Cigarette Sales, Price Hikes

FMCG companies in India have been grappling with high input costs and margin pressures over the last several quarters. There are also worries that consumers may resort to downtrading or cut back on spending if the overall economic uncertainties continue and RBI hikes interest rates further. However, there will be no such concerns for ITC when it reports second quarter results on Monday. Its bread and butter cigarettes segment continues to surge ahead as consumers smoke tobacco away, despite price hikes and pictoral warnings. The company has raised prices of its Navy Cut and Classic brands by 10%, and analysts expect there will be more price hikes in coming quarters. "The company has not raised prices enough to compensate for the VAT increase in Tamil Nadu, West Bengal and Andhra Pradesh in the second quarter," say Amnish Aggarwal and Harit Kapoor of Motilal Oswal Securities. Still the price increases that ITC has taken will boost EBIT earnings before interest, taxes margins by 80 basis points, they say. Its cigarette volumes are expected to grow 7% in July-September, Bank of America Merrill Lynch sees ITC’s margins surge 115 bps in the quarter. Kotak Securities expects ITC’s cigarette division sales will rise 13% from a year ago, helped by a mix of price hikes and volume growth. While the cigarette business remains robust, its non-cigarette FMCG business is also expected to remain on the growth track. Sharekhan expects the FMCG business losses will reduce 12% year-on-year. The Motilal Oswal analysts expect EBIT losses in FMCG will decline 16%, while sales increase 19%. "Improved profitability in foods Bingo breakeven in the first quarter FY12, education and lifestyle retail will drive the decline in EBIT losses," say Aggarwal and Kapoor. Overall, analysts are expecting ITC to report 17-19% year-on-year profit growth as its other divisions -- paper boards & packaging and agri business are also expected to report strong growth. Sharekhan expects these businesses will grow in 20-25% range from a year ago. Only the hotels business is likely to see modest growth, given that the July-September quarter is generally a lean period for the sector. ITC stock has outperformed its sector and also the broader market over the last three months. While ITC has shed 1.6% of its value, the CNX FMCG index is down 4% and the wider Nifty has tumbled over 10% over the past three months. Will it continue to top its peers post the results? ITC could be a potential results outperformer says BofA Merrill Lynch. Other brokerages like Motilal Oswal and Sharekhan advise a "buy," B&K has "outperform" rating and Angel is neutral on ITC. The stock closed down 0.5% at Rs 204 on NSE on Friday.