Having tanked 8 per cent on Budget Day last month when excise duties on cigarettes were hiked sharply, the ITC stock is now much more cheerful. News reports that the company had effected 10 to 25 per cent price hikes across cigarettes of various lengths sent the stock up over 2 per cent.
On the NSE, the stock ended up 2.4 per cent or Rs 8.20 at Rs 346.40.
Excise duties on cigarettes have been raised in every Budget from 2012-13 onwards. In the February Budget, excise duties on cigarettes of less than 65mm in length were increased by 25 per cent, while duty on cigarettes of length over 65 mm were raised 15 per cent.
The cigarettes business is ITC’s money spinner, accounting for around 40 per cent of revenues. ITC has consistently increased product prices in response to higher duties. The average hike effected now is reported to be at 15 per cent.
Persistently higher prices have put off consumers; ITC’s December 2014 quarter was its weakest in cigarette sales with the segment growing less than 1 per cent. Underlying sales volumes have been shrinking as well. Fresh price hikes may keep revenue steady, but volumes to sustain the growth may fall further.
But where the hike will help ITC is in profitability. The cigarettes segment accounts for the bulk of profits at almost 85 per cent. With the steady hikes in selling prices, the segment’s profit margins rose from 62.6 per cent in the March 2014 quarter to 69.7 per cent by the December 2014 quarter.
Compensating other segments
Maintaining the profitability of the cigarettes cash cow is important for ITC in order for it to support investments in FMCG and hotels and compensate for lower profits in other segments. The FMCG business, while having revenues that can rival Dabur or Godrej Consumer, swings between losses and nebulous profits. The hotels business is also grappling with over-supply in the luxury segment and lower room rents. Agri-business may see a muted performance with commodity prices turning lower.