Price rises help ITC beat profit forecasts

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ITC Ltd, India's largest cigarette maker, relied on price increases to post a better-than-expected rise in quarterly profit as cigarette volumes slackened, sending down its shares by 3.8 percent, their biggest fall in nearly a year.

Analysts who spoke with the company told Reuters that cigarette volumes grew 4-5 percent in the third quarter, while prices rose 8-8.5 percent ahead of an expected steep increase in excise taxes expected in the 2013/13 federal budget.

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"There has been a slight drop, about a percentage point lower, in cigarette volumes from what was expected, and because that is the largest segment it is hurting sentiment," said Arnab Mitra, an analyst at India Infoline Ltd.

Cigarettes make up about 50 percent of the sales of the company, which is 31.7 percent by British American Tobacco Plc .

ITC, which also makes packaged foods, personal care products and runs hotels, reported a 22 percent rise in net profit to 17 billion rupees for the quarter ended December 31.

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The company, whose brands include Sunfeast biscuits, Bingo snacks and Mint-o-Fresh candies, was expected to report a profit of 16.2 billion rupees, according to Thomson Reuters I/B/E/S.

Net sales rose 14 percent to 62 billion rupees.

Indian consumer goods companies are reeling from rising commodity inflation, sluggish consumer demand and high interest rates.

"Cigarette margins have gone up, which has been the main driver for the strong earnings growth," said Naveen Trivedi, an analyst at Pinc Research.

Cigarette margins rose by 250 basis points in the quarter, another analyst who was briefed by the company said.

Revenue from ITC's FMCG business, which includes cigarettes, grew 17 percent while the revenue in its agri business increased 10 percent, helped by the depreciation of the rupee.

The hotels business, however, was hurt by the weak macro-economic environment in the United States and Europe, two of its key source markets, the company said.

Hotel revenue fell 1 percent to 3.1 billion rupees, although earnings rose 15 percent to 1.02 billion rupees.

ITC, which has a market capitalization of $30 billion, plans to raise prices gradually by 6-7 percent this year across its packaged food categories, Chief Executive Chitranjan Dar told Reuters last week.

"Despite cigarettes constituting only 15 percent of overall tobacco consumption, the continuing discriminatory taxation and polarised regulatory framework against cigarettes in India is a major cause of concern," the company said in a statement.

ITC shares closed 3.8 percent down at 201.30 rupees.

ITC trades at 22.6 times 12-month forward earnings, compared with 28.1 times for Hindustan Unilever, India's largest consumer products firm, according to Thomson Reuters Starmine. Nestle India trades at 32.8 times and Godrej Consumer at 18.3 times.