ITC profit falls 17% as cigarette taxes burns a hole in ITC's profits

Mumbai: Higher cigarette taxes took a toll on ITC Ltd’s earnings in the September quarter, as falling volumes and shrinking margins outweighed the strong growth in its packaged foods business. Despite a pickup in demand for biscuits, snacks and packaged staples, the company’s profit fell 17% from a year ago even as revenue jumped nearly 44%, underscoring the weight of its cigarette business.

Consolidated profits after tax before exceptional items were at ₹4,249 crore, down 17% from ₹5,121 crore a year ago, while consolidated revenue from operations jumped nearly 44% to ₹30,578 crore, ITC announced after market hours on Monday.

Consolidated earnings before interest, taxes, depreciation and amortization (Ebitda) fell 15.7% year-on-year to ₹5,645 crore.

Analysts at brokerage firm Nuvama said ITC's Ebitda margin of 28% for the reporting quarter was 665 basis points (bps) lower than a year ago, but 134 bps higher from the previous quarter.

Ahead of the results, shares of ITC closed 0.3% higher on Monday, lagging benchmark Nifty 50 that ended 1.7% higher.

ITC’s cigarette business grew 1.78x to ₹15,536 crore year-on-year, although margins were squeezed as the operating income fell more than 27% year on year to ₹3,813.45 crore.

Equities brokerage firm Nuvama estimated ITC’s cigarette volumes had fallen 7-8% year-on-year during the quarter.

“Legal industry volumes remain under pressure due to unprecedented increase in tax,” ITC said in a press release, adding that the sharp increase in taxes had led to lower domestic demand, weighing on the company’s leaf tobacco business, which is part of ITC’s agri business vertical.

Late last year, India approved a law that replaced the 28% goods and services tax (GST) on cigarettes along with a compensation cess with an additional excise duty over and above the 40% GST tax slab reserved for 'sin' goods. The new tax rates kicked in from 1 February this year, leading to an immediate price rise of ₹22-25 per pack of 10 cigarettes. ITC had last raised its cigarette prices late September.

However, the overall agri business picked up pace after a slump. Revenue from the segment grew to ₹4,452 crore, up 12% from a year ago despite supply chain disruptions and input cost rise triggered by the West Asia war. Much of the growth came from value-added products, including export-grade spices and fruits and vegetables, the company said.

Revenue from the paper and packaging business was up 36% to ₹3,016 crore, largely due to the acquisition of Aditya Birla Group’s Century Pulp and Paper, which was completed in August.

Like-to-like revenue growth in the segment was 10% year-on-year, with price hikes mitigating higher input costs.

Revenues from the FMCG-Others segment grew 15.6% to ₹6,967.17 crore, while the segment’s Ebitda was up 22% year-on-year at ₹723 crore.

The segment’s growth was broadbased and had hit a 14-quarter high, the company said. There was an over 20% jump in revenue from biscuits, snacks and packaged staples, ITC said.

“Sharp input cost escalation across categories [was] mitigated through portfolio mix enrichment, cost management initiatives [and] calibrated pricing actions,” the ITC statement said, adding that “calibrated” price hikes and premiumization in the portfolio had protected the Ebitda margins.

ITC’s portfolio of digital-first and organic brands grew over 70% year-on-year to top an annualized revenue rate of ₹1,800 crore during the quarter. This portfolio includes its acquired brands, including frozen meat and snacks brands Prasuma and Meatigo, organic staples brand 24 Mantra and healthy snacking brand Yogabar.

The company’s ‘fresh foods’ business of cloud kitchens also grew 53% from a year ago to cross ₹320 crore revenue. The vertical operates delivery-only kitchens under several brand names, including Aashirvaad Soul Creations.

“ITC’s Q2FY27 results were marginally ahead of estimates, driven by FMCG, Agri, and paper,” analysts at Nuvama said. “The cigarette business was exactly in line with our estimates, with a mild recovery quarter-on-quarter.”

Growth in ITC's FMCG business comes after a challenging June quarter, where growth and margins were affected due to input cost inflation led by the ongoing war in West Asia and the mixed performance of Aashirvaad atta.

“Ongoing impact on inputs would be proactively mitigated through focused cost management initiatives, revenue management and price-volume rebalancing,” analysts at brokerage firm JM Financial had said in a note in August.

In its investor presentation, ITC flagged “moderating” global growth, but said that the demand in India remains resilient.

“West Asia led disruptions, imported inflation & El Niño pose downside risks to growth outlook,” the company said, adding that Brent crude oil prices are escalating again and ocean freight rates are at all time highs, posing a risk to ITC’s input costs as well as export-oriented businesses including the agri segment.

The company also flagged this year’s monsoons as the weakest in a decade, with nearly half the country reporting drought-like or abnormally dry conditions.

Highlighting these factors, the company said they had led to higher uncertainty, and that it will monitor consumer sentiment, inflation rates and rural demand for the rest of the fiscal year.

Rival Hindustan Unilever Ltd (HUL), India's largest packaged consumer goods company, has also flagged margin pressure due to higher input costs. Last week, it had reported a 14-quarter high in sales growth led by a 7% jump in volumes for the September quarter, although margins in personal care, its key segment, fell. The company also cut back on advertising spending during the quarter.

HUL's consolidated profit after tax was unchanged from a year ago at ₹2,796 crore, due to a one-off tax-related gain of ₹273 crore a year ago.

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