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ITC: Firing on all cylinders

Jan 21, 2011

ITC Limited has announced its 3QFY11 results. The company has reported an 18.6% YoY and 21.4% YoY growth in sales and net profits respectively. Here is our analysis of the results.

Performance summary
  • Top line for ITC grew by 18.6% YoY in 3QFY11, bolstered by a strong growth in FMCG (including cigarettes), hotels, paper and packaging and agriculture businesses.
  • Operating (EBITDA) margins increased marginally as all costs remained flat (as a percentage of sales). Rise in raw material was offset by fall in other expenditure (both as a percentage of sales).
  • Net profit grew by 21.4% YoY during the quarter. This increase was a result of growth in operating income, higher other income and fall in effective tax rate. Net profit growth could have been higher but for increase in interest expense.
  • For 9mFY11, ITC’s net profits grew by 22.2% YoY while net profit margins expanded by 1% to 23.9%. This performance comes on the back of higher operating income, increase in other income, fall in interest, lower depreciation and lower effective tax rate.

(Rs. m) 3QFY10 3QFY11 Change 9mFY10 9mFY11 Change
Net sales 46,479 55,137 18.6% 132,506 155,083 17.0%
Expenditure 29,402 34,845 18.5% 85,655 99,670 16.4%
Operating profit (EBDITA) 17,076 20,293 18.8% 46,851 55,413 18.3%
EBDITA margin (%) 36.7% 36.8%   35.4% 35.7%  
Other income 1,591 1,930 21.3% 3,151 4,160 32.0%
Interest (net) 109 230 111.2% 349 341 -2.1%
Depreciation 1,549 1,681 8.5% 4,549 4,918 8.1%
Profit before tax 17,010 20,313 19.4% 45,105 54,314 20.4%
Extraordinary inc/(exp) 0 0   0 0  
Tax 5,569 6,422 15.3% 14,777 17,253 16.7%
Profit after tax/(loss) 11,442 13,891 21.4% 30,328 37,061 22.2%
Net profit margin (%) 24.6% 25.2%   22.9% 23.9%  
No. of shares (m) 3780 7706   3780 7706  
Diluted earnings per share (Rs)*         6.1  
Price to earnings ratio (x)         27.5  
* trailing 12 month earning

What has driven performance in 3QFY11?
    Revenue mix
    (%of net sales) 3QFY10 3QFY11 9mFY10 9mFY11
    Cigarettes 45.7% 45.4% 45.3% 43.6%
    Others 16.9% 18.1% 16.6% 17.6%
    Total FMCG 62.6% 63.5% 61.9% 61.2%
    Hotels 4.7% 4.6% 3.9% 3.9%
    Agri business 17.2% 17.5% 19.0% 20.5%
    Paperboards, paper & packaging 15.5% 14.4% 15.2% 14.5%

  • Sales of the company grew 18.6% YoY during the quarter backed by higher sales across company’s businesses. Cigarette portfolio of the company grew 15.6% YoY during the quarter. This growth in sales was supported by introduction of new brands, price hikes and strengthening of trade and distribution channels. Sales would have been stronger had the governments of several states not increased the VAT on cigarettes and imposed entry tax. Moreover, the sales were also affected due to graphic pictoral warnings on cigarette packs and ban on smoking in public places.

  • Sales of other FMCG portfolio grew by 23.8% YoY. The branded packaged foods business grew by 24% YoY during the quarter on the back of product mix enrichment, higher net realisation, smart commodity sourcing and active cost management. Sale of Sunfeast biscuits increased by 28% YoY during the quarter on the back of improvement in product mix and higher sales of value added variants of cookies and creams. Bingo range of potato chips and finger snacks recorded an impressive 48% YoY increase in sales aided by advertisement and brand promotion. Sunfeast Yippee noodles launched in September 2010 continued to elicit positive response from consumers. Personal care business gained traction during the quarter in the face of stiff competition from companies like HUL and Godrej Consumer. The stationery business continued on its impressive growth trajectory and registered an impressive 50% YoY growth during the quarter.

  • The hotels business showed a growth of 15% YoY in sales as the hospitality sector leaves the recession behind it. EBIT grew by 16% YoY during the quarter.

  • Sales for the Agri business grew 18% YoY while EBIT grew by 36%. This impressive performance comes on the back of higher demand for soya, coffee and leaf tobacco.

  • The Paperboards, Paper & Packaging segment revenues posted a growth of 12% YoY, while the PBIT grew by an impressive 21% YoY. The improvement in profitability was due to better product mix enrichment, higher capacity utilization, and enhanced value capture through in-house pulp production.

  • Net profit of the company for the year increased by 21.4% YoY while net profit margins expanded by 0.6%. This growth comes on the back of higher operating income, higher other income, lower depreciation and lower effective tax rate during the quarter. Effective tax rate fell from 32.7% to 31.6% during the quarter. The net profit could have been higher but for a 111% increase in interest costs during the quarter.

    PBIT margin trend...
    (% of segmental revenues) 3QFY10 3QFY11 9mFY10 9mFY11
    Cigarettes 54.6% 55.3% 53.7% 55.0%
    Others -9.7% -6.7% -10.8% -7.3%
    Total FMCG 37.2% 37.7% 36.4% 37.1%
    Hotels 30.8% 31.5% 23.3% 23.8%
    Agri business 11.5% 13.2% 13.2% 12.7%
    Paperboards, paper & packaging 24.8% 21.8% 22.4% 24.1%
    Total PBIT 30.6% 30.8% 29.4% 29.7%

What we expect?
At the current price of Rs 169, the stock trades at a P/E multiple of 26.3 times our per share (RPro subscribers can click here). The company has done well on the back of all round growth. However, we believe that growth for the next 2-3 years is priced in. We would advise investors to be cautious on this stock.

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