Excise duty is dependent on length of cigarette and keeps changing. ITC plays around these to maximizing profits rather than revenue. I remember they reducing length of some brands to fall in lower tax bracket, thus keeping retail prices same, taking a hit on revenue but increasing profitability.
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Thank you kb_snn and nav_1996 for your response.
I completely agree with your point that regarding volume and product mix and the fact that ITC might have played with the cigarette length
But lets take a look at some facts and try to link them together. “ITC management mentioned in page number 40 of 2016 annual report that the incidence of Excise duty and VAT on cigarette at per unit level has gone up cumulatively by 118% and 142% over the last 4 years. Which means that from 2012 to 2016 the Excise duty has gone up by 118% per cigarette”
Lets ignore VAT and look at just Excise duty.
Assume that in 2012 cigarette price per unit was = Rs10
In 2012 excise duty/gross rev = 45%
Therefore Excise duty per unit = 45%*10= Rs 4.5
Now in 2016 if excise duty has increased by 100% then its
2016 excise duty per unit = 4.5*2 = Rs 9
in 2017 excise duty/gross rev = 47%
That means if we reverse calculate the price of cigarette it should have grown to = 9/47% = Rs 19.14
In other words the price per unit has almost become double.
Its gross rev from Cigarette from 2012 to 2016 went up from 22250cr to 32348cr which is a growth of 45%. Now if the price per unit has gone up by 90% and rev grown by 45% means then volume went down by 45% (assuming mix is same)
So does it mean that the volume and product mix (smaller length) has undergone 50% change in the time period from 2012 to 2016? I am not sure if that it the case? Can someone please tell me what key information or assumption I am missing here?
All this I am trying to do is to understand what might happen in future if government will come up with another tax increase for cigarette.
Read this you will understand the concept better
Most FMCG company which masters in area of marketing like advt etc and lot of their initiative are strategic long term in nature -
However ITC has to masters tactical Product R&D , product sizing and pricing in addition to strategic marketing . Its response esp in pre budget and post budget - what to produce , what to stock and what to sell has to fast and quick . Moment a tax is announced it tries to optimise the product mix to ensure there is minimum volume and profitability impact .
For this it controls entire value chain - Tobacco field level development with farmers , basic inhouse commodity screening and manufacturing , in house packaging of products , manufacturing of final product and sales outlets through well planned shelf design. This all improves its response time across even small paan shops .
Now for future … I think GST rate is constant across segment - so that product length approach no longer exist But they have great brains within company who know how to protect gross margins . They have been doing it for over 75 odd years across many budgets . There is nothing to indicate that they cannot do that in future .
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Thank you kb_snn.
This explanation is quite helpful.
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Hi,
Everything is good about ITC.but it has become the cheapest FMCG stock with one the best professionally managed business.Simply there is no value created for shareholders in last 5 years.Only consolation is dividend income.
Thanks,
Deb
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Fmcg and non cigarette profits are slowly becoming more n more meaning ful with strong growth on both topline and bottomline.
Rerating could be around the corner.
HUL: Same FMCG, nothing has changed drastically in the way it operates, yet throughout 2010 to 2014 it traded in a PE-range of 25 to 35. However, folks are now happy to pay PE 77. Some consider it a strong buy at 10% correction.
It is great company, which is in for a long period of time correction.
ITC price has been in a sideways movement for half a decade. On occasion it excites investors who are waiting for a breakout. The opportunity on staying invested in ITC has been significant. The dividend and all is there but I think net net there is nothing on the table
I feel ITC is going to have its HUL moment in near future with PE re-rating as the non-tobacco revenues and profits become substantial in the larger scheme of things at ITC
Non-Tobacco revenues already form a big portion of top-line. The issue is its lack of contribution to bottom line. That turn-around is what gives not only earnings expansion, but also re-rating scope. For now as a cigarette business alone 25x-30x is a premium valuation in general but for the pedigree of ITC, in the Indian context market and its optionalities it does not seem as expensive as the other heavyweights. It can be argued that it is at some sort of a “reasonable” valuation.
As per reports in Bloomberg quint ITC is evaluating options to buy caffe coffee day.that piece of news might be another dragger to it.
Hi,
Thanks,
Deb
Hi,
Thanks,
Deb
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Thank God, ITC shareholders don’t need further diworsification, there was some talk last year of them entering the hospital business. In my opinion, Tata Global which has partnership with Starbucks in India could be a good candidate to take over CCD.
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ITC is already in cafe business under Sunbean coffee cafe. How ever it is serving only premium segment and hence they have not considered CCD offer.
I believe those are only present within their own ITC hotels only and there is no standalone cafe like CCD/Starbucks till now.
I see a lot of positives for ITC compared to other FMCG companies
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Most of ITC’s profits are from a habit forming product
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A good portion of ITC’s FMCG products are in the premium segment which has been less affected in the present slowdown
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Amazon has entered some categories which are major revenue and profit contributors for HUL
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ITC’s 80% profits (cigarettes) are immune to the Amazon risk.
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Given our government’s love for taxes and seeing the extent of prevelance of illegal cigarettes, the government might clamp down on illegal cigarettes.
I also believe I am suffering from confirmation bias and I first decided that ITC is a good investment and then started looking for supporting evidence subconsciously. Therefore I am seeking fellow members’ help in seeing the bear case for ITC.
Things that I think go against ITC
- It’s a conglomerate. Resulting lack of focus. Some not so great business segments
- Increasing cost difference between legal and illegal cigarettes may lead to the market further shifting away from the legal industry.
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ITC growth for FMCG mainly has been in top-line. Bottom line is still dependent on Cigarettes followedby Hotels. The kicker will start coming once FMCG expansion and penetration deepens and converts into bottom line. It is a buy and hold stock. There has been fall in export of tobacco which needs some understanding otherwise the tax for this year is a positive for ITC.
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ITC is all set to shut down the premium retail brand Wills Lifestyle. ITC says the Lifestyle retailing business is continuing to execute structural interventions including restructuring the retail footprint and rationalising stores
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