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ITC: Strong demand buoys bottomline - Views on News from Equitymaster

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ITC: Strong demand buoys bottomline

May 20, 2011

ITC Limited has announced its fourth quarter results for financial year 2010-2011 (4QFY11). The company has reported a 15.9% YoY and 24.6% YoY growth in sales and net profits respectively. Here is our analysis of the results.

Performance summary
  • Top line for ITC grew by 15.9% YoY in 4QFY11, bolstered by a strong growth in FMCG (including cigarettes), hotels, paper and packaging and agriculture businesses.
  • Operating (EBITDA) margins increased by 0.4% as a result of fall in raw material costs and staff costs (as a percentage of sales).
  • Net profit grew by 24.6% YoY during the quarter. This increase was a result of growth in operating income, higher other income, fall in interest expense and fall in effective tax rate.
  • For FY11, ITC's net profits grew by 22.8% YoY while net profit margins expanded by 1.1% to 23.2%. 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) 4QFY10 4QFY11 Change FY10 FY11 Change
Net sales 51,417 59,600 15.9% 183,924 214,683 16.7%
Expenditure 35,136 40,472 15.2% 120,792 140,141 16.0%
Operating profit (EBDITA) 16,281 19,128 17.5% 63,132 74,541 18.1%
EBDITA margin (%) 31.7% 32.1%   34.3% 34.7%  
Other income 604 1,022 69.1% 3,756 5,182 38.0%
Interest (net) 299 140 -53.1% 648 481 -25.7%
Depreciation 1,539 1,642 6.7% 6,087 6,560 7.8%
Profit before tax 15,048 18,368 22.1% 60,153 72,682 20.8%
Extraordinary inc/(exp) 0 0   0 0  
Tax 4,766 5,553 16.5% 19,543 22,806 16.7%
Profit after tax/(loss) 10,282 12,815 24.6% 40,610 49,876 22.8%
Net profit margin (%) 20.0% 21.5%   22.1% 23.2%  
No. of shares (m) 3818 7738   3818 7738  
Diluted earnings per share (Rs)*         6.4  
Price to earnings ratio (x)         28.9  
* trailing 12 month earning

What has driven performance in FY11?

    Revenue mix
    (%of net sales)  4QFY10 4QFY11 FY10 FY11
    Cigarettes 43.6% 43.4% 44.9% 43.5%
    Others 20.0% 20.6% 17.5% 18.4%
    Total FMCG 63.6% 64.0% 62.4% 61.9%
    Hotels 4.6% 4.7% 4.1% 4.1%
    Agri business 17.6% 17.0% 18.6% 19.5%
    Paperboards, paper & packaging 14.3% 14.4% 15.0% 14.4%

  • Sales of the company grew 16.7% YoY during the year backed by higher sales across company’s businesses. Cigarette portfolio of the company grew 13.4% 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 affected due to graphic pictoral warnings on cigarette packs and ban on smoking in public places. New brand launches by global cigarette companies trying to gain a foothold in India also affected sales of cigarettes.

  • Sales of other FMCG portfolio grew by 23.1% YoY. The branded packaged foods business grew by 25% YoY during the year on the back of new product launches, heightened communication and increased levels of consumer promotions, higher net realisation, smart commodity sourcing and active cost management. Sale of Sunfeast biscuits recorded significant growth 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 showed robust growth 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 aided by an impressive growth of 100% in non paper category.

  • The hotels business showed a growth of 17.6% YoY in sales as the hospitality leaves the recession behind it. EBIT grew by an impressive 23% YoY during the year.

  • Sales for the Agri business grew 22.9% YoY while EBIT grew by 26.5% YoY. This impressive performance comes on the back of higher demand for soya and leaf tobacco.

  • The Paperboards, Paper & Packaging segment sales posted a growth of 12.9% YoY. PBIT grew faster than sales with a growth rate of 19.7% YoY.

  • Net profit of the company for the year increased by 22.8% YoY while net profit margins expanded by 1.1%. This growth comes on the back of higher operating income, higher other income, fall in interest costs and lower effective tax rate during the quarter. Other income increased by 38% YoY while interest costs fell by 25.7% YoY. Effective tax rate fell from 32.4% to 31.3% during the quarter.

    PBIT margin trend...
    (% of segmental revenues) 4QFY10 4QFY11 FY10 FY11
    Cigarettes 51.0% 53.1% 53.0% 54.5%
    Others -7.0% -5.2% -9.6% -6.7%
    Total FMCG 32.8% 34.4% 35.4% 36.4%
    Hotels 30.5% 33.2% 25.5% 26.6%
    Agri business 7.1% 9.2% 11.6% 11.9%
    Paperboards, paper & packaging 21.0% 21.1% 22.0% 23.4%
    Total PBIT 26.5% 28.2% 28.6% 29.3%

What we expect?
At the current price of Rs 186, the stock trades at a P/E multiple of 23.9 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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