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ITC: Robust all round performance - Views on News from Equitymaster

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ITC: Robust all round performance

Jul 23, 2010

ITC Limited has announced its 1QFY11 results. The company has reported a 15.5% YoY and 21.8% YoY growth in sales and net profits respectively. Here is our analysis of the results.

Performance summary
  • Top line for ITC grew by 16% YoY in 1QFY11, bolstered by a strong growth in FMCG (including cigarettes), hotels and agriculture businesses.
  • Operating (EBITDA) margins increased by 0.8% on the back of lower other expenditure (as a percentage of sales). The growth in operating margins was capped by increase in raw material costs and staff costs as a percentage of sales.
  • Net profit grew by 22% YoY during the quarter. This increase was a result of growth in operating income, low depreciation charge and lower effective tax rate.

(Rs. m) 1QFY10 1QFY11 Change
Net sales 41,978 48,473 15.5%
Expenditure 28,105 32,103 14.2%
Operating profit (EBDITA) 13,873 16,371 18.0%
EBDITA margin (%) 33.0% 33.8%  
Other income 876 985 12.5%
Interest (net) 58 58 -0.7%
Depreciation 1,516 1,597 5.3%
Profit before tax 13,175 15,701 19.2%
Extraordinary inc/(exp) 0 0  
Tax 4,388 4,998 13.9%
Profit after tax/(loss) 8,787 10,703 21.8%
Net profit margin (%) 20.9% 22.1%  
No. of shares (m)   3825  
Diluted earnings per share (Rs)*   11.1  
Price to earnings ratio (x)   26.7  
* trailing 12 month earning

What has driven performance in 1QFY11?

    Revenue mix
    (%of net sales) 1QFY10 1QFY11
    Cigarettes 46.2% 42.5%
    Others 15.8% 17.2%
    Total FMCG 62.0% 59.7%
    Hotels 3.6% 3.6%
    Agri business 19.7% 23.1%
    Paperboards, paper & packaging 14.7% 13.6%

  • Sales of the company grew 15.5% during the quarter backed by higher sales across company's businesses. Cigarette portfolio of the company grew 12% YoY during the quarter. This growth in sales was supported by introduction of new brands, price hikes and strengthening of trade and distribution channels. Sales would have been stronger had the governments of several states not increased the VAT on cigarettes and imposed entry tax. Moreover, the sales were also affected due to graphic pictoral warnings on cigarette packs and ban on smoking in public places.

  • Sales of other FMCG portfolio grew by 32% YoY. The branded packaged foods business grew by 34% YoY during the quarter on the back of improved realization, better product mix, and active cost management. Aashirvaad atta grew by 21% YoY during the year. Sale of Sunfeast biscuits increased by 43% YoY during the quarter on the back of improvement in product mix and higher sales of value added variants of cookies and creams. Personal care business gained traction during the quarter growing by 86% YoY. In fact the company achieved a market share of 5% in soaps business during the quarter in the face of stiff competition from companies like HUL and Godrej Consumer. The stationery business continued on its impressive growth trajectory and registered an impressive 30% YoY growth during the quarter.

  • The hotels business showed a growth of 21% YoY in sales as the hospitality leaves the recession behind it. EBIT grew by 26% YoY during the quarter.

  • Sales for the Agri business grew 44% YoY while EBIT grew by 23%. This impressive performance comes on the back of higher demand for soya, leaf tobacco and wheat.

  • The Paperboards, Paper & Packaging segment revenues posted a growth of 13% YoY, while the PBIT grew by an impressive 47% YoY. The improvement in profitability was due to a better product mix, higher realization and lower input costs.

  • Net profit of the company for the year increased by 22% YoY while net profit margins expanded by 1.2%. This growth comes on the back of higher operating income, lower depreciation and lower effective tax rate during the quarter. Effective tax rate fell from 33.8% to 31.8% during the quarter.

    PBIT margin trend...
    (% of segmental revenues) 1QFY10 1QFY11
    Cigarettes 50.9% 52.5%
    Others -13.2% -8.9%
    Total FMCG 34.6% 34.9%
    Hotels 17.7% 18.3%
    Agri business 10.6% 9.1%
    Paperboards, paper & packaging 18.2% 23.7%
    Total PBIT 26.8% 26.8%

What to expect?
At the current price of Rs 297, the stock trades at a P/E multiple of 23x our estimated FY13 earnings per share (RPro subscribers can click here). The company has done well on the back of all round growth. However, we believe that growth for the next 2-3 years is priced in. We would advise investors to be cautious on this stock.

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