significant sales contributors at 19% and 12% each.

Pulp prices have softened after a sharp rise in the first half of FY23, while restrictions on rice and wheat exports impacted segment revenue in Q4), the company said.

Even then, ITC’s patience is paying off, notably in cigarettes, where the company had lost volume share to illegal players following an increase in taxation in the past.

“Cigarette volumes shot up by 12% year-on-year in Q4FY23 versus a five-year compounded annual growth rate of 5% in terms of volumes reported in the past. This implies that there have been market share gains by ITC from illegal players, which is a good sign,” Abneesh Roy, executive director at brokerage Nuvama Institutional Equities, said. “Stable taxation should aid growth in cigarettes volumes in the future,” he added.

The FMCG business delivered a 19% year-on-year revenue growth and margin improvement despite inflationary pressures in some agri commodities such as milk and wheat, sector experts said.

“Unlike its peers in consumer staples, ITC has reported a consistent performance in its FMCG business, led by growth in categories such as biscuits, noodles, snacks, dairy and beverages,” analysts at brokerage Motilal Oswal said in their post-results analysis on Friday.

At least three of ITC’s top brands, Yippee Noodles, Aashirvaad Aata and Sunfeast biscuits are part of the company’s foods portfolio and the company has indicated that it would like to add more from this segment to its top brand list.

ITC is also aggressively investing in new go-to-channels including direct-to-consumer and quick commerce apart from leveraging AI in manufacturing and distribution to drive growth in its FMCG business, it said in its investor presentation.

Amnish Aggarwal and Harish Advani, analysts at Prabhudas Lilladher, said that the hotels business, which doubled revenue in Q4 versus last year to `809 crore, has a positive outlook for the future due to G20 and a revival in business and leisure travel. Kunal Vora, analyst at BNP Paribas, added that momentum in the hotels business would sustain led by a burst in wedding activities as well as meetings, events, conferences and exhibitions.

ITC said there was a healthy pipeline of management contracts under Welcomhotel, Mementos, Storii and Fortune brands to capitalise on the momentum. The hotels division has over 115 hotels in 80 destinations across six brands.

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