ITC’s Margin Contracts, Says Demand Remains Sluggish After GST

ITC Ltd. said its two main businesses – cigarettes and consumer goods – remain under pressure as it reported subdued quarterly earnings.

Demand for fast moving consumer goods remains sluggish after the Goods and Services Tax disrupted the distribution channel, the company said in a statement. The cigarette segment, which contributes half of its revenue, is also under “tremendous pressure from sharp increase in taxes over the last few quarters”, it said.

Net profit rose 6 percent to Rs 2,640 crore in the three months ended September over the year-ago period. That compares with Rs 2,670 crore consensus estimate of analysts tracked by Bloomberg. Revenue rose 7 percent year-on-year to Rs 10,314 crore, ITC said in an exchange filing.

Earnings before interest, tax, depreciation and amortisation rose 4 percent to Rs 3,762 crore while the operating margin contracted by 110 basis points to 36.5 percent.

Cigarette sales at Rs 4,550 crore were not comparable with the same quarter last year as excise is no longer part of revenue after the GST rollout.

“The legal cigarette industry, already reeling under the cumulative impact of steep increase in taxation over the last five years and intense regulatory pressures, was further impacted by the sharp upward revision in GST Compensation Cess,” the company said. The combined impact of increase in excise duty in the last budget and the cess resulted in an incremental tax burden of over 20 percent on ITC, it said.

The “sharp increase in tax incidence” on cigarettes will lead to tax arbitrage by informal players, the statement said.

Other Highlights

• Earnings before interest and tax in absolute terms for the cigarette segment rose 2.4 percent to Rs 3,292 crore.
• Ebit for ITC’s hotel segment rose to Rs 4.2 crore from Rs 65 lakh year-on-year.
• Ebit for its agri business fell 14 percent to Rs 256.
• Ebit for its paper and paperboard business rose 18 percent to rs 274 crore.