ITC’s FMCG show still tepid, Street shrugs off cigarettes, hotels bounce

As the Covid wave receded in the country, ITC witnessed recovery in the cigarette and hotel businesses, while the FMCG and agribusinesses posted subdued performances. The ITC stock closed 5.5% lower on Thursday.

Toward the end of the September quarter, cigarette volumes recovered to near pre-Covid levels. The hotels business performed well with occupancy rising to three times that posted in the base quarter. As a result, the losses of the hotels business shrunk to ₹48 crore from the year-ago level of ₹185 crore. Occupancy levels are still below the pre-Covid levels – indicating scope for improvement in the coming quarters.

The paperboards volumes stood at a record high due to the revival of demand across most end-user segments except publications, quick service restaurants and wedding card businesses.

However, the FMCG segment – held to be the most vital by the Street – posted disappointing performances for the quarter. Revenues rose 3% year-on-year – affected due to the high base effect in the case of staples, convenience foods and the hygiene portfolio. There was a rebound in the ‘out-of-home consumption’ even as ‘at-home consumption’ got rationalised.

School closures continued to adversely impact the company’s stationery business. There has been a 3% year-on-year contraction in the FMCG segmental profit impacted in part by the unprecedented commodity inflation. At 13%, the overall raw material cost increased faster than the growth in revenues.

The agribusiness emerged as the only segment posting a decline in revenues. The performance was impacted by the delay in customer call-offs due to a shortage in availability of containers, port congestions and inclement weather.

Despite the overall input cost inflation, the company has been able to sustain its operating margins at 34.6% – 60 bps higher than the year-ago level – achieved through cost management practices and judicious pricing actions.

With the cigarette business not yet completely out of the woods and the FMCG business struggling to maintain consistent growth, ITC’s investors continue to remain sceptical. Before the results, the ITC stock had risen 16% in the past six months. Factors such as uncertainty over the panel set up on tobacco tax and ESG investing theme are likely to limit any major upside in the stock.