Despite an encouraging show on the topline front, it’s the bottom-line performance of ITC that the Street has frowned upon. Notwithstanding a double-digit revenue growth aided by around 8 per cent volume surge in cigarettes, the Street was not pleased with the December quarter performance of tobacco-to-FMCG major ITC. As a result, the stock slumped more than 4 per cent, declining for the fifth consecutive session on Wednesday.
ITC posted a 4 per cent increase in net profit – the slowest growth in the past 11 quarters – against an expectation of double-digit growth. The operating margin too decreased by 140 bps over the year-ago level. Higher raw material cost (including higher leaf tobacco prices) dented the bottom-line growth. Input cost grew nearly 20 per cent, higher than the 15 per cent growth in revenues. Likewise, other expenses (including ad spend) grew faster than the top-line growth.
The cigarette business contributes over 80 per cent to the company’s bottom-line. So, any headwind in the business has a direct impact on the bottom-line and valuations. Little wonder then that the Street ignored the smart gains in cigarette volumes against a corresponding drop a year ago. The same was also the case with the non-cigarette businesses that posted a double-digit growth in revenues. The margins of the FMCG and hotels business also improved over the earlier quarters.
The ITC stock is trading at the same level as two years ago. It has predominantly been a value stock rather than a growth one. With increased taxation and curbs on smoking, the cigarette volumes are unlikely to have a secular increase. The company has been zealous in steadily improving its profitability. Hence impact on the bottom-line in any quarter is likely to evoke a negative response from the Street.
Trading at 28.5 times its trailing four quarters earnings, the stock is one of the cheapest in the FMCG sector. The price-to-earnings multiple of the ET FMCG Index stands at 47. However, the subdued bottom-line performance of the December quarter doesn’t make the stock any more attractive.
With the Q3 results behind it, the Street is going to closely track next month’s Union Budget for the triggers on ITC. The stock typically trades flat, or weak, ahead of the Budget in the fear of higher taxes on cigarettes.
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