ITC: Still at the crossroads… - Views on News from Equitymaster

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ITC: Still at the crossroads…

Jul 26, 2002

Tobacco major, ITC Limited, has recorded a 21% topline and a 15% bottomline growth in 1QFY03. The 1QFY02 figures have been restated to include ITC Bhadrachalam's numbers as well. The slower bottomline growth seems largely a result of a 360 basis point dip in operating margins.

(Rs m) 1QFY02 1QFY03 Change
Gross sales 23,717 27,478 15.9%
Net Sales 11,596 14,080 21.4%
Other Income 203 260 27.8%
Expenditure 6,490 8,396 29.4%
Operating Profit (EBDIT) 5,106 5,685 11.3%
Operating Profit Margin (%) 44.0% 40.4%  
Interest (net) 217 86 -60.5%
Depreciation 485 533 10.1%
Profit before Tax 4,608 5,325 15.6%
Tax 1,624 1,886 16.2%
Profit after Tax/(Loss) 2,984 3,439 15.2%
Net profit margin (%) 25.7% 24.4%  
No. of Shares (eoy) (m) 245.4 247.5  
Diluted Earnings per share* 48.2 55.6  
*(annualised)      
Current P/e ratio   11.3  

ITC's Bhadra's merger with ITC is largely seen as the reason for the lower operating margin. In cigarettes, the company continues to be able retain high margins but paperboards is a comparatively low margin business. Profit before tax was up 15.6% YoY and the company saw nearly 16% growth in tax provisioning. The company's interest burden shrunk by 60% from Rs 217 m in June quarter 2001 to Rs 86 m in 1QFY03.

Turnover snapshot
(Rs m) 1QFY02 1QFY03 Change
Cigarettes 20,017 22,049 10.1%
Others (retailing) 23 105 361.4%
Total FMCG 20,040 22,154 10.5%
Hotels 379 411 8.4%
Paperboards, paper & packaging 2,456 2,735 11.4%
Agri business 1,883 4,327 129.8%
Total turnover 24,758 29,627 19.7%
Less: Inter segment revenues 1,245 2,409 93.5%
Gross sales 23,513 27,218 15.8%

As per the management's statement, the cigarette industry continued to be under pressure in the wake of fresh state level taxes and growing contraband trade. During the quarter, Tamil Nadu and New Delhi imposed taxes on cigarettes at 10% and 20% respectively. While these levies were stayed by the respective High Courts, the company continues to provide for such taxes. However, despite this, ITC managed to record a 10% growth in cigarette revenues during the June quarter, led by price hikes.

PBIT snapshot
(Rs m) 1QFY02 1QFY03 Change
Cigarettes 4,622 4,974 7.6%
Others (retailing) -155 -205 -
Total FMCG 4,467 4,769 6.8%
Hotels 7 0 -94.3%
Paperboards, paper & packaging 310 465 50.2%
Agri business 41 361 771.0%
Total PBIT 4,825 5,595 16.0%

On the retailing front ITC added 7 more 'Wills Lifestyle' stores during the quarter, taking the total tally to 45 stores across 37 cities in India. Hotel business continued to suffer owing to the travel warnings issued by western countries. But construction of hotels in Kolkata (Sonar Bangla) and Upper Worli (Mumbai) is progressing on schedule. Though revenues from hotel business were up by over 8% YoY, ITC earned a meager 0.4 m at the PBIT level on this business in 1QFY03, as compared to Rs 7 m it earned in 1QFY02. Paperboards business registered a 50% PBIT growth on the back of an 11% revenue growth.

On the agri business front, exports grew by 109% to Rs 2,690 m backed by healthy growth in exports of non-basmati rice. The e-choupal model was further ramped up to 1,020 installations covering 6,000 villages. This initiative now extends beyond soya to wheat, coffee and marine products. As per company, its greeting cards business has gained 3% market share during the quarter.

Cost break-up
(Rs m) 1QFY02 1QFY03 Change
Material cost 3,923 5,325 35.8%
Staff cost 696 816 17.2%
Other exp. 1,872 2,255 20.5%
Total expenses 6,490 8,396 29.4%

When we had covered ITC's June quarter results last year, the story's headline read 'ITC: At the crossroads', highlighting its moves to diversify its business. Since then the company's stock price has fallen over 20% YoY to Rs 629 levels currently (P/E of 11x 1QFY03 annualised earnings). ITC seems still at the crossroads. Investors have been wary of the counter owing to its diversification moves. Its not that investors don't understand the reasons for ITC's diversifications, but currently ITC's other ventures like hotels, retailing and greeting cards are a drain on its resources and have yet to add significantly to the bottomline. Also, ITC's diversification moves give one an indication of a lack of vision. For example, the company has also launched 'Mint-O' a confectionery brand recently and has expanded its 'Kitchens of India' packaged food folio.

The ITC stock had always been accorded premium valuations owing to its robust tobacco business, but in recent times, it has become more of a diversified company. There are also concerns that ITC may merge ITC Hotels (a 70% subsidiary) going forward and this may further affect the company's quality of earnings. So the valuations are adjusting to this change in business profile.


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