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ITC: Robust sales & margins improve - Views on News from Equitymaster
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ITC: Robust sales & margins improve
Jul 26, 2013

ITC Limited has announced its first quarter results for financial year 2013-2014 (1QFY14). The company has reported 10% YoY growth in sales and 18% YoY increase in net profits. Here is our analysis of the results.

Performance summary
  • Topline increased by 10.5% led by strong double-digit growth in non-cigarette FMCG and agri business segments.
  • Operating margin expanded by 2.3% on the back of lower other expenditure.
  • Net profit increased by 18% aided by higher operating profit and other income earned during the quarter.

(Rs. m) 1QFY13 1QFY14 Change
Total income 67,065 74,107 10.5%
Expenditure 43,313 46,194 6.7%
Operating profit (EBITDA) 23,752 27,913 17.5%
EBITDA margin (%) 35.4% 37.7%  
Other income 1,699 2,032 19.6%
Interest 138 170 23.2%
Depreciation 1,948 2,153 10.5%
Profit before tax 23,366 27,622 18.2%
Extraordinary inc/(exp) 0 0  
Tax 7,344 8,709 18.6%
Profit after tax/(loss) 16,021 18,913 18.1%
Net profit margin (%) 23.9% 25.5%  
No. of shares (m)   7902  
Diluted earnings per share (Rs)*   9.7  
Price to earnings ratio (x)   38.2  
* trailing 12 month earnings

What has driven performance in 1QFY14?
  • ITC recorded a 10.5% rise in revenues led by over 10% growth in the non-cigarette FMCG and agri business segments. In non-cigarette FMCG segment, the company continued to launch innovative products in biscuits, confectionary and snack segments. The robust performance in the agri-business was driven by higher trading volumes and improved realizations in leaf tobacco and wheat. Even the paper business clocked a robust growth of 9.9% aided by new capacity addition. The company recently commissioned a state-of-the-art paperboard machine of over 1 lakh tonnes per annum capacity at Bhadrachalam. Cigarette and hotels were the slow performers with each business segment posting growth of less than 8% during the quarter. In cigarettes, the company augmented its product portfolio in the recently introduced segment of 'filter cigarettes of length not exceeding 65 mm' with the launch of 3 new offers - 'Flake Galaxy', 'Flake Liberty' & 'Silk Cut Virginia' in identified markets.

    All round picture
      % contribution to sales Revenue growth PBIT growth PBIT margin (%) PBIT margin gain/(decline) in basis points
    Cigarettes 40% 7.1% 18.0% 63% 588
    Others 20% 18.4%   -1%  
    Total FMCG 59% 10.6%   42% 313
    Hotels 3% 7.5% -65.9% 4% -771
    Agri Business 25% 29.4% 16.3% 9% -103
    Paperboards, Paper & Packaging 13% Rs -5.0% 24% 101

  • The company's operating margin expanded by 2.3% during the quarter on the back of a 2% fall in other expenses. Raw material costs remained stable during the quarter. Among business segments, only cigarettes and paper businesses posted incremental margins. The margin expansion for the paper business was muted due to high price levels of coal and wood. The company is setting up a wind energy project in Andhra Pradesh to meet its growing energy requirements through renewable sources. The non-cigarette FMCG business pared its EBIT loss to Rs 189 m as compared to EBIT loss of Rs 388 m in the year-ago quarter.

  • Net profits increased by 18% aided by a 17.5% rise in operating profit and 19.6% higher other income earned during the quarter.

What to expect?

On the back of strong pricing power enjoyed in the cigarette business, ITC has been able to offset the fledgling profitability of the other business segments and clock higher margins. Even the non-cigarette business has been steadily cutting down losses. ITC's FMCG business continues to derive synergistic benefits from its agri and paper businesses. Only the hotel business has been performing poorly due to the overall economic slowdown. However, this business contributes a mere 3% to the overall revenues to make any sizeable impact. Going forward, ITC wants to sharpen its focus on its non-cigarette FMCG business. The company has targeted to achieve a turnover of over Rs 1 trillion from its brands in the new FMCG businesses by 2025-30.

At the current price of Rs 369, the stock trades at a P/E multiple of 22 times its estimated FY16 earnings. Although the stock holds good potential from its rapidly growing FMCG business, the current high valuations do not provide much scope for any meaningful upside. We would therefore recommend a SELL on stock at current levels.

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