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ITC: FMCG continues to drive growth - Views on News from Equitymaster

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ITC: FMCG continues to drive growth
Jul 26, 2012

ITC Limited has announced its first quarter results for financial year 2011-2012 (1QFY13). The company has reported 15% YoY and 20% YoY growth in sales and net profits respectively. Here is our analysis of the results.

Performance summary
  • Revenues grew by 15% YOY in 1QFY13 backed by 17% growth in the core FMCG business and 8% growth in the paper business. Revenues from the hotels and agri businesses remained largely stagnant during the quarter.
  • On the back of controlled raw material costs and other expenses, the operating margin improved by 180 basis points during the quarter.
  • Earnings grew by 20% aided by 21% rise in operating profit and 31% cut in interest expense.

(Rs. m) 1QFY12 1QFY13 Change
Total income 58,524 67,131 14.7%
Expenditure 38,945 43,447 11.6%
Operating profit (EBITDA) 19,579 23,683 21.0%
EBITDA margin (%) 33.5% 35.3%  
Other income 1,656 1,768 6.7%
Interest 200 138 -31.3%
Depreciation 1,665 1,948 17.0%
Profit before tax 19,370 23,366 20.6%
Extraordinary inc/(exp) 0 0  
Tax 6,043 7,344 21.5%
Profit after tax/(loss) 13,327 16,021 20.2%
Net profit margin (%) 22.8% 23.9%  
No. of shares (m)   7823  
Diluted earnings per share (Rs)*   8.2  
Price to earnings ratio (x)   30.6  
* trailing 12 month earnings

What has driven performance in 1QFY13?
  • ITC recorded 15% growth in topline driven by a 23% rise in the non-cigarette FMCG business. In this segment, branded packaged foods and education & stationary products logged impressive growth during the quarter. The largest segment cigarettes reported a 15% YoY revenue growth, lower than 17.4% YoY growth in the previous quarter. The slowdown points to the demand moderation after the 11% price-hike undertaken last quarter to pass on the excise duty burden. Paperboards, paper & packaging clocked an 8% growth due to enhancement in the product-mix. However, the hotel business was adversely impacted by weak demand outlook in the domestic & international markets as well as significant addition to room supply in key Indian cities. Even the agri business revenues dipped on account of the surplus leaf tobacco inventory and unfavourable commodity price movement.

    All round picture
      %contribution to sales Revenue growth PBIT growth PBIT margin (%) PBIT margin gain/(decline) basis points
    Cigarettes 43% 15.0% 20.5% 57% 263
    Others 19% 23.0%   -3%  
    Total FMCG 62% 17.3%   39% 210
    Hotels 3% 0.8% -48.9% 11% -1098
    Agri Business 22% -0.9% 9.1% 10% 93
    Paperboards, Paper & Packaging 13% 8.0% 16.6% 28% 568

  • Backed by controlled growth in the cost of goods sold and other expenditure, ITC posted a huge improvement in the operating performance. All product segments, barring hotels and non-cigarette FMCG, expanded their EBIT margin during the quarter. The paper business saw its EBIT margin increase by 5.6% whereas the cigarette business EBIT margin was up by 2.6%. The agri business witnessed marginal rise in operating margin. The hotels business saw its EBIT margin halve to 11% on account of room additions made during the quarter. The non-cigarette FMCG pared losses from Rs 763 m in the year-ago quarter to Rs 388 m.

  • 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 262, the stock trades at a P/E multiple of 23 times its estimated FY15 earnings.

ITC's cash generating business viz. cigarettes is facing pressure after the company raised prices to pass on the higher excise duty. The country is witnessing a structural rise in taxation on cigarettes. The state government in Uttar Pradesh raised the value-added tax on cigarettes from 17.5% to 50% in July. Other states like Karnataka and Kerala too have raised their taxes on cigarettes. The ban on chewing tobacco in five states is likely to adversely impact the industry as state governments try to make up for the revenue loss through higher taxes on cigarettes. Although ITC enjoys considerable pricing power, frequent price-hikes are likely to impact its volume growth in future.

Therefore with its core business facing regulatory headwinds and the non-cigarette FMCG business still to break-even, the stock is overvalued at current valuations. We thus advice a SELL on the stock.

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