ITC: FMCG biz in black in FY14

ITC Limited has announced its fourth quarter results for financial year 2013-2014 (4QFY14). The company has reported 12% YoY growth in sales and 18% YoY increase in net profits. Here is our analysis of the results.

Performance summary

• For 4QFY14, revenues grew by 12% aided by double-digit growth in FMCG and paper businesses. In FY14, revenues were up by 11%.
• Backed by lower cost of goods sold and other expenses, both as a proportion of sales, the operating margin expanded by 1.9% in 4QFY14 as well as in FY14.
• Net profit grew by a faster 18% as a slower increase in other income earned has been offset by lower interest outgo. For FY14, the net profits increased by 18%.
• The company has declared a dividend of Rs 6 per equity share of face value of Re 1 each for the financial year ended March 2014.

Financial Performance Snapshot

(Rs. m)	4QFY13	4QFY14	Change	FY13	FY14	Change
Total income	82,574	92,385	11.9%	299,013	332,386	11.2%
Expenditure	55,511	60,351	8.7%	192,738	207,838	7.8%
Operating profit (EBITDA)	27,063	32,034	18.4%	106,275	124,548	17.2%
EBITDA margin (%)	32.8%	34.7%	1.9%	35.5%	37.5%	1.9%
Other income	2,540	2,667	5.0%	9,387	11,071	17.9%
Interest	243	95	-60.7%	865	30	-96.6%
Depreciation	2,067	2,378	15.1%	7,956	8,999	13.1%
Profit before tax	27,293	32,227	18.1%	106,842	126,591	18.5%
Extraordinary inc/(exp)	0	0		0	0
Tax	8,014	9,447	17.9%	32,658	38,739	18.6%
Profit after tax/(loss)	19,280	22,780	18.2%	74,184	87,852	18.4%
Net profit margin (%)	23.3%	24.7%	1.3%	24.8%	26.4%	1.6%
No. of shares (m)					7,953
Diluted earnings per share (Rs)*					11.0
Price to earnings ratio (x)					31.6

* trailing 12 month earnings

What has driven performance in 4QFY14?

• Led by double-digit growth in FMCG and paper businesses, ITC posted a 12% topline growth in 4QFY14. In FMCG, the cigarette business recorded a growth of 12.6% whereas the non-cigarette business grew by a faster 13.7% during the quarter. Aided by higher volumes and better product-mix, the paper business remained the fastest growing segment clocking a growth of 19% for the quarter. Among other businesses, the agri business recorded a growth of 8%. The hotel business remained the slow mover registering a rise of 1.6% in 4QFY14. This business continued to be adversely impacted by weak economic conditions coupled with addition in room supplies in key Indian cities.
  All round picture

  	% contribution to sales	Revenue growth	PBIT growth	PBIT margin (%)	PBIT margin gain/(decline) in basis points
  Cigarettes	41%	12.6%	20.8%	62.6%	426
  Others	23%	13.7%	263.0%	1.9%	128
  Total FMCG	64%	13.0%	22.2%	40.6%	305
  Hotels	3%	1.6%	47.3%	18.7%	580
  Agri Business	20%	8.1%	14.1%	7.3%	38
  Paperboards, Paper & Packaging	13%	19.3%	0.1%	17.8%	290

  
  
• Even the operating margin witnessed expansion of 1.9% during the quarter on the back of controlled increase in input costs and other expenditure. As a proportion of sales, the cost of goods sold and other expenditure fell by 1% each during the quarter. While the agri segment just managed to maintain its EBIT margin, the other business segments clocked substantial increase in EBIT margins during the quarter. The non-cigarette FMCG business reported an EBIT margin of 1.9%, an expansion of 1.3% from the year-ago quarter.

• At the net level, profits grew by a robust 18% aided by 61% fall in interest outgo due to write-back of rates and taxes and interest thereon consequent to a favourable High Court Order. The other income earned for the quarter was up by a mere 5%.

What to expect? ITC has reported a decent financial performance. Although its topline growth has slowed down due to sluggish growth in the FMCG and hotel businesses, the company has managed to expand operating margins. The strong operational performance has been on the back of pricing power enjoyed in the cigarette business and turn-around in its non-cigarette FMCG business. The non-cigarette FMCG business reported a net profit of Rs 218 m in FY14 as compared to loss of Rs 813 m in FY13.

At the current price of Rs 346, the stock trades at a P/E multiple of 23 times its estimated FY16 earnings. Although the stock holds good potential from its rapidly growing FMCG business, the current high valuations do not provide any significant upside. We would therefore recommend a SELL on stock at current levels.