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ITC: Diversification worries - Views on News from Equitymaster
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  • May 26, 2003

    ITC: Diversification worries

    Tobacco major, ITC Limited, has reported 16% net sales and an encouraging 15% bottomline growth in FY03. The numbers of last year have been restated to include ITC Bhadrachalam Paperboards, consequently making the numbers comparable.

    (Rs m) 4QFY02 4QFY03 Change FY02 FY03 Change
    Gross sales 26,061 28,395 9.0% 99,825 111,945 12.1%
    Net Sales 13,845 15,199 9.8% 50,592 58,658 15.9%
    Other Income 397 601 51.4% 1,424 1,696 19.1%
    Expenditure 9,654 10,465 8.4% 31,560 37,120 17.6%
    Operating Profit (EBDIT) 4,191 4,734 13.0% 19,033 21,538 13.2%
    Operating Profit Margin (%) 30.3% 31.1%   37.6% 36.7%  
    Interest (net) 143 60 -58.4% 669 298 -55.4%
    Depreciation 509 642 26.1% 1,985 2,374 19.6%
    Profit before Tax 3,936 4,634 17.7% 17,803 20,562 15.5%
    Tax 1,072 1,399 30.6% 5,905 6,848 16.0%
    Profit after Tax/(Loss) 2,864 3,234 12.9% 11,897 13,713 15.3%
    Net profit margin (%) 20.7% 21.3%   23.5% 23.4%  
    No. of Shares (eoy) (m) 247.5 247.5   247.5 247.5  
    Diluted Earnings per share (Rs)* 46.3 52.3   48.1 55.4  
    Current P/e ratio   13.1     12.3  

    As per the management's statement, the cigarette industry continued to be under pressure in the wake of state level taxes and growing contraband trade. Despite this, ITC managed to record an 11.6% growth in cigarette revenues during the March quarter, led by better product mix. The growth witnessed in the March quarter was higher than the 6% growth seen in the December quarter. Overall, in FY03, ITC's cigarette revenues were up 9.3% YoY backed by a volume growth of 4.1% and a better product mix.

    Turnover snapshot
    (Rs m) 4QFY02 4QFY03 Change FY02 FY03 Change
    Cigarettes 19,670 21,960 11.6% 80,209 87,640 9.3%
    Others (retailing, greeting cards,
    packaged foods, agarbattis, matches)
    54 455 746.7% 221 1,092 395.0%
    Total FMCG 19,724 22,415 13.6% 80,430 88,732 10.3%
    Hotels 490 579 18.2% 1,624 1,934 19.1%
    Paperboards, paper & packaging 2,755 3,038 10.3% 10,310 11,629 12.8%
    Agri business 4,230 3,647 -13.8% 11,478 16,581 44.5%
    Total turnover 27,199 29,679 9.1% 103,842 118,876 14.5%
    Less: Inter segment revenues 1,535 1,885 22.8% 5,441 8,627 58.6%
    Gross sales 25,664 27,794 8.3% 98,401 110,249 12.0%

    As must be clear from the table above, ITC's other businesses grew well in both March quarter as well as in FY03. Its hotels business showed an encouraging 19% growth in revenues during the year and despite a poor March quarter, ITC's agri-business was up 44% YoY in FY03.

    At the PBIT level, except for its agri business, the performance of all its businesses improved to give a fillip to its operating margins in the March quarter. While the cigarette division improved PBIT margin by over 100 basis point, ITC's hotels, paperboards and agri business too registered encouraging rise at PBIT levels. Consequently, its operating margins have improved in the March quarter.

    On the retailing front, the company's 'Wills Lifestyle' stores tally stands at 48 across 38 cities in India. The company added 10 new stores in FY03. As far as paperboard business is concerned, the overall segment revenue grew by a healthy 13% during the year. The share of value-added products in total paperboard sales stood at 62%.

    PBIT snapshot
    (Rs m) 4QFY02 4QFY03 Change FY02 FY03 Change
    Cigarettes 3,778 4,684 24.0% 16,931 19,235 13.6%
    Others (retailing, greeting cards, packaged foods, agarbattis, matches) -245 -438 - -734 -1,224 -
    Total FMCG 3,533 4,246 20.2% 16,197 18,011 11.2%
    Hotels 39 47 20.7% -5 101 -
    Paperboards, paper & packaging 420 573 36.6% 1,622 2,263 39.5%
    Agri business 82 -46 - 110 841 666.2%
    Total PBIT 4,074 4,821 18.3% 17,923 21,215 18.4%

    The company's e-choupal model was further ramped up to 2,100 installations covering nearly a million farmers. This initiative now extends beyond soya to wheat, coffee and marine products. The ‘e-Choupal’ infrastructure is being extended to support efficient sourcing of wheat for the Branded Packaged Foods business. As per the company's release, its greeting cards business grew briskly and ITC's market share has expanded to 15% during the year.

    Cost break-up
    (Rs m) 4QFY02 4QFY03 Change FY02 FY03 Change
    Material cost 5,859 5,890 0.5% 18,904 22,484 18.9%
    Staff cost 941 854 -9.3% 3,105 3,461 11.5%
    Other exp. 2,854 3,721 30.4% 9,551 11,175 17.0%
    Total expenses 9,654 10,465 8.4% 31,560 37,120 17.6%

    In the past, the ITC stock had always been accorded premium valuations owing to its robust tobacco business. But in recent times, it has become more of a diversified company. There are also concerns that ITC may merge ITC Hotels (a 70% subsidiary) going forward and this may further affect the company's quality of earnings. At the current price of Rs 684 the stock trades at 12x FY03 annualised earnings.



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