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ITC: Core performance - Views on News from Equitymaster
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ITC: Core performance
Jan 18, 2008

Performance summary
  • Topline growth of 11% YoY for 3QFY08 led by double digit growth across all its segments except agri business.

  • Operating profits grow by 10.8% YoY, while margins stable at 34.7%

  • The bottomline beats the topline during the quarter, registering a 15.8% YoY growth.

  • According to management, Non Bingo food businesses have broken even this quarter.

  • 9mFY08 profits grow 16% YoY on the back of a 14% YoY growth in topline.

Rs(m) 3QFY07 3QFY08 (%) Change 9mFY07 9mFY08 (%) Change
Net sales 31,147 34,580 11.0% 88,001 100,252 13.9%
Expenditure 20,319 22,583 11.1% 57,740 66,660 15.4%
Operating profit (EBDITA) 10,829 11,997 10.8% 30,261 33,592 11.0%
EBDITA margin (%) 34.8% 34.7%   34.4% 33.5%  
Other income 698 1374 96.9% 2342 4472 90.9%
Interest (9) 18   33 19 -42.6%
Depreciation 921 1097 19.2% 2707 3170 17.1%
Profit before tax 10,614 12,255 15.5% 29,863 34,875 16.8%
Tax 3,440 3,948 14.8% 9,370 11,032 17.7%
Profit after tax/(loss) 7,175 8,307 15.8% 20,493 23,844 16.4%
Net profit margin (%) 23.0% 24.0%   23.3% 23.8%  
No. of shares (m) 3,703 3,738   3,703 3,738  
Diluted earnings per share (Rs)*         8.1  
Price to earnings ratio (x)         26.2  
* 12 months trailing earnings

What has driven performance in 3QFY08?
  • ITC reported a topline growth of 11% YoY and 14% YoY respectively for 3QFY08 and 9MFY08. Despite VAT, central sales tax and trade tax imposed on cigarettes in UP, the company’s cigarette division grew by 11% YoY in 3QFY08. Price hikes and better product mix led to the higher growth. The ‘others’ division grew by 50% YoY. The company launched its personal care products under the ‘Fiama Di Wills’ and ‘Superia’ brands. Even its food products did well. Hotel segment grew by 10% YoY. The growth was lower due to rupee appreciation and lower occupancy. Agri business witnessed a 9% YoY fall due to lower exports on account of restriction on exports of certain commodities.

    Revenue mix
    (Rs m) 3QFY07 3QFY08 (%) Change 9mFY07 9mFY08 (%) Change
    Cigarettes 15,202 16,933 11.4% 43,498 49,048 12.8%
    % of revenues 44.1% 44.0%   42.4% 41.7%  
    Others 4,367 6,551 50.0% 12,059 17,844 48.0%
      12.7% 17.0%   11.7% 15.2%  
    Total FMCG 19,569 23,485 20.0% 55,557 66,891 20.4%
      56.8% 61.0%   54.1% 56.8%  
    Hotels 2,607 2,876 10.3% 6,267 6,996 11.6%
      7.6% 7.5%   6.1% 5.9%  
    Paperboards, paper & packaging 4,943 5,519 11.6% 14,261 15,902 11.5%
      14.4% 14.3%   13.9% 13.5%  
    Agri business 7,319 6,630 -9.4% 26,598 27,903 4.9%
      21.3% 17.2%   25.9% 23.7%  
    Total turnover (net) 34,438 38,510 11.8% 102,684 117,692 14.6%
    Less: Inter segment revenues 3,291 3,929 19.4% 14,683 17,440 18.8%
    Net sales 31,147 34,580 11.0% 88,001 100,252 13.9%

  • ITC managed to keep the operating margin stable at 34.7% in 3QFY08. The raw material prices fell as a % of sales from 42% in 3QFY07 to 38% in this quarter. However, staff and other expenses witnessed a rise. Other expenses were higher by 32% YoY on account of launch of personal care products and market development of Bingo.

    PBIT margin trend…
    (% of segmental revenues) 3QFY07 3QFY08 9mFY07 9mFY08
    Cigarettes 54.5% 56.8% 55.9% 56.4%
    Others -10.6% -9.8% -12.7% -8.2%
    Total FMCG 40.0% 38.2% 41.0% 39.1%
    Hotels 45.4% 47.9% 37.3% 38.3%
    Paperboards, paper & packaging 21.1% 21.4% 22.4% 20.8%
    Agri business 3.0% 4.2% 4.3% 3.3%
    Total PBIT 29.8% 30.7% 28.7% 28.1%

  • The EBIT of the cigarette division grew by 2.3% YoY in 3QFY08 due to a combination of product mix improvement and price hike. The total EBIT of the FMCG portfolio grew by 15% YoY. EBIT margins of agri and hotels segments grew by 1.2% YoY and 2.5% YoY respectively, while that of paper segment remained stable at 21%.

  • Higher other income (97% YoY) and lower interest costs led to the bottomline growth of 15.8% YoY in 3QFY08. For 9mFY08, the profits have risen by 16.4% YoY.

What to expect?
At the current price of Rs 213, the stock is trading at a price to earnings multiple of 20.7 times our FY10 estimates. Though the revenue growth and operating profit growth are marginally below our expectations, the company’s net profit is higher due to higher other income. With further investment in other segments, we continue to be positive on its growth prospective. Valuations however are not very attractive and thus, it has a limited medium term upside potential from the current levels.

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