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ITC: FMCG propels growth
Jan 20, 2012

ITC Limited has announced its third quarter results for financial year 2011-2012 (3QFY12). The company has reported 14.2% YoY and 22.4% YoY growth in sales and net profits respectively. Here is our analysis of the results.

Performance summary
  • Revenues grew by 14.2% YOY in 3QFY12 backed by 18.8% growth in its FMCG business. Each of the agribusiness & paperboard segmental sales was up by over 9%. Only hotels saw sales erode by 1% during the quarter. During the 9mFY12, sales increased by 17% aided by double-digit growth in most of the segments.
  • Operating margin expanded by 130 basis points during the quarter on the back of lower cost of goods sold and staff costs (as a percentage of sales). For 9mFY12, operating margin was up by a mere 50 basis points on account of higher commodity inflation in 1HFY12.
  • At the net level, profitability improved significantly backed by higher other income and lower effective tax rate.


(Rs. m) 3QFY11 3QFY12 Change 9mFY11 9mFY12 Change
Total income 54,728 62,478 14.2% 155,073 181,717 17.2%
Expenditure 34,570 38,667 11.9% 99,655 115,956 16.4%
Operating profit (EBITDA) 20,159 23,811 18.1% 55,417 65,762 18.7%
EBITDA margin (%) 36.8% 38.1%   35.7% 36.2%  
Other income 1,926 2,851 48.1% 4,156 6,098 46.7%
Interest (net) 111 157 41.4% 341 463 35.7%
Depreciation 1,661 1,739 4.7% 4,918 5,105 3.8%
Profit before tax 20,313 24,767 21.9% 54,314 66,292 22.1%
Extraordinary inc/(exp) 0 0   0 0  
Tax 6,422 7,759 20.8% 17,253 20,812 20.6%
Profit after tax/(loss) 13,891 17,008 22.4% 37,061 45,480 22.7%
Net profit margin (%) 25.4% 27.2%   23.9% 25.0%  
No. of shares (m)         7796  
Diluted earnings per share (Rs)*         7.4  
Price to earnings ratio (x)         27.1  
Price to earnings ratio (x)
* trailing 12 month earnings

What has driven performance in 3QFY12?
  • Sales of ITC grew 14.2% YoY in 3QFY12 driven by 24.4% growth clocked by non-cigarette FMCG segment. Growth in this segment was contributed by strong rise in revenues from branded packaged foods, personal care products, stationary products and lifestyle retailing. Cigarettes, the largest segment, grew by 16.6% YoY. Backed by higher trading volumes and improved realization in tobacco leaf & wheat, the agri segment sales grew by 9.8%. Even the paperboard business grew by a healthy 11.5% YoY aided by better product-mix and higher realizations from integrated operations. Only the hotel segment sales fell marginally as the weak economic conditions in Europe and US affected the hospitality industry.

    All round picture
      % contribution to sales Revenue growth PBIT growth PBIT margin (%) gain/(decline) basis points
    Cigarettes 46% 16.6% 20.3% 57% 176
    Others 20% 24.4%   -3%  
    Total FMCG 66% 18.8% 23.2% 39% 138
    Hotels 4% -1.0% 26.2% 37% 788
    Agri Business 15% 9.8% 9.7% 12% -10
    Paperboards, Paper & Packaging 14% 11.5% 17.2% 26% 600

  • Operating margin of ITC increased by 130 basis points during the quarter aided by waning commodity inflation and substantial price-hikes undertaken. This is reflected in the 242 basis points drop in cost of goods-to-sales ratio. However, the proportion of other expenses, which includes the launch & roll-out costs of personal care products and brand-building costs of the food business, in total sales rose to 22% from 21% in the year-ago quarter. Majority of the segments reported higher profitability during the quarter. PBIT margin of the largest profit generating segment, cigarettes appreciated by 176 basis points YoY. PBIT margin of the hotel segment expanded by 788 basis points YoY and that of the paperboard segment increased by 600 basis points YoY in 3QFY12. While agri segment maintained its PBIT profitability, the non-tobacco FMCG segment curtailed the share of its loss in sales to 3.4% in 3QFY12 from 6.7% in the year-ago quarter.

  • At the net level, profitability expanded by 180 basis points YoY backed by lower effective tax rate and higher other income earned in 3QFY12. Effective tax rate fell to 31.3% from 31.6% in the year-ago quarter. The other income earned was higher by 48% YoY.

What to expect?
At the current price of Rs 201, the stock trades at a P/E multiple of 23 times our estimated FY14 earnings per share. ITC has succeeded in utilizing cash flows from its integrated business model in building the non-cigarette FMCG business. Although this segment is yet to break-even, but the redeeming factor has been the gradual reduction in the magnitude of loss posted by the segment. But the current valuations appear stretched and we advise investors to exercise caution.

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