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ITC: Brisk earnings growth continues

Jan 18, 2013

ITC Limited has announced its third quarter results for financial year 2012-2013 (3QFY13). The company has reported 23% YoY and 21% YoY growth in sales and net profits respectively. Here is our analysis of the results.

Performance summary
  • Topline increased by 23% led by 30% growth in non-cigarette FMCG business and 43% rise in agri business. For 9mFY13, revenues grew by 19% on the back of double-digit growth in both FMCG and agri businesses.
  • Operating margin contracted by 80 basis points due to steep escalation in cost of goods sold. During 9mFY13, operating margin increased by 50 basis points.
  • Earnings grew by 21% for 3QFY13. For 9mFY13, profits were up by the same magnitude.

(Rs. m) 3QFY12 3QFY13 Change 9mFY12 9mFY13 Change
Total income 62,789 77,121 22.8% 182,155 216,518 18.9%
Expenditure 38,967 48,543 24.6% 116,427 137,306 17.9%
Operating profit (EBITDA) 23,823 28,578 20.0% 65,729 79,212 20.5%
EBITDA margin (%) 37.9% 37.1%   36.1% 36.6%  
Other income 2,906 3,298 13.5% 6,299 6,847 8.7%
Interest 223 252 12.6% 631 622 -1.4%
Depreciation 1,739 2,052 18.0% 5,105 5,889 15.4%
Profit before tax 24,767 29,572 19.4% 66,292 79,548 20.0%
Extraordinary inc/(exp) 0 0   0 0  
Tax 7,757 9,053 16.7% 20,812 24,644 18.4%
Profit after tax/(loss) 17,010 20,519 20.6% 45,480 54,904 20.7%
Net profit margin (%) 27.1% 26.6%   25.0% 25.4%  
No. of shares (m)         7878  
Diluted earnings per share (Rs)*         9.0  
Price to earnings ratio (x)         32.0  
* trailing 12 month earnings

What has driven performance in 3QFY13?
  • ITC continued its robust performance in 3QFY13, registering a 23% rise in its sales. The growth was primarily driven by branded packaged foods, personal care, agri business and cigarettes. The branded packaged foods recorded brisk growth led by Sunfeast biscuits and innovative offerings in the premium cream biscuits segment, Sunfeast Yipee noodles and Bingo snacks. The personal care segment continued to grow at robust pace on the back of increased consumer franchise for the soap category. The product portfolio was further expanded with the launch of spa range of soaps, deodorants, body lotion, moisturizer and skin toner. The overall non-cigarette FMCG business grew by 30% whereas cigarettes registered a rise of 13% aided by new variants and product enhancements. The agri-business witnessed a 43% jump backed by exports of wheat, leaf tobacco and soya. The hotel and paper businesses recorded growth of 11% and 8.5%, respectively during the quarter.

    All round picture
      % contribution to sales  Revenue growth  PBIT growth  PBIT margin  (%) PBIT margin 
    gain/(decline)  basis points
    Cigarettes 43% 13.1% 21.1% 61% 402
    Others 21% 30.1%   -1%  
    Total FMCG 64% 18.2%   41% 157
    Hotels 4% 11.0% -45.5% 18% -1857
    Agri Business 19% 43.1% 21.9% 11% -185
    Paperboards, Paper & Packaging 13% 8.5% 1.9% 23% 223

  • Operating margin constricted during the quarter on the back of a steep rise in raw material costs. The cost of goods to sales ratio jumped up by 506 basis points to 39.9% during the quarter. Its effect was offset largely by savings in other expenditure and staff costs, both as a proportion of sales. Cigarettes and paper were the only business segments that saw their EBIT margins expand during the quarter. Hotel business saw its EBIT margin shrink by more than half to 18%. Even the agri business reported a 185 basis points drop in EBIT margin. The non-cigarette FMCG business continued to remain in red, but the redeeming factor is that the magnitude of losses almost halved to Rs 240 m during the quarter.

  • Net profits grew by a robust 21% on a 20% rise in operating income and modest rise in interest and depreciation expenses. The other income earned during the quarter was up by 13.5%.

What to expect?
While regulatory headwinds have led to a moderation in ITC's cigarette business, the impact has been partially offset by the brisk growth in its FMCG business. Despite a structural rise in taxation, ITC has been able to expand margins in its core cigarette business, thanks to the huge pricing power enjoyed by it. Even cigarettes launched in the new filter segment (cigarette length not exceeding 65 mm) have met with reasonable success and the company is rolling out the products across the country. The company has been consistently reducing losses in the FMCG segment. All these factors have enabled ITC to grow its topline as well as earnings at a robust pace.

At the current price of Rs 287, the stock trades at a P/E multiple of 23 times its estimated FY15 earnings. At current valuations, the stock still appears overpriced and we maintain a SELL view on the stock.

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