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ITC: Bhadrachalam blues

May 22, 2002

Tobacco major, ITC Limited, has finally declared its FY02 numbers. The numbers also include the fourth quarter performance of its newly amalgamated paperboard subsidiary, ITC Bhadrachalam. Consequently, the merged entity has recorded a 20% growth in topline YoY and an 18% growth in bottomline in FY02. However, YoY numbers are not comparable.

(Rs m) 4QFY01 4QFY02 Change FY01 FY02 Change
Gross Sales 22,598 29,617 31.1% 88,271 99,824 13.1%
Net Sales Turnover 10,898 17,137 57.2% 42,081 50,592 20.2%
Other Income 616 234 -62.0% 1,445 1,424 -1.5%
Expenditure 6,571 12,209 85.8% 25,164 31,560 25.4%
Operating Profit (EBDIT) 4,327 4,928 13.9% 16,917 19,033 12.5%
Operating Profit Margin (%) 39.7% 28.8%   40.2% 37.6%  
Interest 237 217 -8.4% 959 669 -30.2%
Depreciation 365 827 126.4% 1,399 1,985 41.8%
Profit before Tax 4,342 4,118 -5.1% 16,003 17,803 11.2%
Tax 1,571 1,156 -26.4% 5,940 5,905 -0.6%
Profit after Tax/(Loss) 2,771 2,962 6.9% 10,063 11,897 18.2%
Net profit margin (%) 25.4% 17.3%   23.9% 23.5%  
No. of Shares (eoy) (m) 245.4 247.5   245.4 247.5  
Earnings per share* 45.2 47.9   41.0 48.1  
Current P/e ratio   13.0     12.9  

ITC had recorded a 7.4% topline growth in the first nine months of FY02. This is probably a more realistic topline growth number for the tobacco major on a like to like basis. Based on these estimates, it seems that the ITC Bhadrachalam merger has added around Rs 5.3 bn to ITC's 4QFY02 and FY02 topline numbers. This Rs 5.3 bn is ITC Bhadra's full year FY02 topline.

Though ITC has managed to add significantly to its topline post ITC Bhadra merger, a similar jump in bottomline is not reflected in the consolidated performance. In fact, ITC has hardly shown any bottomline growth in 4QFY02 YoY. But this may be because the fourth quarter has had to absorb the full impact of ITC Bhadra's FY02 numbers. The annual numbers give a more reasonable picture.

Cost break-up
(Rs m) 4QFY01 4QFY02 Change FY01 FY02 Change
Material cost 3,773 7,245 92.0% 14,924 18,904 26.7%
Staff cost 788 1,200 52.4% 2,744 3,111 13.3%
Other exp. 2,010 3,764 87.3% 7,496 9,545 27.3%
Total expenses 6,571 12,209 85.8% 25,164 31,560 25.4%

In our earlier coverage, we had warned that the merger of ITC Bhadra with ITC is likely to impact the company's robust operating margins. And so it has. The dominance of ITC in the branded Indian cigarette market (70% share) has ensured immense pricing power for the company, despite punitive goverment taxation policies. Moreover, over the years ITC has managed to improve its overall efficiencies thus resulting in operating margins of nearly 40% for the company.

However, post the ITC Bhadra merger, it operating margins seem under pressure. OPM has slumped from 40% in FY01 to around 38%. A higher OPM was largely the reason that ITC in the past has been able to report above 20% bottomline growth consistently over the years, even in difficult economic conditions.

This was one of the reasons why the stock has languished on the bourses, despite being priced at a discount ot its peers in terms of valuations. At Rs 621 the stock trades on a P/E of 13x FY02 earnings. There is no doubt that ITC has a strong and dominant tobacco business. The management knows this business in and out. However, because of the pressure the company is facing in terms of government's punitive taxation policies as well as the growing public apathy towards tobacco, it has been investing in other businesses, which are not as lucrative.

Going forward, ITC's valuations will again have to weather the ITC Hotels merger plans. Though the management has said nothing on this issue as yet, sooner or later ITC Hotels is going to come into the books of ITC Limited. The company has declared a dividend of Rs 13.5 per share.

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