MUMBAI, July 26 (Reuters) - ITC Ltd, which supplies four out of every five cigarettes sold in India, was dealt a new blow after quarterly tobacco product sales unexpectedly dropped, sending its shares lower even as net profit increased by a fifth.
The company, India's fifth-largest by market capitalisation and 30.8 percent owned by British American Tobacco, generates about half its revenue from cigarettes. Government curbs on tobacco use pose a challenge to sales.
Cigarette sales volumes fell about 2.5-3 percent from the previous quarter, according to three analysts briefed by the company on its fiscal first-quarter results. They had expected flat volumes.
"The crucial part for ITC would be to further ramp up its efforts towards reducing its dependence on the cigarette business," said G. Chokkalingam, executive director and chief investment officer at Centrum Wealth Management, which recently sold some of its ITC shares.
Uttar Pradesh, the country's most populous state, in early July increased the value-added tax on cigarettes to 50 percent from 17.5 percent. The northern state contributes 5 percent of the company's sales by value.
"After Uttar Pradesh a lot of states will look at hiking the taxes on tobacco products because of its health hazards," said Chokkalingam.
ITC said net profit rose to 16.02 billion rupees ($285.23 million) in the quarter ended June 30 from 13.33 billion rupees a year earlier, after the company boosted cigarette prices in April.
Analysts had expected a 23 percent rise in earnings, according to Thomson Reuters I/B/E/S.
The company does not provide details on sales volumes in its earnings statements.
Shares in ITC, which also sells food and owns hotels and is a staple of fund portfolios for its defensive nature, fell as much as 2.5 percent after the results and ended 1.77 percent lower, lagging the broader market. (Reporting by Nandita Bose; Editing by Tony Munroe and Michael Urquhart)