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Cigarette Tax Chokes ITC, Net Misses Street Projections in Q3
The Economic Times - 22 Jan 2015

ITC's third-quarter profit missed expectations as higher taxes limited growth at its flagship cigarette business, sending the company's shares sharply lower on Wednesday.

Net profit rose 10.4% to Rs 2,635 crore in the October-December period; analysts on average were expecting Rs 2,692 crore, according to Thomson Reuters.

Net sales grew a marginal 2% to Rs 8,800.22 crore as robust sales in packaged food, personal care and stationery products grew better than rivals, partly offsetting nearly flat growth in cigarettes and lower revenue from some other divisions such as agri-business. The hotel segment posted marginal growth.

ITC shares fell 5% on BSE to close at Rs 352.60 on Wednesday.

In a release, ITC said the quarterly performance reflected the full impact of the steep excise duty hike – up to 72% - on cigarettes announced in the last Budget. The recent sharp increase in value-added tax by Tamil Nadu, Kerala and Assam also hurt cigarette business that brings a little less than half the sales at the company, it said.

ITC's cigarette business reported less than 1% growth in sales at Rs 4,141.9 crore in the past quarter while profitability rose 8.8% as the division posted a gross profit of Rs 2,886.31 crore. According to analyst estimates, ITC's cigarette sales volume in the past quarter dropped more than 10% over the same period last year while profit growth of the business was one of the slowest in recent years.

Kotak Securities FMCG analyst Ritwik Rai said ITC has suffered double-digit (in percentage terms) volume decline in the quarter in the cigarette segment. "The results indicate significant impact of price hikes on consumer demand for cigarettes and challenges the belief that cigarette demand shall remain inelastic in the face of consistent price hikes."

The non-cigarette FMCG business comprising brands like Bingo!, Sunfeast and Engage reported an 11.4% jump in sales at Rs 2,314.1 crore. Its profitability improved over the same period last year by 10.7% at Rs 11.5 crore. The hotel business reported 4.7% growth in revenue at Rs 330.3 crore while gross profit fell to less than half at Rs 28.7 crore due to additional depreciation charge of Rs 12.6 crore and gestation costs of two new hotels in Bengaluru and Gurgaon. The company said the hospitality industry continued to be impacted by weak pricing environment.

ITC's agri-business revenue fell 10.5% at Rs 1,597.86 crore, which it attributed to lack of trading opportunities in soya due to higher crop output in the US, Brazil and Argentina while profit went up 16.2% at Rs 238.84 crore due to improved realisations, mainly in leaf tobacco. In the paperboards, paper and packaging business, revenue fell 4.6% to Rs 1,198.77 crore and profit dropped 7.6% to Rs 213.88 crore. The company cited slowdown in FMCG and cigarette industries for this impact.

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