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Tuesday, January 24, 2012

ITC’s cigarette biz drives margin improvement

ITC Ltd’s December quarter results show a company in fine form, extracting the most out of its cigarettes’ franchise, with its other businesses providing able support. But it would be natural for shareholders to keep an eye on the national budget.

ITC Logo
ITC Ltd Logo
The government’s desire to increase revenue may see it hike duties on cigarettes. Cigarette companies argue that undue duty hikes only pushes users to illegally sell cigarettes. While the likelihood of a duty hike is higher this year, ITC has proven that it has the capability to ultimately overcome such obstacles in its cigarettes business.

In the December quarter, ITC’s sales rose by 14.2% year-on-year to Rs6,195 crore while net profit rose by 22.5% to Rs1,701 crore.

The cigarettes segment remains a key contributor, with sales growth of 16.6%, while its segment profit margin improved by 180 basis points year-on-year. This segment contributes to about 80% of the profit before interest and tax. One basis point is one-hundredth of a percentage point.

Among other segments, its consumer products division is seen as the business of the future and sales rose by 24.4%, though the segment continues to make a loss. But the positive sign is that the loss keeps getting smaller, even as the business keeps growing. ITC’s chief objective in this business is to use the cash flows from the cigarette business to grow a very large consumer business.

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