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ITC: Stoking non-smoke fires

Jul 30, 2004

Performance summary
Tobacco major, ITC, has reported strong numbers in the June quarter. The company has clocked a significant 24% topline growth led by strength in its key business of cigarettes, as well as continued strength in its non-tobacco businesses like foods, hotels, paperboards and exports. However, increase in depreciation and interest costs, as well as a dip in operating margins led to the company reporting a somewhat lower 16% growth in profits.

(Rs m) 1QFY04 1QFY05 Change FY04 Change
Gross sales 28,127 32,940 17.1% 120,399 7.6%
Net Sales 14,289 17,750 24.2% 64,704 10.3%
Other Income 571 578 1.2% 2,249 32.6%
Expenditure 8,169 10,774 31.9% 41,099 10.7%
Operating Profit (EBDIT) 6,120 6,976 14.0% 23,606 9.6%
Operating Profit Margin (%) 42.8% 39.3%   36.5%  
Interest (net) 55 129 136.6% 248 -16.9%
Depreciation 594 679 14.3% 2,416 1.8%
Profit before Tax 6,041 6,745 11.6% 23,191 12.8%
Tax 2,069 2,125 2.7% 7,262 6.0%
Profit after Tax/(Loss) 3,972 4,620 16.3% 15,929 16.2%
Net profit margin (%) 27.8% 26.0%   24.6%  
No. of Shares (m) 247.5 247.7   247.7  
Diluted Earnings per share (Rs)* 64.2 74.6   64.3  
P/E Ratio (x)   13.9      

What is the company's business?
ITC commands about 70% of India's Rs 120 bn domestic cigarette market (value terms). Out of the top 10 brands in India, 6 belong to ITC. The growing awareness on harmful effects of tobacco as well as the government's punitive tax policy forced ITC to move towards de-risking its revenue profile. Consequently, it merged the paperboards subsidiary with itself and invested in growing the hospitality, retailing, packaged foods and IT businesses. The ITC group has emerged as the second biggest luxury hotel chain after Indian Hotels. In packaged foods, its product range includes ready to eat (Kitchens of India), staples (Aashirvaad Atta and Salt), confectionery (Mint-O and Candyman) and biscuits. ITC has also entered into garment retailing and has 48 Wills Lifestyle stores in 38 cities. Other initiatives include greeting cards (20% market share), safety matches and incense sticks.

What has driven performance in 1QFY05?
Sales:  Cigarettes (78.4% of 1QFY05 sales) led the performance with nearly 11% YoY growth. The company's FMCG business (comprising of retailing, foods, agarbattis, greeting cards etc.) continued to grow strongly, doubling revenues in the June quarter. Hotels business benefited from the upturn in the industry's occupancy rate and grew by 25% YoY. The performance has also to be viewed in the context that the industry is coming out of a bad trough. Paperboards (nearly 12% of turnover) clocked strong growth led by continued shift to speciality paperboards and capacity augmentation. The company's agri business (14% of sales) was also up a strong 39%.

Turnover snapshot
(Rs m) 1QFY04 1QFY05 Change FY04 YoY Change
Cigarettes 22,911 25,383 10.8% 92,303 5.3%
Others 517 1,052 103.7% 3,042 178.5%
Total FMCG 23,427 26,435 12.8% 95,344 7.5%
Hotels 501 625 24.8% 2,575 33.2%
Paperboards, paper & packaging 2,956 3,773 27.6% 12,533 7.8%
Agri business 3,313 4,593 38.6% 17,088 3.1%
Total turnover 30,197 35,426 17.3% 127,540 7.3%
Less: Inter segment revenues 2,641 3,063 16.0% 9,390 8.8%
Gross sales 27,556 32,363 17.4% 118,150 7.2%

ITC grew by 17% at the gross level. But increasing contribution of non-tobacco businesses to revenues (up from 17% in 1QFY04 to 22% in 1QFY05) led to a decline in the percentage of excise burden on gross turnover (down from over 49% last year to 46% in 1QFY05). Thus, net sales growth was faster than gross sales.

Operating margins:  Increased material cost as percentage of sales was largely responsible for the pressure on margins. At the PBIT level, while cigarettes more or less maintained its margins, PBIT margins of the agri business fell by nearly 150 basis points to 5.6%. This dip seems the key reason for the fall in overall margins. Hotels and paperboards improved on their margins and FMCG was able to decrease its overall loss as percentage of sales. Hotel margins were low last year owing to Iraq concerns and also because the company's new hotel at Calcutta had just come on stream.

PBIT as a % of sales
(Rs m) 1QFY04 1QFY05 FY04
Cigarettes 23.4% 23.1% 22.0%
Others -70% -37% -57.3%
Total FMCG 21.3% 20.7% 19.5%
Hotels 1.7% 12.1% 12.6%
Paperboards, paper & packaging 17.8% 21.5% 18.3%
Agri business 7.2% 5.6% 5.3%
Total PBIT 19.1% 18.6% 17.3%
Cost break-up
as % of sales 1QFY04 1QFY05
Material cost 31.4% 35.7%
Staff cost 6.6% 5.7%
Other exp. 19.2% 19.3%
Total expenses 57.2% 60.7%

Net profit:  The company's increasing capex on hotels and paperboards capacity has led to higher depreciation provisioning. Interest costs too seem to have risen on account of higher debt levels. Combined with lower operating margins, these factors led to lower growth at the net profit level. The growth was nonetheless, encouraging.

Over the last four quarters
  2QFY04 3QFY04 4QFY04 1QFY05
Net sales growth (YoY) 4.5% 10.6% 23.8% 24.2%
Cigarette value growth (YoY) 3.5% 6.8% 7.1% 10.8%
Excise as % of gross sales 47.5% 45.8% 43.1% 46.1%
OPM (%) 40.2% 36.5% 28.6% 39.3%
Net profit growth (YoY) 12.4% 17.7% 19.7% 16.3%

What to expect?
At Rs 1,034, the stock trades at 13.9x annualised 1QFY05 earnings and market cap. to gross sales of 1.9x. Though the company has reported 1QFY05 EPS numbers that are above our FY05 estimates, we would like to maintain the same owing to the fact that its agri exports business has shown signs of volatility in the past. Slowly but surely, ITC's other businesses are coming of age. Their contribution to overall PBIT has increased from 7.2% in June quarter last year to over 11% this quarter. Overall, we are enthused by ITC's 1QFY05 performance and believe that the company's non-tobacco initiatives are on track.

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Jun 18, 2021 (Close)