While rising FMCG presence is a positive, the cigarette business will keep revenues on the growth path.
Nothing succeeds like success. The management at ITC would believe so, as it enters into fairness segment with elan. The company’s foray into the consumer staple business is well chronicled. Its personal care segment has delivered strong revenue growth of 70 per cent on an annual basis in the current financial year, and an increasing market share in the soap and shampoo categories.
From almost nothing in 2007, the soap and shampoo categories garnered market shares of 5 per cent and 4 per cent, respectively. And, even if the share of the cigarette business continues to fall to around 75 per cent in the coming years, it is strongly positioned as well.
Analysts note ITC took a 13 per cent average price increase, post-budget. This sharp hike could have an impact and the June quarter may actually see a fall in volumes. Yet, profitability is expected to be intact.
According to analysts at Edelweiss, the cigarette business’ earnings before interest, tax depreciation and amortisation (Ebitda) margins are likely to rise 30-50 basis points in the next financial year. The company is currently test marketing a 59 mm mid-size filter (in Berkeley, Scissors and Capstan brands) in 30 markets, and is cautiously positive on the segment, they mention.
Also analysts at Macquarie Research reckon volumes would bounce back in the second half of the current financial year. “The income-based indicator shows the cigarette price growth has lagged the per capita income growth and have increasingly become much more affordable,” the report mentions. More, the company would be generating strong cash flows, and this is what makes it a favourite on the bourses, besides the bonus issue.
Analysts estimate the company will have around Rs 1,500 crore of untilised cash and allow to grow the way it wants. Another observation from Macquarie analysts is that the company’s share price has done well, even when rains have been deficient. In past rain-deficient years, it has been observed that Hindustan Unilever underperformed relative to the market during the June-September period and ITC outperformed. So, it’s gung-ho for the company at the moment.
