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ITC: FY15 ends on a dull note - Views on News from Equitymaster
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ITC: FY15 ends on a dull note
May 26, 2015

ITC Limited has announced its fourth quarter results for financial year 2014-2015 (4QFY15). The company has reported 0.5% YoY growth in sales and 3.7% YoY increase in net profits. Here is our analysis of the results.

Performance summary
  • Revenues remained almost flat for 4QFY15 due to sluggish cigarette biz and downfall in paper and agri sales. For FY15, the topline has increased by 9.8%.
  • The company has been able to maintain operating margin at 35% for 4QFY15 on the back of lower cost of goods sold. The operating margin during FY15 has contracted slightly by 0.6%.
  • Backed by a 39% jump in the other income, the net profits were up by 3.7% for 4QFY15. The net profits during FY15 increased by 9.4% on an 8% rise in operating profit and 39% jump in other income.
  • The company has announced a dividend of Rs 6.25 per share of face value of Re 1 per share subject to shareholder's approval. At the current market price, the dividend yield works out to 1.9%.

(Rs. m) 4QFY14 4QFY15 Change FY14 FY15 Change
Total income 92,385 92,928 0.6% 332,386 365,074 9.8%
Expenditure 60,351 60,497 0.2% 207,838 230,339 10.8%
Operating profit (EBITDA) 32,034 32,431 1.2% 124,548 134,735 8.2%
EBITDA margin (%) 34.7% 34.9% 0.2% 37.5% 36.9% -0.6%
Other income 2,667 3,704 38.9% 11,071 15,431 39.4%
Interest  95 155 62.7% 30 574  
Depreciation 2,378 2,496 4.9% 8,999 9,617 6.9%
Profit before tax 32,227 33,484 3.9% 126,591 139,975 10.6%
Extraordinary inc/(exp) 0 0 0 0  
Tax 9,447 9,872 4.5% 38,739 43,898 13.3%
Profit after tax/(loss) 22,780 23,612 3.7% 87,852 96,077 9.4%
Net profit margin (%) 24.7% 25.4% 0.8% 26.4% 26.3% -0.1%
No. of shares (m)         8016  
Diluted earnings per share (Rs)*       11.9  
Price to earnings ratio (x)         26.8  
* trailing 12 month earnings

What has driven performance in 4QFY15?
  • The slowdown in topline growth that started in the December 2014 quarter continued in the March 2015 quarter. The cigarette business witnessed a muted recovery due to continued pressure on volumes and posted a growth of 3.2%.This coupled with the continued decline in the agri and paper businesses have led to flat growth in overall revenues for the quarter. The agri business recorded a steep decline of 29% due to lack of trading opportunities. Even the paper business saw 4.6% erosion in revenues due to slowdown in the FMCG and cigarette businesses.

  • However, the FMCG business reported robust growth of 11% during the quarter. The company forayed into the fast growing juices with the launch of seven variants under the B'Natural brand in January 2015. In February 2015, the company acquired the 'Savlon' and 'Shower to Shower' brands from Johnson & Johnson group further expanding its product portfolio in the personal care space. The hotels business growth recovered to 8% during the quarter.

      % contribution to sales  Revenue growth  PBIT growth  PBIT margin (%) PBIT margin gain/(decline)
    in basis points 
    Cigarettes 43% 3.2% 6.0% 64.3% 170
    Others 26% 10.9% 12.6% 1.9% 3
    Total FMCG 69% 6.0% 6.2% 40.6% 6
    Hotels 4% 8.1% -29.8% 12.1% -654
    Agri Business 15% -28.8% 13.0% 11.5% 426
    Paperboards, Paper & Packaging 12% -4.6% 1.1% 15.1% -56

  • The operating margin remained flat at 35% due to steep 10% rise in other expenses that offset the input cost savings during the quarter. Among product segments, only cigarettes and agri segments have posted incremental EBIT margins during the quarter. The EBIT margin for the FMCG business remained flat due to costs of Rs 580 m towards rationalization of safety matches manufacturing operations and start-up costs of the juices category. The paper business profitability was hit by input cost pressures due to reduction in import duties under Free Trade Agreements with ASEAN countries. Even the hotel business continued to report erosion in EBIT margins due to additional depreciation from revision in useful life of fixed assets under Companies Acvt and gestation costs on new properties.

  • Net profits grew by a 9.4% on an 8.2% increase in operating profit and 39% jump in the other income earned during the quarter. The tax incidence remained at 29% whereas interest expenses rose by 63% during the quarter.
What to expect?
ITC's largest business segment, cigarette has been adversely impacted by falling sale volumes after steep price hikes taken to pass on the duty burden. However, on a positive note, the company's FMCG business has been growing in robust double digits. The company has recently entered the packaged juice segment and has also acquired brands in the personal care space. The company has set up a dairy unit in Bihar and would be launching dairy products. ITC has announced capital expansion plans of Rs 250 bn over the next five years and remains steadfast to grow the size of its FMCG business to Rs 1 trillion by 2030.

At the current price of Rs 318, the stock trades at a P/E multiple of 27 times its trailing twelve months earnings. We are currently in the process of updating our forecast to incorporate the unaudited financials of FY15. We shall accordingly inform our subscribers about our updated view on the stock.

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