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ITC: Another great quarter

Jan 18, 2002

ITC Limited's good performance continues unabated. As per figures available, the company has declared 8% growth in topline (post excise duties) in December quarter FY02. The company also managed to improve its bottomline by nearly 20% YoY.

(Rs m) 3QFY01 3QFY02 Change 9m FY01 9m FY02 Change
Net Sales Turnover 11,068 11,953 8.0% 31,157 33,456 7.4%
Other Income 292 277 -5.2% 855 1,189 39.1%
Expenditure 7,171 7,547 5.2% 18,594 19,350 4.1%
Operating Profit (EBDIT) 3,897 4,406 13.0% 12,563 14,106 12.3%
Operating Profit Margin (%) 35.2% 36.9% 40.3% 42.2%
Interest 251 115 -54.3% 723 452 -37.4%
Depreciation 365 403 10.3% 1,034 1,158 12.0%
Profit before Tax 3,573 4,165 16.6% 11,662 13,685 17.4%
Tax 1,412 1,573 11.4% 4,562 4,749 4.1%
Profit after Tax/(Loss) 2,161 2,592 19.9% 7,100 8,936 25.9%
Net profit margin (%) 19.5% 21.7% 22.8% 26.7%
No. of Shares (eoy) (m) 245.4 245.4 245.4 245.4
Earnings per share* 35.2 42.3 38.6 48.5
*(annualised)
Current P/e ratio 17.4 15.1

The highlight of the company's performance has been its control on expenses. This has come on the back of reduction in staff costs and more importantly, as result of reduction in advertising expenses. The court order banning tobacco companies from sponsoring sports and cultural events has come as a blessing in disguise for ITC.

This has helped the company to improve its operating margins by 170 basis points to 36.9% during the quarter. What is even more encouraging in the company is the consistentcy it has shown overall in FY02. During the nine month period (April-December 2001) the company has recorded over 7% growth in topline and around 26% growth in bottomline. Its operating margins for the nine month period stand at an impressive 42.2%.

The company has managed to grow topline despite reports of a slowdown in the cigarette mrket. However, all this has not translated into good valuations for the company. At the current price of Rs 733 the stock trades at a P/E of 15 x annualised nine month earnings FY02. The valuations are pretty low for a company with such continous growth record and premium margins. However, this is as a result of the company's merge moves with ITC Bhadrachalam and its other investment plans.

ITCís investment plans include 15 bn over the next three years in hotels, another Rs 15 bn investment in paperboards business spread over five to seven years. This is where investors are concerned. Despite the managementís commendable hold over the tobacco business and improving operating efficiencies, ITC new investments continue to be viewed with cynicism and caution.

With ITC deciding to merge with ITC Bhadrachalam, the companyís EPS is likely to be affected when merged figures come out. This is likely to change the valuation matrix for ITC. In all likelihood, ITC will merge ITC Hotels (another 70% subsidiary) with itself in the future. This will again be a dampener to valuations.

The valuations are low mirroring the aforesaid concerns. Any sign of performance exceeding expectations in its new businesses will give the stock fundamental strength.


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