Analysts said ITC's first-quarter numbers are likely to stress-test investors' patience. JM Financial said in a company note, that though result was not all that bad (sub-1% miss versus forecasts in cigarettes), it could raise question on the possibility of ITC driving early-teens operating profit growth on a sustainable basis in the near future; the same was still not delivered after nearly two years of no-hike in cigarette taxes.

"Volume growth has decelerated to around 3%, and pricing does not appear to be all that forthcoming. FMCG has done well on profitability front – 41% earnings before interest, tax, depreciation and amortisation (Ebitda) growth – but these feelgood factors do not really matter all that much if core cigarettes business remains lacklustre. We continue to stay positive for now and we do see the government taking a much more reasonable stance towards tobacco taxation after what we view to be a series of initial missteps on this subject in its early years (2014-2015)," JM Financial research analysts Richard Liu and Vicky Punjabi said in the note.

On its part, the ITC management said punitive and discriminatory taxation (increased by 20% in 2017-18) and regulatory regime, together with a sharp increase in illegal trade in recent years, continues to pose significant operating challenges to the legal cigarette industry in the country. "Performance during the quarter was also impacted by weakness in the overall demand environment. Tax incidence on cigarettes nearly trebled between 2011-12 and 2017-18 and taxes on cigarettes are effectively about 55 times higher than taxes on other tobacco products on a per kilogram basis," the company said in its first-quarter fiscal 2020 results statement.

Excessive taxation has made legal, duty-paid cigarettes in India amongst the costliest in the world in terms of per capita affordability. The disparity in taxation on tobacco products has caused a progressive migration from consumption of duty-paid cigarettes to other lightly taxed / tax-evaded forms of tobacco products comprising illegal cigarettes and bidis, chewing tobacco, gutkha, zarda, snuff, etc, it said.

ITC's operating performance, analysts said, was below expectation due to weaker-than-expected cigarette volume performance. The company's June quarter FY'20 sales, Ebitda and net profit grew 6%, 8.7% and 12.6% to Rs 11,360 crore – net of taxes, but includes National Calamity Contingent Duty (NCCD), Rs 4,570 crore and Rs 3,170 crore respectively. The overall segment result, however, was broadly in line with analysts forecasts with FMCG doing significantly better as far as profit improvement goes.

Volume growth in the cigarettes business, according to Sagarika Mukherjee and Rohit Harlikar, research analysts, Elara Securities, at 3% on year was in line with estimates but lower than consensus at 5% on year. "The compounded annual growth rate (CAGR) for the last three years was recorded at 2% on the year, while the price hike in the June quarter was 2.5%. Ebit growth in cigarettes was at 8% on year while Ebit margin in cigarettes expanded by 145 basis points (bps) mainly led by the price increase. Price hikes effective from the second quarter of fiscal 2020 will be 3.5%, as there was a hike taken in early June, which will flow through from September quarter of current fiscal," Elara Research analysts said in a note.

FMCG earnings before interest and tax (Ebit) grew 55% despite stepped-up investments in brand-building and costs of gestating categories. Revenue trends were, however, weaker across most segments which management attributed to sluggish demand conditions. Margin performance was, however, healthy with an overall 100 basis points (bps) expansion in segment margin led by cigarettes (+145 bps) and FMCG (2.5% versus 1.7% last year).

Analysts said cigarette Ebit growth is back to single-digit level, volume growth has also slowed, but the margin is back on expansion mode. While cigarette revenue growth decelerated sharply as volume growth trajectory slowed to around 3%. Analysts said this was a clear disappointment given that pricing has been kept benign (year-on-year growth of just around 2%) in order to win volumes.