Ultra News

ITC Q2 hit by steep hike in tax load after GST implementation

ITC Ltd said its performance during the second quarter was relatively subdued due to “severe pressure” on the cigarette industry and sluggish demand conditions prevailing in the FMCG industry. Operating conditions in the Agri Business and Hotels Segment also remained challenging, it said.

On a comparable basis, Gross Sales Value’ stood at Rs 16,391.58 crores representing a growth of 3.9%.

Profit Before Tax at Rs. 3944.29 crores and Net Profit at Rs. 2639.84 crores registered a growth of 3.1% and 5.6% respectively during the quarter.

It said over 85% of the incremental value-added by the company during the quarter went to the government in the form of taxes.

Cigarettes

Pressure on the legal cigarette industry escalated significantly during the quarter on account of the Steep increase in tax incidence under the GST regime and additional burden on the Business due to GST transition costs, the company said.

“The legal cigarette industry, already reeling under the cumulativeimpact of steep increase in taxation over the last 5 years and intense regulatory pressures, was further impacted by the sharp upward revision in GST Compensation CeSS announced by the GST Council at its meeting on 17th July, 2017.

“While the intention of the Government was to correct an apparent anomaly in cigarette taxation under the new tax regime announced earlier on account of the removal of the Cascading effect of Excise Duty which existed in the pre GST regime, the upward revision resulted in significantly higher tax incidence on cigarettes compared to the pre GST Scenario which is not in keeping with the fundamental principle of revenue neutrality,” it complained.

The combined impact of increase in Excise Duty announced by the Union Budget 2017 and the revision in GST Compensation Cess asresulted in an incremental tax burden of over 20% on the Company.

“The cumulative growth in tax incidence on cigarettes, after cognising for the latest increase in Cess rates, stands at a Staggering 202% since 2011-12, i.e. the last 6 years,” it noted

Further, the Cigarette Business had to Contend with additional costs associated with the transition to GST due to non-availability of Additional Duty Surcharge credit on transition Stocks and the unanticipated revision of GST Compensation Cess w.e.f. 18th July 2017 which impacted pipeline Stocks, it added.

“It is apprehended that the sharp increase in tax incidence on cigarettes will further increase the huge tax arbitrage available to unscrupulous players and provide a fillip to smuggling syndicates. This will severely undermine the legal cigarette industry and adversely impact tobacco farmers and the revenue objective of the Government,” it said.

India is considered 4th largest market for illegal cigarettes in the world.

“It is estimated that almost 68% of the tobacco Consumed in the Country remains outside the tax net on account of evasion… The significant decline in legal cigarette Volumes and the consequent reduction in the utilisation of Indian Flue-Cured Virginia (FCV) tobaccO has adversely impacted the livelihoods of over 45 million tobacco farmers, farm workers and others dependent on the tobacco Sector,” it said.

“Besides, the soft demand for Indian FCV tobacco has prompted Consecutive reductions in the authorised tobacco Crop size in 2015-16 and 2016-17. This, in turn, has also led to lower exports of tobacco. In fact, since 2013-14, the annual earnings of tobacco farming Community has shrunk by more than Rs. 1,500 crores due to drop in offtake of tobacco for the manufacture of domestic legal cigarettes.”

FMCG

Segment Revenue registered robust growth of 10% on a comparable basis despite muted demand environment and disruption due to GST transition.

Growth was driven by Strong performance of the Branded Packaged Foods and Personal Care Businesses partly offset by the impact of ongoing restructuring of retail & trade footprint in the Lifestyle Retailing Business. While offtake in the retail channel has normalised progressively through the quarter, the wholesale channel is yet to fully recover. Market Standing Stood enhanced acroSS major Categories, particularly in atta, potato chips, premium Cream biscuitS and deodorantS.

The Branded Packaged Foods Businesses posted healthy growth in revenue led by atta, Snacks and noodles.

In the Staples, Snacks and Meals Business, “Aashirvaad’ atta continued to perform well, consolidating its leadership position, it said.

The Bingo range of snack foods recorded robust growth driven by Yumitos’ potato chips and Tedhe Medhe”.

In the Confections Business, ‘Sunfeast biscuits performed well with “Dark Fantasy Choco Fills’, ‘Sunfeast Marie’ and “Mom’s Magic’ continuing to enhance market standing, it said.

In the Dairy and Beverages Business, B Natural juices Continued to register strong growth leveraging a portfolio of differentiated products including a wide range of “Not from Concentrate” variants, it said.

During the quarter, the Business expanded the footprint of ‘Fabelle Chocolate Boutiques, hitherto available exclusively across ITC Hotels, to premium outlets in Bengaluru, Kolkata and Chennai.

In Personal Care Products Business, it made progress towards Setting up state-of-the-art owned integrated consumer goods manufacturing facilities at Panchla (West Bengal) and Kapurthala (Punjab).

“These facilities are expected to commence operations in phases, beginning the ensuing quarter. Currently, over 20 projects are underway and in various Stages of development – from and acquisition/site development to construction of buildings and other infrastructure,” it said.

HOTELS

During the quarter, Room revenue grew at a healthy pace on account of increase in ARRS. However, Food & Beverage revenue growth was impacted by highway liquor ban which prevailed for a significant part of the quarter, it added.

While Segment Results improved as Compared to the corresponding quarter in the previous year, it remained muted due to the challenging business context as aforestated and gestation costs of the recently commissioned ITC Grand Bharat, Gurgaon.

Renovation work at ITC Maurya and TC Maratha also weighed on overall performance, it said.

The Business commissioned Welcom Hotel Coimbatore on 1 October 17 and made steady progress during the quarter in the construction of ITC Hotels at Hyderabad, Kolkata & Ahmedabad and Welcom Hotels in Guntur and Bhubaneswar.

Agri Business

The performance of the Agri Business Segment during the quarter was impacted by shortage of leaf tobacco in Andhra Pradesh due to lower Crop output on account of drought in 2016 & adverse crop quality, relative strength of the Indian Rupee vis-a-vis Currencies of competing origins and limited trading opportunities in other agri-Commodities.

Paperboards, Paper & Packaging

Paperboards, Paper & Packaging Segment ResultS registered a robust growth of 18% driven by richer product mix and structural cost saving initiatives. Improvement in profitability was also aided by benign input costs. Growth in Segment Revenue, however, remained muted on account of Subdued demand environment prevailing in the FMCG and legal Cigarette industry, Surplus capacity in the domestic industry alongwith zero duty imports under Free Trade Agreement with ASEAN countries and cheap importS from China, it added.