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ITC’s cigarettes business grows during FY23 but drops in revenue contribution

ITC’s cigarettes business grows during FY23 but drops in revenue contribution

Over the years, there has been a decline in the share of the cigarette business in ITC’s overall revenue. In fiscal year 2013 (FY13), the cigarette business accounted for 47 percent of ITC’s total revenue. However, this share has gradually decreased and stood at 37 percent in fiscal year 2022-23 (FY23), despite a larger revenue base.

ITC’s most recent annual report emphasizes that the company’s leadership position has been sustained through various strategic factors. These include:

1. Nurturing a future-ready portfolio: ITC focuses on developing and maintaining a portfolio of world-class products that align with emerging market trends and consumer preferences. This involves continuous assessment and adaptation to ensure relevance in an ever-changing business landscape.

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2. Integrated seed to smoke value chain: ITC’s strong presence in the tobacco sector is supported by an integrated value chain that covers the entire process from seed cultivation to the manufacturing and distribution of tobacco products. This integrated approach allows for better quality control and cost efficiency.

3. Superior consumer insights: ITC places significant emphasis on gaining deep insights into consumer behavior and preferences. By understanding consumer needs and expectations, the company can tailor its offerings to better meet market demands and build long-term customer loyalty.

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4. Robust innovation pipeline: ITC maintains a strong focus on innovation and continuously invests in research and development activities. This enables the company to introduce new and innovative products, differentiate itself in the market, and stay ahead of the competition.

5. World-class product development capabilities: ITC’s product development capabilities are backed by state-of-the-art facilities and expertise in manufacturing and technology. This enables the company to create high-quality products that cater to diverse consumer segments and meet stringent regulatory requirements.

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By leveraging these strategic pillars, ITC aims to adapt to changing market dynamics, enhance its product offerings, and maintain a strong market position across its various business segments beyond cigarettes. This strategic approach helps ITC navigate industry challenges and sustain its growth in an evolving business environment.

According to a report by Emkay Global, ITC’s business is projected to achieve around 8 percent sales growth on a compounded basis, amounting to over Rs 24,000 crore for the fiscal year 2022-23 (FY23). The report further estimates a 9 percent growth in earnings before interest and taxes (EBIT) between FY23 and FY26.

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To drive growth and cater to evolving consumer preferences, ITC has recently introduced differentiated variants in its portfolio. Some of the notable launches include:

1. Classic Connect: This variant offers a unique smoking experience, targeting specific consumer preferences and taste profiles.

2. Gold Flake Indie Mint: A variant that combines the flavor of traditional Gold Flake cigarettes with a mint twist, providing a refreshing smoking experience.

3. Gold Flake Kings Mixpod: This variant introduces a mix of different flavors, offering consumers a varied and distinctive smoking experience.

4. Classic Alphatec: A new addition to the Classic brand, offering advanced technology and enhanced product features to meet the changing needs of consumers.

5. Gold Flake Smart Mintz: Another mint-infused variant that combines the trusted Gold Flake brand with a refreshing mint flavor.

6. Wills Fab: A variant introduced under the Wills brand, designed to provide a unique and satisfying smoking experience.

7. Lucky Strike: A renowned international brand launched by ITC in the Indian market, catering to a distinct consumer segment.

These differentiated variants demonstrate ITC’s commitment to innovation and meeting diverse consumer preferences. By introducing new products with unique features and flavors, ITC aims to enhance its market position, attract new consumers, and drive sales growth.

The company’s focus on product development, innovation, and brand diversification allows it to tap into emerging market trends and adapt to changing consumer demands. These efforts align with ITC’s objective of nurturing a future-ready portfolio and sustaining its leadership position in the tobacco industry.

The annual report of ITC highlights the company’s efforts to counter illicit trade, strengthen its market position, and fortify its product portfolio through various strategic initiatives. These include:

1. Innovation: ITC focuses on product innovation to meet evolving consumer preferences and demands. By introducing new and differentiated products, the company aims to stay ahead in the market and provide unique offerings to consumers.

2. Democratising premiumisation: ITC aims to make premium products more accessible across various market segments. This strategy involves offering premium features and experiences at different price points, enabling a wider range of consumers to enjoy elevated product offerings.

3. Enhancing product availability: ITC emphasizes improving the availability of its products to meet the demands of consumers. This involves strengthening distribution networks and ensuring that products are easily accessible in various markets.

4. Superior on-ground execution: ITC strives for excellence in executing its business strategies. This includes efficient management of operations, effective marketing, and strong execution on the ground to drive sales and maintain a competitive edge.

Based on the positive outlook for ITC’s business prospects, Emkay Global has given a buy recommendation for the company’s stock. Emkay has set a price target of Rs 525, reflecting confidence in the firm’s structural prospects and growth potential.

In terms of stock performance, ITC’s share price closed at Rs 473.55 on the BSE on Friday, representing a significant increase of over 60 percent in the past year. This upward trend in the stock price suggests investor optimism and positive market sentiment towards ITC’s future prospects.

The combination of the company’s strategic initiatives, positive outlook, and favorable stock performance indicates confidence in ITC’s ability to sustain growth and create value for its shareholders in the coming period.

According to the report, the core cigarette business is expected to benefit from rational tax hikes in the future, as the higher ad-valorem component of taxation will lead to volume growth. This, combined with an improving product mix, is projected to drive high-single-digit EBIT (earnings before interest and taxes) growth for the segment.

In terms of non-cigarette operations, the report highlights the potential for profitable growth and an improving return profile. The individual segments within this category are considered self-sufficient in addressing their growth requirements. The report also mentions that execution will play a crucial role in capitalizing on the enhanced demand in sectors such as food and beverage, agricultural exports, and paper.

The report emphasizes the significance of ahead-of-time capital expenditure (capex) as a competitive advantage for the company, contributing to its positive structural prospects. Furthermore, it identifies the potential value unlocking in the hotels operations as a near-term catalyst for growth.

Regarding the cigarettes business specifically, the report points out several key factors that could act as tailwinds. These include the expectation of limited sharp tax hikes due to the higher ad-valorem component in taxation. While the possibility of double-digit taxation cannot be ruled out entirely, the government is anticipated to adopt a more rational approach to tax increases.

The report also highlights the importance of connecting with the youth through innovative formats, such as low-smell products and flavor and capsule formats. Additionally, the company’s fortified product portfolio, efforts to curb illegal supplies, and improvements in sales mix from deluxe size filter tip to regular size filter tip and king size filter tip are identified as positive factors.

In summary, the report emphasizes the positive prospects for ITC’s core cigarette business, expecting rational tax hikes and highlighting the company’s efforts to connect with the youth and strengthen its product offerings. It also underscores the potential for profitable growth and improved returns in the non-cigarette operations, with execution and ahead-of-time capex seen as critical factors.

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