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ITC: Cigarettes boosts top line - Views on News from Equitymaster

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ITC: Cigarettes boosts top line
May 21, 2010

ITC Limited has announced its FY10 results. The company has reported a 16.3% YoY and 24.4% YoY growth in sales and net profits respectively. Here is our analysis of the results.

Performance summary
  • Top line grows by 29% YoY in 4QFY10, bolstered by a strong growth in cigarettes and agriculture businesses.
  • Operating (EBITDA) margins declined by 1% on the back rise in raw material costs.
  • Net profit grew by 27% YoY during the quarter. This increase was a result of growth in operating income, low depreciation charge and lower effective tax rate.
  • Bottomline for the full year grows by 24% YoY on the back of a 16% growth in topline


(Rs. m) 4QFY09 4QFY10 Change FY09 FY10 Change
Net sales 39,859 51,316 28.7% 158,065 183,822 16.3%
Expenditure 26,876 35,137 30.7% 107,534 120,792 12.3%
Operating profit (EBDITA) 12,983 16,180 24.6% 50,532 63,031 24.7%
EBDITA margin (%) 32.6% 31.5%   32.0% 34.3%  
Other income 523 592 13.3% 3,403 3,743 10.0%
Interest (net) 137 185 35.3% 183 534 191.3%
Depreciation 1,451 1,539 6.0% 5,494 6,087 10.8%
Profit before tax 11,918 15,048 26.3% 48,257 60,153 24.7%
Extraordinary inc/(exp) 0 0   0 0  
Tax 3,828 4,766 24.5% 15,622 19,543 25.1%
Profit after tax/(loss) 8,090 10,282 27.1% 32,636 40,610 24.4%
Net profit margin (%) 20.3% 20.0%   20.6% 22.1%  
No. of shares (m) 3753 3803   3753 3803  
Diluted earnings per share (Rs)*         10.7  
Price to earnings ratio (x)         25.3  
* trailing 12 month earning

What has driven performance in FY10?
    Revenue mix
    (%of net sales)  4QFY09 4QFY10 FY09 FY10
    Cigarettes 47.4% 43.6% 42.7% 44.9%
    Others 19.2% 20.0% 16.5% 17.5%
    Total FMCG 66.6% 63.6% 59.2% 62.4%
    Hotels 5.1% 4.6% 5.1% 4.1%
    Agri business 12.0% 17.6% 21.1% 18.6%
    Paperboards, paper & packaging 16.3% 14.3% 14.5% 15.0%

  • Sales of the company grew 16.7% during the year backed by higher sales in the FMCG business as well as the paper and paperboard business. Cigarette portfolio of the company grew 20% 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 over the consensus VAT of 12.5%. Some states during the year also levied entry tax on cigarettes while some states increased the entry tax rate affecting cigarette sales. Moreover, the sales were also affected due to graphic pictoral warnings on cigarette packs.

  • Sales of other FMCG portfolio grew by 21% YoY. The branded packaged foods business grew during the quarter on the back of improved product mix, smarter sourcing of inputs, improved servicing of markets and supply chain efficiencies. Aashirvaad atta grew by 21% YoY during the year. The stationery business continued on its impressive growth trajectory and registered an impressive 40% growth. ITC 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.

  • The hotels business showed a decline of 9% in sales during the year. However green shoots were visible during the last quarter as after a decline in the first 3 quarters, top line and EBIT margins grew by 16% and 10% respectively.

  • Sales for the Agri business grew marginally while EBIT grew by 70%. The reason for sales remaining flattish was a result of rationalization of the product portfolio by the company. This impressive performance comes on the back of the leaf tobacco portfolio due to strong demand for Indian tobacco.

  • The Paperboards, Paper & Packaging segment revenues posted a growth of 17% YoY, while the PBIT grew by an impressive 34% YoY. The improvement in profitability was due to a better product mix and lower input costs. Value added paperboards grew at 29% YoY while exports grew by 38% YoY.

  • Net profit of the company for the year increased by 24% YoY while net profit margins expanded by 1.5%. This growth comes on the back of higher operating income registered during the year, partly offset by higher interest costs and higher tax expense.

    PBIT margin trend...
    (% of segmental revenues)  4QFY09 4QFY10 FY09 FY10
    Cigarettes 52.2% 51.0% 53.8% 53.0%
    Others -14.0% -7.0% -16.1% -9.6%
    Total FMCG 33.2% 32.8% 34.3% 35.4%
    Hotels 32.2% 30.5% 33.8% 25.5%
    Agri business 10.1% 5.9% 6.7% 11.3%
    Paperboards, paper & packaging 21.3% 21.0% 19.2% 22.0%
    Total PBIT 28.4% 26.3% 26.2% 28.5%

What we expect?
At the current price of Rs 270, the stock trades at a P/E multiple of 24.7x our estimated FY12 earnings per share. The company has done well this year across segments. However, the hotel business continues to disappoint. We will update our model shortly.

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