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ITC: FMCG biz drives profitable growth
May 20, 2013

ITC Limited has announced its fourth quarter results for financial year 2012-2013 (4QFY13). The company has reported 19% YoY growth in both sales and net profits. Here is our analysis of the results.

Performance summary
  • Revenues grew by 18.8% driven by 26% rise in non-cigarette FMCG business and 31% growth in agri business. For FY13, topline grew by 19% backed by double-digit growth in FMCG and agri business segments.
  • Operating margin was maintained as higher inputs costs have been offset by controlled staff costs and other expenditure for the quarter. The operating margin for FY13 improved marginally.
  • Net profit increased by 19.4% backed by a modest rise in depreciation charges. For FY13, net profits increased by 20%.

Financial snapshot
(Rs. m) 4QFY12 4QFY13 Change FY12 FY13 Change
Total income 69,500 82,574 18.8% 251,475 299,013 18.9%
Expenditure 46,742 55,511 18.8% 162,988 192,738 18.3%
Operating profit (EBITDA) 22,758 27,063 18.9% 88,486 106,275 20.1%
EBITDA margin (%) 32.7% 32.8%   35.2% 35.5%  
Other income 1,955 2,540 29.9% 8,253 9,387 13.7%
Interest  148 243 63.7% 779 865 11.0%
Depreciation 1,880 2,067 9.9% 6,985 7,956 13.9%
Profit before tax 22,684 27,293 20.3% 88,975 106,842 20.1%
Extraordinary inc/(exp) 0 0   0 0  
Tax 6,540 8,014 22.5% 27,352 32,658 19.4%
Profit after tax/(loss) 16,144 19,280 19.4% 61,624 74,184 20.4%
Net profit margin (%) 23.2% 23.3%   24.5% 24.8%  
No. of shares (m)         7902  
Diluted earnings per share (Rs)*         9.3  
Price to earnings ratio (x)         36.2  
* trailing 12 month earnings

What has driven performance in 4QFY13?
  • ITC clocked a robust 18.8% rise in turnover led by double-digit growth in most of its business segments. Only paperboards, paper & packaging clocked an 8% rise in sales for the quarter. The largest revenue generator, FMCG, clocked a 16.3% growth driven by 26% rise in the non-cigarette FMCG business whereas cigarette sales grew by 11.5%. The agri-business recorded 31% higher revenues during the quarter. The hotel business grew by 10.4%.

    All round picture
      % contribution to sales  Revenue growth PBIT  growth PBIT margin (%) PBIT margin  gain/
    (decline) basis points
    Cigarettes 41% 11.5% 20.2% 58% 421
    Others 23% 26.0%   1%  
    Total FMCG 64% 16.3%   38% 176
    Hotels 4% 10.4% -51.0% 13% -1612
    Agri Business 21% 31.1% 20.8% 7% -59
    Paperboards, Paper & Packaging 12% 7.9% -3.9% 19% 68

  • The company has been able to keep margins in-tact backed by rationalization in other expenditure. The other expenses to sales ratio fell by 2% to 20% for the quarter. Even staff costs as a proportion of sales declined by 0.6%. This has offset the 2.6% rise in the raw material-to-sales ratio for the quarter. Among product segments, only FMCG and paper businesses have been able to post incremental margins. The cigarette segment clocked the sharpest expansion of 4.2% in EBIT margin for the quarter. Even the loss making non-cigarette FMCG segment has turned in the black and posted EBIT margin of 0.6%. The paper business saw a marginal expansion of 0.6% in EBIT margin for the quarter.

  • Net profits increased by 19.4% aided by a modest 10% rise in depreciation charges and 30% higher other income earned during the quarter. The interest cost grew by a steep 64% for the quarter.

What to expect?
ITC has been able to maintain its growth tempo thanks to robust growth in its FMCG business. Backed by strong pricing power in cigarette business, the company has managed to pass on the structural increase in taxation. In Union Budget 2012-13, the imposition of ad-valoreum duty of 10% on 50% of retail sales price of cigarettes led to a 22% rise in excise duty. Further in Union Budget 2013-14, the excise duty on cigarettes was further hiked by 18%. Moreover, states like Uttar Pradesh raised VAT on cigarettes from 17.5% to 50% in 2012. Notwithstanding, ITC's cigarette business grew by 13.4% in FY13 which speaks volumes about its pricing power. Recently, Uttar Pradesh has reduced VAT to 25%.

Its non-cigarette FMCG business has been the fastest growing business other than the agri business segment. And backed by strong growth in packaged foods and personal care products, the FMCG business turned in the black in 4QFY13. The only point of concern is the falling profitability of the other business segments that has offset margin gains in the FMCG business resulting in flat profit margins in FY13.

At the current price of Rs 337, the stock trades at a P/E multiple of 26 times its estimated FY15 earnings. We would like to inform our subscribers that our past estimates need to be revised as well as updated with forecast for FY16. ITC's Annual General Meeting is scheduled on 26th July 2013 post which we will be able to revise our forecasts. We would therefore request our subscribers to bear with us and revisit the recommendation link in August. We would, also, be sending mailers once we have put up the revised target price for the stock based on FY16 forecast numbers.

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