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ITC Q2 Results Preview: Profit seen falling nearly 30% YoY as cigarette tax hikes bite

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In short

The tobacco division's shortfall is projected to trigger a 20 percent drop in consolidated EBITDA and reduce overall operating margins by 619 basis points. Subdued performance in the agricultural sector will offer little relief, with revenue growth there stalling at just two to three percent. However, non-cigarette units should soften the blow, bolstered by double-digit FMCG growth and capacity additions in paper packaging following the Century Pulp and Paper acquisition.

Key points

  • Nuvama Equities projects a 3% decline in consolidated revenue alongside a substantial 20%…: Nuvama Equities projects a 3% decline in consolidated revenue alongside a substantial 20% drop in consolidated EBITDA.
  • Operating profitability will experience intense pressure as consolidated EBITDA margins a…: Operating profitability will experience intense pressure as consolidated EBITDA margins are expected to contract to roughly 28.5%.
  • Stronger non-tobacco divisions like FMCG will partially cushion group earnings with antic…: Stronger non-tobacco divisions like FMCG will partially cushion group earnings with anticipated revenue expansion between 11% and 14%.

Sources checked by our analysis pipeline: 1

Analysts expect cigarette volumes to decline around 8% year-on-year (YoY), while operating profit from the business could fall as much as 29%, as higher taxes and insufficient price increases continue to weigh on margins.

Nuvama Equities expects ITC's consolidated revenue to decline 3% YoY, hurt by weakness in the cigarette business and subdued agricultural operations, partially offset by growth in FMCG. The brokerage also projects a 20% YoY decline in consolidated EBITDA, with the margin contracting by 619 basis points to around 28.5%.

JM Financial and Motilal Oswal Financial Services have also flagged pressure on cigarette earnings, although both expect the company's non-cigarette businesses to deliver relatively healthy growth.

Cigarette volumesThe cigarette business, ITC's largest profit contributor, is expected to remain under pressure for another quarter as higher taxation affects pricing and consumer demand.

JM Financial estimates cigarette volumes will decline 8% YoY, while segment EBIT is expected to fall 29%. The brokerage said the decline would reflect the impact of the new tax regime and the normalisation of channel inventory.

Nuvama expects cigarette net revenue to fall 23% YoY,…

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