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ITC: Robust profitable growth
May 28, 2012

ITC Limited has announced its fourth quarter results for financial year 2011-2012 (4QFY12). The company has reported 17.5% YoY and 26% YoY growth in sales and net profits respectively. Here is our analysis of the results.

Performance summary
  • Revenues grew by 17% YOY in 4QFY12 backed by 19% growth in the core FMCG business. Higher export realizations from a weak rupee saw agri business clocking a 30.7% jump in revenues during the quarter. However, the paper business grew by a relatively subdued 6.9% whereas hotel revenues continued to decline registering a fall of 4.8%. During FY12, topline increased by 17% aided by double-digit growth in most of the segments.
  • Operating margin expanded by 50 basis points during the quarter on the back of lower cost of goods sold offsetting increased staff costs and other expenses (all as a percentage of sales). For the full year FY12, operating margin was marginally up by 30 basis points on account of higher commodity inflation in 1HFY12.
  • Earnings grew by a robust 26% aided by falling interest costs and lower tax incidence. A 1.8 folds jump in other income also added to the bottomline during the quarter. For FY12, earnings increased by 23.6%.

Standalone numbers
(Rs. m) 4QFY11 4QFY12 Change FY11 FY12 Change
Total income 59,483 69,546 16.9% 214,590 251,738 17.3%
Expenditure 40,426 46,913 16.0% 140,463 164,252 16.9%
Operating profit (EBITDA) 19,057 22,634 18.8% 74,127 87,486 18.0%
EBITDA margin (%) 32.0% 32.5%   34.5% 34.8%  
Other income 1,151 2,079 80.6% 5,798 8,253 42.3%
Interest 198 148 -25.2% 684 779 14.0%
Depreciation 1,642 1,880 14.5% 6,560 5,985 -8.8%
Profit before tax 18,368 22,684 23.5% 72,682 88,975 22.4%
Extraordinary inc/(exp) 0 0   0 0  
Tax 5,553 6,540 17.8% 22,806 27,352 19.9%
Profit after tax/(loss) 12,815 16,144 26.0% 49,876 61,624 23.6%
Net profit margin (%) 21.5% 23.2%   23.2% 24.5%  
No. of shares (m)         7818  
Diluted earnings per share (Rs)*         7.8  
Price to earnings ratio (x)         29.9  
* trailing 12 month earnings

What has driven performance in 4QFY12?
  • ITC’s topline grew by 17% led by 23% growth in the non-cigarette FMCG segment. Cigarettes, the largest segment, grew by relatively subdued 17.4% YoY on slowing offtake after the company hiked prices by 11% post the excise-duty hike in Union Budget 2012-13. The cigarette volume growth dipped to 5% in 4QFY12 from 6% in the year-ago quarter. Aided by a weakening rupee, realizations from export of basmati rice, processed fruits and soymeal grew handsomely. This resulted in a 30.7% jump in agri business revenues during the quarter. The paperboard business grew by a sluggish 6.9%. Only the hotel segment sales fell by 4.8% as the weak economic conditions in Europe and US affected the hospitality industry.

    All round picture
      % contribution to sales Revenue growth PBIT growth PBIT margin (%) PBIT margin gain/(decline) basis points
    Cigarettes 43% 17.4% 19.5% 54% 95
    Others 21% 23.2%   -1%  
    Total FMCG 64% 19.3%   36% 140
    Hotels 4% -4.8% -16.8% 29% -416
    Agri Business 14% 30.7% 5.8% 7% -176
    Paperboards, Paper & Packaging 13% 6.9% 1.1% 21% 158

  • ITC has been able to improve operating margin by 50 basis points backed by lower input costs. The cost of goods sold to sales ratio fell by 118 basis points that more than offset the higher staff costs and other expenses (as a percentage of sales) during the quarter. Only FMCG and paper businesses reported higher EBIT margins. EBIT margin of the cigarette business improved by 95 basis points largely aided by price-hikes whereas the non-cigarette FMCG business pared EBIT losses by Rs 511 m. Overall EBIT margin for FMCG business increased by 140 basis points. The paper business saw its EBIT margin expand by 158 basis points. The operating profitability of agri and hotel businesses was down by 176 and 416 basis points, respectively during the quarter.

  • At the net level, profitability expanded by 170 basis points YoY backed by lower effective tax rate and interest outgo coupled with higher other income. Effective tax rate fell to 28.8% from 30.2% in the year-ago quarter. The company reported a 1.8 folds jump in other income earned for the quarter.

What to expect?
At the current price of Rs 234, the stock trades at a P/E multiple of 24 times our estimated FY14 earnings per share. ITC has been able to clock robust topline growth backed by its successful foray in the non-cigarette FMCG business. Recently, the company set up the second manufacturing plant for noodles in Kolkata in partnership with the Keventer Group. The plant set up at a cost of Rs 500 m is equipped with a capacity of 50 tons instant noodles per day. The company weathered the onslaught of commodity inflation in FY12 on the strength of its integrated business model. However, as all these upsides are already factored we would advise investors to exercise caution.

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