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ITC: Hotel business up in smoke - Views on News from Equitymaster

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ITC: Hotel business up in smoke
Jul 23, 2009

Performance summary
  • Net sales increase by 5% YoY on the back of 23% YoY growth in sale of cigarettes and 16% YoY growth on sales from the paperboard, paper and packaging business. However, this was offset by a decline of 49% YoY and 28% YoY in sales from the agri and hotels businesses respectively.
  • Operating (EBITDA) margins increase to 34% in 1QFY10, from 30% for 1QFY09. This improvement comes due to a drop in cost of goods sold which fell from 46% of sales in 1QFY09 to 39% this quarter.
  • Net profit grew by 17% YoY while net profit margins increased from 19% in 1QFY09 to 21% in the current quarter.


(Rs m) 1QFY09 1QFY10 Change
Net sales 39,340 41,329 5.1%
Expenditure 27,726 27,456 -1.0%
Operating profit (EBDITA) 11,614 13,873 19.5%
EBDITA margin (%) 29.5% 33.6%  
Other income 801 876 9.4%
Interest 14 58 314.2%
Depreciation 1,261 1,516 20.2%
Profit before tax 11,140 13,175 18.3%
Tax 3,653 4,388 20.1%
Profit after tax/(loss) 7,487 8,787 17.4%
Net profit margin (%) 19.0% 21.3%  
No. of shares (m) 3,769 3,774  
Diluted earnings per share (Rs)*   9.0  
Price to earnings ratio (x)*   25.6  
* On a trailing 12 months basis

What has driven performance in 1QFY10?

    Revenue mix
    (%of net sales) 1QFY09 1QFY10
    Cigarettes 33.7% 45.2%
    Others 13.4% 16.0%
    Total FMCG 47.1% 61.2%
    Hotels 4.6% 3.6%
    Paperboards, paper & packaging 12.6% 15.4%
    Agri business 35.6% 19.8%

  • Although sale for cigarettes grew strongly, the growth could have been stronger had the governments of Maharashtra, Delhi and Punjab not increased the VAT on cigarettes from 12.5% to 20%. Moreover, the growth was affected due to graphic pictorial warnings on cigarette packs.

  • The sales of remaining FMCG businesses of the company which comprises of packaged food, personal care products, lifestyle retailing and stationary products grew by 10%. Packaged food segment saw strong growth in Bingos and in Sunfeast. Market share of Aashirvaad increased to 57% during the quarter. The confectionery category sales grew by 37% with growing demand for products like Lactos and Tofichoos. Stationary products grew by 22% on the back of demand from school children. The company is also seeing strong demand for its newly launched premium eco friendly paper among corporate houses. In the face of slowing retail segment, the company protected its margins by renegotiating rentals and rationalizing non economic stores. Emphasis on product design and manufacturing saw the company increase its exports by 23% YoY.

  • Hotels business was adversely affected by slowdown in international travelers due to the global recession. The fallout has been lower occupancy as well as a drop in average room rates. The terrorist attack in Mumbai and the recent spread of swine flu has also had a negative impact on this business.

  • Sales in paperboard, paper and packaging business was driven by the growth of the premium value added paperboard segment, further penetration of the paper markets and robust performance of the packaging business. However, Interdivisional business was impacted due to adjustment in pipeline inventory in preparation for the introduction of pictorial graphic warnings.

  • Sales for the agri business were driven by leaf tobacco exports. However, lack of business opportunities resulted in lower sale of soya and wheat, impacting agri product sales during the period

    PBIT margin trend…
    (% of segmental revenues) 1QFY09 1QFY10
    Cigarettes 55.3% 52.5%
    Others -17.7% -13.2%
    Total FMCG 34.5% 35.3%
    Hotels 35.7% 17.7%
    Paperboards, paper & packaging 11.7% 17.5%
    Agri business 6.7% 10.6%
    Total PBIT 21.8% 27.0%

    Operating margins expansion has been supported by margins expansion in all the business expect the hotels segment. The margins for cigarettes dropped from 55% to 52%. However, the margins for other FMCG segments showed a smaller loss at operating level, pushing the blended margins for the combined FMCG business this quarter to 35%. ITC witnessed margin expansion in its paper division to 17% YoY and in its agri business to 11% YoY. However, the margins of the hotel division shrunk to 18% on the back of falling occupancy and falling average room rent.

What to expect?
At the current price of Rs 230, the stock is trading at a multiple of 20 times our estimated FY12 earnings. The company has witnessed good growth in its core business of cigarettes. However, the fall in sales of its agri business is a matter of concern. We will update our model as and when we get further clarity from the company on its businesses.

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