Mumbai: Shares of ITC Ltd are about 8% away from its pre-covid highs seen in February. As the company reports its June quarter earnings today, cigarette volume performance is expected to be miserable. On the other hand, analysts expect ITC’s fast-moving consumer goods (FMCG) business to perform better. This would be helped by higher in-home food consumption as Indians spend more time indoors to protect themselves from the virus.
“We expect the FMCG business to have done well on the back of both foods and personal care (due to health and hygiene). Biscuit should see good double-digit growth. Snacks should do well as well" said analysts from Edelweiss Securities Ltd in a report on 8 July.
True, FMCG contribution is small for ITC currently but analysts expect the segment to do better from a medium-term perspective. In FY20, FMCG segment contributed about 25% of total revenues and 2.4% of earnings before interest and tax (Ebit).
“FMCG segment was already recording higher-than-expected margin gains (+300 basis points in two years), which may increase further. We now forecast FY21/22 FMCG Ebitda margins of 9.2%/10.8% (7-7.5% earlier) versus 7.1% in FY20, which can result in Ebit doubling in FY21," points out a report from Emkay Global Financial Services Ltd on 23 July. One basis point is one-hundredth of a percentage point. Ebitda is earnings before interest, tax, depreciation and amortization.
Having said that, the cigarette business is ITC’s mainstay and contributed almost 85% of its overall Ebit in FY20.
For the March quarter, the company’s cigarette volumes were estimated to have declined by about 10% year-on-year. For the June quarter, many analysts have forecast a much sharper volume decline of as much as 35%. The covid-19 pandemic lockdown impacted cigarette sales for a good part of the quarter. “However, the June run rate is likely to be a mid-single digit decline, including the impact of the channel re-stocking, which we need to see if it sustains in July," said a Credit Suisse Securities (India) Pvt. Ltd report on 6 July.
Meanwhile, valuations offer comfort. The ITC stock trades at about 15 times estimated financial year 2022 earnings, based on Bloomberg data. Note that while the prospects of the FMCG segment are relatively brighter, considering that cigarettes contribute a lion’s share of ITC’s earnings, investors will keep a close eye on the segment’s recovery.
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