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ITC: Demonetisation woes pull down business growth - Views on News from Equitymaster
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ITC: Demonetisation woes pull down business growth
Feb 8, 2017

ITC has announced third quarter results of the financial year 2016-2017 (3QFY17). The company has reported 4.7% YoY and 5.7% YoY growth in revenues and net profits respectively. Here is our analysis of the results.

Performance Summary
  • ITC faced multiple headwinds this quarter, with the dual effect of a demonetisation induced cash crunch and added pressure on the legal cigarette industry. The operating environment was extremely challenging during the quarter. Resultantly, net sales grew by a subdued 4.7% YoY in 3QFY17. For 9MFY17, the net sales recorded a growth of 7% YoY.
  • The company's cigarette business, that contributes to a lion's share of 58.2% to net revenues, grew by a muted 2.2% YoY whereas the non-cigarette FMCG business was up by 3.4% YoY in 3QFY17. The agricultural business emerged as a key growth driver with a YoY revenue growth of 12.9%.
  • FMCG sales were adversely impacted as a result of lower consumer offtake and reduction in trade pipelines particularly in the immediate aftermath of the Government's decision to withdraw specified high denomination currency notes. While the impact was felt across all operating segments, sales of biscuits, snacks, noodles, personal care products and branded apparel were impacted the most in the initial phase.
  • Owing to the liquidity issues, ITC could not keep profit margins intact during the quarter. At the EBIT level, margins for the cigarette, and non-tobacco FMCG business segments contracted by about 0.2% YoY and 1.5% YoY, respectively. EBIT margins of the agri business contracted by 1.7% on a YoY basis. Only the Hotels business margins grew, with an expansion of 3.9%.
  • Aided by a 6% rise in other income coupled with lower interest and tax outgo, the net profit grew by 5.7% YoY in 3QFY17. For 9MFY17, the net profit was up by 8.6% YoY.

    Financial Performance Snapshot
    Rs(m) 3QFY16 3QFY17 Change 9MFY16 9MFY17 Change
    Revenues 129,619 135,700 4.7% 378058 404396 7.0%
    Expenditure 94,872 100,236 5.7% 276962 297370 7.4%
    Operating profit (EBDITA) 34,746 35,464 2.1% 101,096 107,027 5.9%
    EBDITA margin (%) 26.8% 26.1% -0.7% 26.7% 26.5% -0.3%
    Other income 6,490 6,879 6.0% 13,980 15,838 13.3%
    Interest 161 136 -15.5% 369 344 -6.6%
    Depreciation 2,619 2,665 1.8% 7,777 7,962 2.4%
    Profit before tax 38,456 39,542 2.8% 106,931 114,558 7.1%
    Extraordinary inc/(exp) 0 0 0 0
    Tax 13,419 13,075 -2.6% 37607 39244 4.4%
    Effective tax rate 35% 33% 35% 34%
    Profit after tax/(loss) 25,038 26,467 5.7% 69,324 75,314 8.6%
    Net profit margin (%) 19.3% 19.5% 18.3% 18.6%
    No. of shares (m) 12121
    Diluted earnings per share (Rs)* 8.2
    Price to earnings ratio (x)* 33.5

    *trailing twelve months earnings

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