ITC Q1 Preview: Cigarettes to Drive Earnings, but Agri and Paper Struggle

ITC Limited, the Indian conglomerate with a diverse portfolio spanning cigarettes, FMCG, hotels, paper, and agriculture, is set to announce its first quarter (Q1) results for FY24 on July 25th, 2023. While the market eagerly awaits the numbers, analysts predict a mixed bag, with the cigarette segment likely driving earnings growth, offset by continued weakness in the agri and paper businesses.

Cigarette Segment: The Steady Performer

ITC’s cigarette business, the mainstay of its revenue and profit, is expected to perform well in Q1 FY24. Several factors point towards a strong showing:

• Healthy Demand: Despite inflationary pressures, the demand for cigarettes remains robust, indicating consumers are willing to prioritize their smoking habit.

• Price Increases: ITC has successfully implemented price increases in the recent past, reflecting the strong pricing power it enjoys in the market. This is expected to translate into higher revenue and margins.

• Market Share Stability: ITC holds a dominant market share in the Indian cigarette market, which gives it a significant advantage in navigating competitive pressures.

Data Point: ITC’s cigarette segment’s revenue grew by 12.5% year-on-year (YoY) in Q4 FY23, highlighting the sustained strength in this business.

Agri and Paper: Headwinds Remain

While cigarettes are expected to drive growth, the agri and paper businesses continue to face headwinds:

Agri Business:

• Commodity Price Volatility: The agri business remains vulnerable to fluctuations in commodity prices. The recent decline in prices of key agricultural products like wheat and cotton has put pressure on margins.

• Input Costs: Rising input costs, including fertilizers and packaging, are further squeezing profitability in the agri segment.

• Weather Uncertainty: The Indian monsoon season, crucial for agricultural production, is unpredictable. Unfavorable weather conditions could impact yield and further strain the business.

Paper Business:

• Weak Demand: The paper industry is grappling with weak demand, primarily from the printing and packaging segments. This is attributed to the shift towards digital media and the impact of the global economic slowdown.

• Competition: The paper segment is intensely competitive, with several domestic and international players vying for market share.

Data Point: ITC’s agri business reported a 2% YoY decline in revenue in Q4 FY23, while the paper business saw a 3% YoY fall.

Key Factors to Watch:

• Raw Material Costs: The impact of rising raw material costs on margins will be closely watched across all businesses, particularly in agri and paper.

• Pricing Power: The ability of ITC to pass on higher input costs through price increases will be a key determinant of profitability.

• Volume Growth: While cigarettes are expected to perform well, the growth trajectory in other segments, particularly FMCG and hotels, will be closely monitored.

• Operating Expenses: Efficient management of operating expenses will be crucial for maintaining profit margins.

Analyst Expectations:

Analysts anticipate ITC to report strong revenue growth in Q1 FY24, driven by the cigarette segment. However, profitability is expected to be impacted by rising input costs and weakness in agri and paper.

Key Sentiment:

• Positive: The strong performance of the cigarette segment is expected to be a key driver of earnings growth.

• Cautious: The continued weakness in agri and paper segments raises concerns about overall profitability.

• Strategic: ITC’s focus on expanding its FMCG portfolio and investing in new businesses could provide future growth opportunities.

Overall, ITC’s Q1 FY24 results are likely to be a mixed bag, with cigarettes driving growth but agri and paper facing challenges. Investors will be closely watching the company’s strategies to navigate the current market environment and its ability to unlock long-term value creation across its diversified portfolio.

Keywords: ITC, Q1 results, FY24, cigarettes, agri business, paper business, revenue growth, profitability, input costs, commodity prices, FMCG, hotels, market share, demand, pricing power, operating expenses, analyst expectations, sentiment, strategy.

Please note: This article is for informational purposes only and should not be considered as financial advice. It is important to conduct thorough research and consult with a qualified financial professional before making any investment decisions.