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ITC: GST Cess Weighs on Cigarettes - Views on News from Equitymaster
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ITC: GST Cess Weighs on Cigarettes
Nov 7, 2017

ITC has announced second quarter results of the financial year 2017-2018 (2QFY18). The company faced multiple headwinds during the quarter, and has reported 28% YoY (year-on-year) de-growth and 5.6% YoY growth in revenues and net profits respectively. Here is our analysis of the results.

Performance Summary
  • It was a tepid quarter for ITC as it faced multiple headwinds in the form of higher tax incidence on cigarettes in the Goods and Service Tax (GST) regime, as well as sluggish demand due to disruptions in trade channels because of the GST implementation. Resultantly, net sales de-grew by 28.3% YoY in 2QFY18. The company's revenue for the September quarter slipped sharply to Rs 97,639 million from Rs 136,166 million. During the quarter, the value added tax was replaced by goods & services tax. Due to this restructuring of indirect taxes, net revenues were not strictly comparable.
  • The company's cigarette business, that contributes to a lion's share of 42% to net revenues, slumped by over 47% YoY whereas the non-cigarette FMCG business was up by 5% YoY in 2QFY18. ITC witnessed a sharp decline in cigarette volumes following the latest revision of taxes in July. However, revenue growth in the non-cigarette FMCG sector, helped support growth.
  • ITC's non-cigarette FMCG business posted a revenue growth of 5% YoY which is broadly in line with the industry reported growth so far. As per the management, this growth was aided by strong performance in Branded Packaged foods and Personal care businesses. The inherent strengths of ITC - its widespread reach and strong agri backend - are likely to aid this segment in the long term.
  • Despite falling volumes, ITC was able to expand margins substantially, with EBIT margins at 38.5% and PAT margins at 27%, compared to 26.7% and 18.4% respectively a year ago. The margin expansion was mainly on the back of stable raw material prices and reversal of excise duty during the quarter.
  • ITC's hotel segment reported a flattish growth of 1%. The company said its room revenue grew at a healthy pace on account of higher tariffs but food and beverage sales were impacted by a ban on sale of liquor at hotels and restaurants close to highways.
  • The paperboards business was sluggish on account of depressed cigarette volumes, while the agri business grew by 5% year on year.
  • Despite a de-growth in revenue figures for 1HFY18, the company managed to grow the bottom line. While net revenues in 1HFY18 fell by over 12% as compared to the same period a year ago, ITC was able to grow its net profits by 6.5% YoY, mainly on the back of stable raw material prices.

    Financial Performance Snapshot
    Rs(m) 2QFY17 2QFY18 Change 1HFY17 1HFY18 Change
    Revenues 136,166 97,639 -28.3% 268697 235643 -12.3%
    Expenditure 99,866 60,024 -39.9% 197134 160564 -18.6%
    Operating profit (EBDITA) 36,300 37,615 3.6% 71,563 75,079 4.9%
    EBDITA margin (%) 26.7% 38.5% 11.9% 26.6% 31.9% 5.2%
    Other income 4,754 4,942 4.0% 8,959 9,710 8.4%
    Interest 107 290 170.6% 208 394 89.2%
    Depreciation 2,684 2,824 5.2% 5,297 5,506 4.0%
    Profit before tax 38,262 39,443 3.1% 75,016 78,889 5.2%
    Extraordinary inc/(exp) 0 0   0 0  
    Tax 13,262 13,045 -1.6% 26169 26885 2.7%
    Effective tax rate 35% 33%   35% 34%  
    Profit after tax/(loss) 25,000 26,398 5.6% 48,847 52,003 6.5%
    Net profit margin (%) 18.4% 27.0%   18.2% 22.1%  
    No. of shares (m)         12184  
    Diluted earnings per share (Rs)*         8.5  
    Price to earnings ratio (x)*         31.2  

    *trailing twelve months earnings

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INTRODUCTION:
Equitymaster Agora Research Private Limited (hereinafter referred to as "Equitymaster"/"Company") was incorporated on October 25, 2007. Equitymaster is a joint venture between Quantum Information Services Private Limited (QIS) and Agora group. Equitymaster is a SEBI registered Research Analyst under the SEBI (Research Analysts) Regulations, 2014 with registration number INH000000537.

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  1. 'subject company' is a company on which a buy/sell/hold view or target price is given/changed in this Research Report.
  2. Equitymaster has financial interest in ITC Limited.
  3. Equitymaster's investment in the subject company is as per the guidelines prescribed by the Board of Directors of the Company. The investment is however made solely for building track record of its services.
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