Date: 7 February, 2018
Price: Rs. 274
No Hike in Excise Duty After 202% rise in previous years to drive volume growth
After almost six years, in the Union Budget 2019, there was no increase in cigarette prices. Since the year 2011 – 12, taxes on cigarettes have been increased by 202%. This has naturally had an impact on the volume of cigarette sales. With no further increase this year, we expect volumes to pick up again.
Growth of non-cigarette FMCG business
ITC has created some landmark brands. Over the last few years, the Company has been expanding rapidly in the FMCG (non-cigarette), retailing and hotel space. To put this in perspective, the company has launched a diverse range of products including confectionaries, biscuits, noodles, wafers and ready to eat meals. Some of its brands such as ‘Vivel’ in the soaps and shampoo category and ‘sunfeast’ in biscuits have quickly cornered a significant portion of the market in which they operate.
For FY 2017, Non-cigarette FMCG business sales have grown over 10 times to reach Rs. 10,512 Crore revenue from Rs. 1013 Crore of revenue as it was ten years ago.
For December 2017, ITC cornered a 16 % market share in overall biscuits with its Sunfeast range, coming neck and neck with Britannia which has been a market leader in the segment. The Vivel brand of soaps and shampoos which was launched in 2008 has within 4 years cornered a sizeable share in the soap segment which has 40+ brands.
In retailing, ITC has established a nationwide presence through its Wills Lifestyle and John Players chain. ‘Wills Lifestyle’ stores currently stand at 400+ outlets in 56 cities and John Players clothing and accessories are available at more than 800 departmental stores across the country.
ITC has finally turned a corner and become profitable in its non-cigarette FMCG business. Thanks to aggressive marketing and celebrity endorsements. Even though at the profitability level, non-cigarette FMCG amounts for only 0.2% (of the bottomline).
|Segment Revenue – Gross (FY 2017)||( ` crore)||Percentage share|
|FMCG – Cigarettes||34,002||57.2%|
|FMCG – Others||10,512||17.7%|
|Paperboards, Paper and Packaging||5,363||9.0%|
|Segment Profits (FY 2017)||(` Crore)||Percentage share|
|FMCG – Cigarettes||12513.91||86.2%|
|FMCG – Others||28.12||0.2%|
|Paperboards, Paper and Packaging||965.84||6.6%|
|FMCG – Total||12542.03||86%|
Results for Nine Month period ended 31 December 2017
For nine month period ended 31 December 2017, non-cigarette FMCG sales were up 8.5 % to Rs. 8,276 Cr (previous period of nine months – Rs. 7,626 Cr) and non-cigarette FMCG profit was Rs. 73 Cr (previous year – loss of Rs. 27 Cr). For the same period the overall revenue was down by 17.11 % to Rs. 33,251 Cr (previous year nine months – Rs. 40,119 Cr) and profit before tax was up by 9.3 % to Rs. 12,518 Cr (previous year nine months – Rs. 11,456 Cr).
The education and stationary business is consolidating its market leadership position with ITCs ‘Classmate’ and ‘Papercraft’ brands and the branded packaged foods business continues to grow rapidly driven by further premiumisation of the portfolio, higher volumes and improved profitability. In addition to managing its own ITC branded hotels, ITC has a 14.98% stake in EIH Limited which operates the Oberoi Group of Hotels and holds a 12.88% stake in Hotel Leela Venture.With improving AARs hotel business will become a larger revenue driver for ITC.
Cigarettes business: Dominant position in a growing industry with a strong distribution network
Indian Tobacco Company Limited (“ITC” or “Company”) is the market leader in cigarettes with 80% domestic market share. Over the years the Company has strengthened its position from a market share of 65% as it was in the year 2000. Put differently, today it manufactures 4 out of 5 cigarettes consumed in India. This dominant position gives ITC a strong pricing power for its products. ITC’s popular cigarette brands include Insignia, India Kings, Lucky Strike, Classic, Gold Flake, Navy Cut, Players, Scissors, Capstan, Berkeley, Bristol, Flake, Silk Cut and Duke & Royal.
The Indian growth story is very encouraging with a significant portion of the country’s large population being below the age of 18 which is the minimum legal age to purchase or smoke cigarettes in India. Such a ‘young’ economy with growing disposable incomes and greater exposure to western lifestyles is favourable for an aspirational product such as cigarettes. Over the next 5 years, there will be roughly 100 million people attaining the age of 18. This should create a potentially huge market and considerable demand for cigarettes. As a company with the widest brand portfolio of cigarettes in India across various price points, ITC is well placed to capture such demand and gain from this opportunity. In terms of distribution network, the cigarette business of ITC is a logistical marvel with 2 million retail outlets (Source: ITC Corporate Presentation). ITC made cigarettes have the deepest penetration and are available in the remotest areas of the country.
Strong financial position
ITC has a history of consistent growth and has one of the strongest financial positions amongst listed companies across all sectors in India. Total returns for ITC shareholders over the 15 year period (i.e. 2001-02 to 2016-17) grew at an impressive CAGR of 21%.
ITC is a debt free Company with reserves in excess of 45,000 Cr despite having spent heavily over the past few years in expansion of its non-cigarette FMCG business. This strong financial position not only enables the company to have bigger marketing and advertising budgets as it forays further into the non-cigarette FMCG business; it also enables the company to take advantage of depressed valuations and acquire assets at cheap prices in a subdued economic environment.
Systemic risk and high regulation and tax in cigarette business
The big investment concern remains that anti-smoking lobbies around the world have been working towards discouraging people from smoking and have gained particular momentum over the last decade. The government attached graphic health warnings on cigarette packets from 2009 which have only become more deterring in recent times. It is difficult to predict the stringency of anti-smoking laws and regulations which may be imposed in future and which may hamper the potential for growth of cigarette business.
Tobacco and in particular cigarettes are taxed heavily in India. It is unlikely that the government will not increase further the rate of tax on cigarettes, let alone reducing such rate.
Any such upward revision in taxes imposed on cigarette sales will make them more expensive reducing the volume of sales which will have a negative impact on the results of operations and financial performance of ITC.
About the Author
Rajat Sharma is a well known stock market analyst and commentator. He has covered Indian markets for over a decade and is regarded for consistently identifying early stage investment opportunities. Attorney by qualification, Rajat has done extensive work for improving corporate governance and disclosure standards.Follow @SanaSecurities