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ITC: At the crossroads

Jul 20, 2001

ITC has recorded a net profit growth of 21% YoY in 1QFY02 to Rs 3,007 m. Net Sales for the quarter ended June 30, 2001 were up 4% and stood at Rs 10,479 m. Other income for the quarter was up a significant 49% to Rs 264 m.

(Rs m)1QFY011QFY02Change
Net Sales10,06010,4794.2%
Other Income17726449.0%
Operating Profit (EBDIT)4,4564,96311.4%
Operating Profit Margin (%)44.3%47.4%
Interest 231186-19.4%
Profit before Tax4,0254,66115.8%
Profit after Tax/(Loss)2,4903,00720.8%
Net profit margin (%)24.7%28.7%
No. of Shares (eoy) (m)245.4245.4
Diluted Earnings per share*40.649.0
Current P/e ratio - 16.0

The results overall are more or less as per market expectations. However, the turnover growth has slowed down from 11.5% in the first nine months of FY01, to 6% in 4QFY01 and now to a little over 4%. This brings out the fact that the company's cigarette volumes are slowing down. The punitive excise duties by the government combined with the increase in contraband cigarettes has taken a toll on the company's topline. Last year, the first quarter (1QFY01) topline had grown by 11% and net profit by 25% YoY.

The only redeeming factor in the results are the company's relentless quest for margin improvement. During the quarter, ITC's operating margins have improved by 310 basis points. In FY01 too, the company managed to improve its OPM by 480 basis points to 40.1% YoY. The company's control over its expenditure and its reducing interest burden have also contributed to improving margins.

But all said and done, there are concerns as to the extent to which the company can cut costs. In order to hedge its risk profile, ITC is investing heavily in businesses like hospitality, greeting cards, retail stores and IT. These businesses may not be as lucrative as its cash cow business of tobacco and cigarettes and the returns, if any, would take some time to come in. On the other hand, the government does not look like giving the cigarette industry a reprieve on the excise front in the coming budgets.

In such a scenario, ITC is at the crossroads today (much like HLL). It is no wonder then, at the current price of Rs 786 the stock languishes at a P/e of 16 x its annualised 1QFY02 earnings.

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