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ITC: Momentum continues - Views on News from Equitymaster
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ITC: Momentum continues
May 23, 2008

Performance summary
  • Topline grows by 14.7% YoY in FY08, led by strong growth across all segments.
  • Initiates the Personal Care business with the launch of a range of shampoos, soaps, shower gels and conditioners under the brand names of ‘Fiama Di Wills’, ‘Vivel Di Wills’, ‘Vivel’ and ‘Superia’.

  • Operating profits grow by 11%YoY, while margins decline marginally to 31.6%.

  • The bottomline registers a 15.6% YoY growth led by higher other income.

  • The board declares a dividend of Rs 3.5 per share (dividend yield of 1.6%).

Standalone Financials
Rs(m) 4QFY07 4QFY08 (%) Change FY07 FY08 (%) Change
Net sales 33,719 39,344 16.7% 121,643 139,475 14.7%
Expenditure 24,416 28,897 18.4% 82,079 95,436 16.3%
Operating profit (EBDITA) 9,303 10,447 12.3% 39,564 44,039 11.3%
EBDITA margin (%) 27.6% 26.6% 32.5% 31.6%
Other income 1,023 1,637 60.0% 3,365 6,109 81.6%
Interest 1 27 5300.0% 33 46 40.5%
Depreciation 922 1,215 31.8% 3,629 4,385 20.8%
Profit before tax 9,403 10,842 15.3% 39,267 45,718 16.4%
Tax 2,897 3,485 20.3% 12,267 14,517 18.3%
Profit after tax/(loss) 6,506 7,357 13.1% 27,000 31,201 15.6%
Net profit margin (%) 19.3% 18.7% 22.2% 22.4%
No. of shares (m) 3,762 3,769 3,763 3,769
Diluted earnings per share (Rs)* 8.3
Price to earnings ratio (x) 25.7
* 12 months trailing earnings

What has driven performance in FY08?
  • ITC witnessed a topline growth of 16.7% YoY and 14.7% YoY in 4QFY08 and FY08 respectively. For the year, the cigarette division grew by 12.6% YoY. In FY08, an unprecedented increase of about 30% in the incidence of taxation on cigarettes arising out of the increase in the rate of excise duty by more than 6% coupled with imposition of VAT at the rate of 12.5% on an ad-valorem basis was witnessed. Despite these challenges, the company retained its leadership position in the market. The FMCG portfolio witnessed a 48.5% YoY growth. Branded packaged foods grew by 57% YoY, while biscuit and ready to eat segments grew by 53% YoY and 100% YoY respectively. The ‘Bingo’ range of potato chips and finger snack foods acquired a double-digit market share within just one year of launch.

    Revenue Breakup
    (Rs m) 4QFY07 4QFY08 (%) Change FY07 FY08 (%) Change
    Cigarettes 15,451 17,302 12.0% 58,949 66,350 12.6%
    % of revenues 42.4% 39.1% 42.4% 41.0%
    Others 4,912 7,373 50.1% 16,895 25,096 48.5%
    13.5% 16.7% 12.2% 15.5%
    Total FMCG 20,364 24,675 21.2% 75,844 91,446 20.6%
    55.9% 55.8% 54.6% 56.5%
    Hotels 2,791 3,125 12.0% 9,058 10,121 11.7%
    7.7% 7.1% 6.5% 6.3%
    Paperboards, paper & packaging 4,845 5,677 17.2% 19,106 21,579 12.9%
    13.3% 12.8% 13.7% 13.3%
    Agri business 8,415 10,781 28.1% 35,013 38,684 10.5%
    23.1% 24.4% 25.2% 23.9%
    Total turnover (net) 36,414 44,259 21.5% 139,021 161,830 16.4%
    Less: Inter segment revenues 2,695 4,915 82.3% 17,378 22,355 28.6%
    Net sales 33,719 39,344 16.7% 121,643 139,475 14.7%

  • Augmentation of the manufacturing capacities, higher exports and wider product portfolio led to a 26% YoY rise in domestic sales in the Lifestyle Retailing business. The stationery business recorded a robust sales growth of 72% YoY for the year, positioning the company as the largest marketer of notebooks in India. Hotels division grew by 11.7% YoY led by higher room rates and sales of food and beverages (F&B). The paperboard division grew by 12.9% YoY led by higher sales realisations. Higher inflationary pressures, ban on exports, market intervention at subsidised prices and imposition of limits on inventory holding led to the agri business growing at a slower pace of 10.5% YoY.

  • Higher expenses (as percentage of sales) during both the periods under consideration led to the operating margins decline by 1% YoY. Raw material prices were higher as all the key commodities witnessed price hikes in the last year. Further, on account of new launches in the personal care and food segments, ITC had to incur higher market development expenses. The operating margins for FY08 are marginally higher than our estimates.

    PBIT margin trend…
    (% of segmental revenues) 4QFY07 4QFY08 FY07 FY08
    Cigarettes 48.0% 50.3% 53.8% 54.8%
    Others -9.8% -16.0% -12.0% -10.5%
    Total FMCG 34.0% 30.5% 39.2% 36.9%
    Hotels 41.9% 45.7% 38.7% 40.6%
    Paperboards, paper & packaging 20.1% 21.6% 21.8% 21.0%
    Agri business 1.0% 3.4% 3.5% 3.3%
    Total PBIT 25.2% 23.8% 27.8% 27.0%

  • On the PBIT front, the cigarettes division witnessed a growth of 15% YoY for FY08 due to an improvement in the product mix. The margins expanded to 55% as compared to 54% in FY07. Though still in losses, the company has managed to improve the performance of the FMCG portfolio. The hotel, agri and paper division witnessed stable margins of 9%, 3% and 21% respectively. The margins for the hotel segment would have been better but for the adverse impact of the strengthening rupee in 1HFY08. In the paper segment, despite firm pulp and crude prices, the company maintained margins by expanding pulp capacities, improving energy management and enhancing internal efficiencies.

  • The bottomline for 4QFY08 increased by 13% YoY, while it was up 15.6% YoY in FY08. Higher other income (up 82% YoY) during the full year led to the growth. The net margins reported by the company are 2% higher than our estimates.

What to expect?
At the current price of Rs 213, the stock is trading at a price to earnings multiple of 19.7 times our FY10 estimates, which we believe makes it fairly valued from a medium term perspective. ITC had not taken a price hike decision on cigarettes on account of a pending review plea by the industry to the government on the recent excise hike. Despite higher taxes, the company has done well on the cigarette front. Also, its FMCG portfolio continues to maintain market share and is witnessing robust growth. Further, new launches like Bingo and personal care products are are expected to contribute to growth going forward.

Construction activity with respect to the super deluxe luxury hotel projects at Bangalore and Chennai is progressing on schedule. Besides this, with the recent commissioning of the new pulp mill, the pulp capacity at the Bhadrachalam unit stands enhanced from 0.1 m tonnes per annum to 0.2 m tonnes per annum. This will help ITC mitigate the impact of escalations in prices of hardwood pulp. The commercial production of the value added and writing paper is expected to start in mid 2008. The incremental pulp capacity would be able to support the requirements of the new paper machine (with a capacity of 0.1 m TPA) for meeting the demand for value added paper. ITC has done well on the margin front inspite of an unprecedented rise in commodity prices. Though the growth prospects look good, execution, inflation and competition risks remain. We shall soon update our research report on the company.

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