Tax hikes and resultant price increases mean that ITC perhaps focusing on the economy segment of the cigarette business to maintain momentum.

Punitive taxes on the core cigarette business notwithstanding, ITC Ltd reported a decent performance for the September quarter.

Net sales (net of excise duty) rose 9.6% from a year ago, broadly in line with Street estimates. Operating profit—or earnings before interest, taxes, depreciation and amortization (Ebitda)—and net profit increased 7% and 10.5%, respectively.

Revenues at the cigarette business grew 7%, better than the 6% rise in Q1 and 1.6% growth in the year-ago quarter.

According to Dolat Capital Markets Pvt. Ltd estimates, cigarette volumes grew 3-4%, similar to the Street forecast. The firm does not reveal volume numbers. The non-cigarette packaged consumer goods business grew by an impressive 13% and losses in the segment came down considerably.

But the performance was not fully captured in the headline numbers as the hotels and agriculture business underperformed, registering an anaemic 2-2.5% growth in revenues. The weak revenue growth in the non-consumer goods businesses weighed down operating profit growth of these segments. While this led to a subdued 7% rise in ITC’s overall operating profit, the steady cigarette business came as a breather.

Operating profit at the cigarette business grew 8.4%, better than the company average. Margins improved 43 basis points (one basis point is one-hundredth of a percentage point) from a year ago to 37.7%. The margin improvement is encouraging, not least because the cigarettes business generates more than four-fifths of ITC’s operating profit.

Tax hikes and resultant price increases meant that the company is perhaps focusing on the economy segment of the cigarette business to maintain volume and revenue momentum. An improvement in margins in the past quarter suggests the strategy is yielding results on the earnings front.

While the performance helped the stock close in the green on Wednesday, it alone cannot trigger an uptrend. The outlook at present is overshadowed by the impending goods and services tax (GST) law. There are fears the government may charge higher tax over and above the peak GST rate. While there is no clarity yet on this, if the government charges a higher rate for cigarettes than what is being charged now, then ITC’s earnings growth can be adversely impacted next fiscal, warns JM Financial Research. Clarity on this can help investors gauge earnings potential and will determine the stock’s value.