ITC Q4 results: Profit drops 9% on-year!

• Revenues decline across segments: The revenues of ITC have contracted across all the segments in Q4FY20. Cigarette revenues, which contributed to about 40% of the total revenues contracted by about 6% to ₹5,130 crore.  The overall revenue growth has come in below estimates, down 6.4% on-year to Rs 11,420 crore. Analysts had estimated revenues around ₹12,000 crore. 
• Lower tax aids profit: While the revenues declined, lower corporate tax aided ITCs Q4 bottom line. Net profit rose 9.1% year-on-year to Rs 3,798 crore in the quarter ended March, beating analysts estimates. ITC also managed to maintain a healthy operating margin of 38.4% in the quarter.
• Covid-19 impact on specific segments: The contagion had a significant impact on the hotels, education and stationery products businesses as it coincided with the peak period and the onset of the school season.
• Hotel business affected: Revenues of the Hotel Segment (about 5% of overall), was severely affected due to the lockdown imposed on March 23rd. ITC said its hotels business posted strong growth in segment revenue and segment results of around 19 per cent and 29 per cent, respectively, during the first nine months of the year. This momentum was sustained in January and February, but the business was severely impacted by the outbreak of Covid-19 pandemic towards the end of the year.
• Dividend: The company recommended a dividend of Rs 10.15 for the financial year ended March 31. This comes after ITC had announced a new dividend distribution policy for FY20, wherein it will offer higher dividend payouts of 80-85% net profit compared to the previous three years. The average over last three years was 69%. The dividend yield comes out to above 5% given the current market price.

While the pandemic has hurt businesses across sectors, FMCG focused business such as ITC, HUL and Nestle have posted decent numbers in the quarter. In fact, food and other FMCG essential services witnessed panic buying and hoarding during the early onset of the pandemic. 

ITC shares have gained by more than 50% from their March lows, as investors were positive on the prospects of defensive businesses such as FMCG and Pharma in these volatile times. 

Sin taxes’ will remain a key overhang on the firm. If the government is unable to meet its revenue targets through taxation, it may need to continue to lean on taxing “sin goods”, such as cigarettes. Such a hike would also impact ITC’s overall revenues. The company has been trying to diversify away from tobacco and increase the revenue share of FMCG and Hotel segments. This shift will benefit the firm, as the FMCG sector commands a higher valuation (PE of around 40), as compared to Cigarettes (PE of around 20). 

Our VGQM model has a BUY rating on the stock.