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ITC: Cigarette business boosts growth - Views on News from Equitymaster

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ITC: Cigarette business boosts growth
Jan 22, 2010

Performance summary
  • Top line grows by 19% YoY in 3QFY10 bolstered by a strong growth in cigarettes business.
  • Operating profits grow at a higher rate of 24% YoY as the company achieves scale in its FMCG business.
  • Net profit margins come in higher at 25%, an increase of 1.6% over 3QFY09. This growth was aided by higher operating income as well as other income.
  • Bottomline grows 24% YoY during 9mFY10 on the back of higher profitability in the FMCG, agri and paper and paperboard businesses.

(Rs. m) 3QFY09 3QFY10 Change 9mFY09 9mFY10 Change
Net sales 38,587 45,802 18.7% 116,553 130,584 12.0%
Expenditure 24,806 28,725 15.8% 79,005 83,733 6.0%
Operating profit (EBDITA) 13,780 17,076 23.9% 37,549 46,851 24.8%
EBDITA margin (%) 35.7% 37.3%   32.2% 35.9%  
Other income 976 1,591 63.1% 2,881 3,151 9.4%
Interest (net) 5 109 2315.6% 46 349 651.1%
Depreciation 1,442 1,549 7.4% 4,043 4,549 12.5%
Profit before tax 13,310 17,010 27.8% 36,340 45,105 24.1%
Extraordinary inc/(exp) 0 0   0 0  
Tax 4,277 5,569 30.2% 11,794 14,777 25.3%
Profit after tax/(loss) 9,032 11,442 26.7% 24,546 30,328 23.6%
Net profit margin (%) 23.4% 25.0%   21.1% 23.2%  
No. of shares (m) 3771.5 3795.3   3771.5 3795.3  
Diluted earnings per share (Rs)*         10.1  
Price to earnings ratio (x)         24.8  
* trailing 12 month earning

What has driven performance in 3QFY10?
  • ITC’s cigarette portfolio grew by 17% YoY during 3QFY10. This was on the back of introduction of new brands, price hikes, and strengthening of trade and distribution channels. Sales would have been stronger had the governments of Maharashtra, Delhi and Rajasthan not increased the VAT (value added tax) on cigarettes from 12.5% to 20%.

    Segment wise performance
    (% of net sales)  3QFY09 3QFY10 9mFY09 9mFY10
    Cigarettes 47.4% 45.0% 40.5% 44.6%
    Others 17.1% 17.2% 15.9% 16.8%
    Total FMCG 64.5% 62.1% 56.4% 61.4%
    Hotels 5.9% 4.8% 5.2% 4.0%
    Paperboards, paper & packaging 14.9% 15.7% 14.1% 15.4%
    Agri business 14.8% 17.5% 24.3% 19.2%

  • Sales of other FMCG portfolio grew by 24% YoY. The branded packaged foods business grew by 24% YoY on the back of improved product mix, smarter sourcing of inputs, improved servicing of markets, and supply chain efficiencies. The stationery business continued on its impressive growth trajectory and registered a growth of 33% YoY. The company emerged as the largest player in the notebook segment with a market share of 12% during the quarter. The personal care product business is showing promise with the company extending the product line of soaps, shampoos and shower gels.

  • ITC's hotels business showed green shoots during the quarter. Sales remained flat YoY after showing a decline in the past few quarters. Substantial improvement has been seen in both occupancy and room rates. However, PBIT for the segment fell by 16% indicating that there is still time for a full recovery.

  • Sales for the agri-business grew by 46% YoY while PBIT was up by 107% YoY. This impressive performance comes on the back of the leaf tobacco portfolio, which grew by 194% due to strong demand for Indian tobacco.

  • ITC’s paperboards, paper & packaging segment posted a strong growth of 29% YoY, while the PBIT grew at an even more impressive 81% YoY. The improvement in profitability was due to a better product mix and lower input costs. Sales of cartons during the quarter grew by 47% YoY.

    PBIT margin trend...
    (% of net sales) 3QFY09 3QFY10 9mFY09 9mFY10
    Cigarettes 47.4% 45.0% 40.5% 44.6%
    Others 17.1% 17.2% 15.9% 16.8%
    Total FMCG 64.5% 62.1% 56.4% 61.4%
    Hotels 5.9% 4.8% 5.2% 4.0%
    Paperboards, paper & packaging 14.9% 15.7% 14.1% 15.4%
    Agri business 14.8% 17.5% 24.3% 19.2%
    Total PBIT 29.9% 31.0% 25.9% 29.7%

What to expect?
At the current price of Rs 251, the stock is trading at a multiple of 22.6 times our estimated FY12 earnings per share. The company has done well this quarter across segments, though the hotels business continues to disappoint. However, the profitability of this business has improved during the year. We will update our model as and when we get further clarity from the company on its businesses.

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