Cigarette demand continues to remain weak. Volumes in the first four months of FY02 (April-July 2001) have fallen by an estimated 8% YoY. The domestic industry is suffering from the double whammy of increased contraband cigarette sales and steep price hikes due to excise duty pressure. ITC being the industry leader continues to be under pressure as a result.
According to ITC chairman Mr. Y. C. Deveshwar, contraband cigarettes are growing at 20% per annum. The continuous excise related price hikes have rendered the smuggled International brands at par with the domestic ones (if not lower). This is only one aspect of ITC’s woes.
The government’s ban on tobacco sponsorship for sports and cultural events was initially cheered because it put ITC’s competitors in the dock. It was thought that it would cut ITC’s advertising expenses by half, which accounted for nearly 5% of net sales. Though this presumption may turn out to be true, it doesn’t seem beneficial for a cigarette company in the long run.
For a ‘habit’ industry like cigarettes it makes more sense to target users at an early age. Corporate sponsorships of popular sports like cigarettes helped in roping users at an early age. Going forward this may not be easy. Also, unlike users in the past who chose from Indian brands, today’s potential users are exposed to a whole gamut of international brands at competitive prices. All this seems to have put a question mark on the potential market expansion of cigarettes.
For ITC another concern is its increased investment plans in non-tobacco ventures, primarily hotels, retailing and paper. ITC plans to invest Rs 15 bn over the three years in hotels and Rs 15 bn investment in paperboards business spread over five to seven years. Its Rs 2.5 bn investment plan for its retail foray is also on. Historically, ITC’s diversifications have not done too well. These investments could further put pressure on its returns.
At the current market price of Rs 739 ITC trades at a P/e of 15 times its FY02 projected earnings. The valuations are on the lower side of the FMCG spectrum. But the valuations are likely to continue to suffer unless the aforesaid concerns show signs of tapering off.
ITC Ltd has announced third quarter results of the financial year 2016-2017 (3QFY17). The company has reported 4.7% YoY and 5.7% YoY growth in revenues and net profits respectively. Here is our analysis of the results.
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