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ITC: Diversification saves the day
May 22, 2009

Performance summary
  • For the full year, sales improve by 10% YoY. A 16% YoY growth in the FMCG portfolio (cigarette and non cigarette) coupled with a growth of 23% YoY in the paperboard division leads to the growth.
  • The operating margins remain stable at 32% during FY09.
  • Higher interest costs (up nearly 300% YoY) and depreciation charges coupled with lower other income (down 10% YoY) leads to the muted 4.6% YoY growth in the bottomline.
  • The Board declares a dividend of Rs 3.7 per share (dividend yield of 2%).


Financials
Rs(m) 4QFY08 4QFY09 (%) Change FY08 FY09 (%) Change
Net sales 40,426 39,274 -2.8% 141,820 155,827 9.9%
Expenditure 28,897 26,291 -9.0% 95,436 105,296 10.3%
Operating profit (EBDITA) 11,529 12,983 12.6% 46,384 50,532 8.9%
EBDITA margin (%) 28.5% 33.1%   32.7% 32.4%  
Other income 555 523 -5.9% 3,764 3,403 -9.6%
Interest 27 137 406.7% 46 183 297.4%
Depreciation 1,215 1,451 19.4% 4,385 5,494 25.3%
Profit before tax 10,842 11,918 9.9% 45,718 48,257 5.6%
Tax 3,485 3,828 9.8% 14,517 15,622 7.6%
Profit after tax/(loss) 7,356 8,090 10.0% 31,201 32,636 4.6%
Net profit margin (%) 18.2% 20.6%   22.0% 20.9%  
No. of shares (m) 3,769 3,774   3,769 3,774  
Diluted earnings per share (Rs)*         8.6  
Price to earnings ratio (x)         21.0  
* On a trailing 12-m basis

What has driven performance in FY09?
  • ITC witnessed a 3% YoY decline in sales during 4QFY09. The cigarette, FMCG and paper division witnessed a strong double digit growth. Through a combination of strong portfolio, significant investments in technology and focused marketing and distribution ITC ensured a sizeable shift of consumers to the filter segments and enabled it to sustain its leadership position despite the taxation issues on cigarettes. The branded packaged foods clocked reasonable growth during the year despite weak demand in certain categories in the face of the economic slowdown. The company continued to launch new products in the snack, biscuit and confectionery segment. The stationery business recorded a strong sales growth of 60% YoY, positioning ITC as the largest marketer of notebooks in India.

    Revenue mix
    (%of net sales) 4QFY08 4QFY09 FY08 FY09
    Cigarettes 39.1% 46.7% 41.0% 42.0%
    Others 16.7% 19.4% 15.5% 16.7%
    Total FMCG 55.8% 66.1% 56.5% 58.7%
    Hotels 7.1% 5.1% 6.3% 5.2%
    Paperboards, paper & packaging 12.8% 16.6% 13.3% 14.7%
    Agri business 24.4% 12.2% 23.9% 21.4%
    Total turnover 100.0% 100.0% 100.0% 100.0%

  • However, a 30% YoY drop in hotel revenues and 51% YoY decline in the agri division revenues (lower soya volumes and rationalisation of the agri-commodity portfolio) held back the company’s performance. The hotel segment contributed around 5% to revenues, agri division contribution dropped to 12% in 4QFY09 from 34% in the corresponding quarter last year.

  • For the full year, however, sales improved by 10% YoY. A 16% YoY growth in the FMCG portfolio (cigarette and non cigarette) coupled with a 23% YoY growth in the paperboard division led to the improvement. While the agri division witnessed flat sales, hotels saw a drop of 8% YoY. Till 9mFY09, while hotel revenues were higher by 2% YoY, the decline in 4QFY09 impacted the full year performance. The sales are lower by 5% than our estimates.

  • Faster decline in costs as compared to the topline led to the increase in operating profits by 13% YoY during the quarter. The input costs fell by 15% YoY, thereby enabling operating margins to improve from 28.5% to 33% during 4QFY09. The expansion would have been more, but for higher staff costs which increased by 16% YoY. For the full year, the margins remained steady at 32% as all costs (as a percent of sales) remained more or less stable. The operating profits are in line with our estimates.

    PBIT margin trend…
    (% of segmental revenues) 4QFY08 4QFY09 FY08 FY09
    Cigarettes 50.3% 53.8% 54.8% 55.4%
    Others -16.0% -14.0% -10.5% -16.1%
    Total FMCG 30.5% 33.8% 36.9% 35.0%
    Hotels 45.7% 32.2% 40.6% 33.8%
    Paperboards, paper & packaging 21.6% 21.3% 21.0% 19.2%
    Agri business 3.4% 10.1% 3.3% 6.7%
    Total PBIT 23.8% 28.8% 27.0% 26.6%

  • As far as segmental PBIT is concerned, the cigarette division continued its good performance with PBIT profits improving by 24% YoY and 15% YoY respectively during both the periods under consideration. A mix of price hikes and product mix improvement led to higher profits. On the non cigarette portfolio front (food, retail, personal care, stationery etc), ITC continued to face losses. For the full year, PBIT loss stood at 4.8 bn (Rs 2.6 bn in FY08). High-cost inventories, sustained brand building costs for the personal care segment and slow growth in foods continued to hamper growth. Paperboards reported stable margins, while agri business saw an improvement in PBIT margins from 3% in FY08 to 7% in FY09, with profits rising by 98% YoY. A stellar performance of the leaf tobacco portfolio aided gains. The hotel segment, however, proved to be a dampener. Terror attacks and slowdown in the economy marred its performance. It reported PBIT margins of 34% during FY09, down from 41% in FY08. The fourth quarter was severely affected with profits falling by 50% YoY.

  • Bottomline for the quarter saw a rise of 10% YoY on the back of a 4.5% YoY increase in operating margins. For the full year, the net profits saw a muted growth of 4.6% YoY due to higher interest costs and lower other income. The net profits are marginally lower than our estimates.

What to expect?
At the current price of Rs 182, the stock is trading at a price to earnings multiple of 16 times our FY11 estimates. The company saw a mixed performance across its divisions during the year. Strong growth in the FMCG segment and the company’s ability to shift consumers from non filter cigarettes to filter is indeed commendable. However, it has lined up huge investments for its non cigarette divisions which in times like these could dampen performance. We shall soon update our research report on the company.

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