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ITC: A dull start to FY16 - Views on News from Equitymaster

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ITC: A dull start to FY16
Aug 3, 2015

ITC declared results for the quarter ended June 2015. The company's revenues were down by 7% YoY, while profits grew by 4% YoY. Here is our analysis of the results:

Performance summary
  • Revenues fall by 7% YoY as the tobacco, agri and paper boards businesses report declines.
  • Operating profits however rise by 3% YoY as margins expand to 39.4% as compared to 35.4% in same period of last year. Margin expansion mainly on account of lower input costs (as a percentage of sales). At the EBIT level, margins of the cigarette and agri businesses expand on a YoY basis.
  • Profits rise by 4% YoY.

Financial performance summary
(Rs m) 1QFY15 1QFY16 Change
Revenues 92,483 85,877 -7.1%
Expenditure 59,707 52,018 -12.9%
Operating profit (EBITDA) 32,776 33,859 3.3%
EBITDA margin (%) 35.4% 39.4%  
Other income 2,346 3,150 34.3%
Interest  152 105 -31.0%
Depreciation 2,313 2,582 11.6%
Profit before tax 32,657 34,322 5.1%
Tax 10,793 11,668 8.1%
Profit after tax/(loss) 21,864 22,654 3.6%
Net profit margin (%) 23.6% 26.4%  
No. of shares (m) 7,955 8,016  
Diluted earnings per share (Rs)* 12.1  
Price to earnings ratio (x)   27.4  
* On a trailing 12 months basis

What has driven performance in the quarter ended June 2015?
  • ITC began FY16 on a dull note. Net sales for the quarter ended June 2015 were down by 7% YoY, while operating profits were up by 3% YoY as margins expanded by 4% YoY. Revenues were impacted by the poor performance of the agri and paper board businesses coupled with a marginal (1% YoY) decline in the tobacco business. The non-cigarette FMCG business nonetheless reported a strong revenue growth of 12% YoY and contributed to about 21% of revenues as compared to 17.6% in same period last year.

    Segment wise performance summary
    Segment % contribution to sales Revenue growth PBIT growth PBIT margin PBIT margin gain/(decline)
    Cigarettes 40.7% -1.2% 2.2% 67.0% 2.2%
    Others 21.3% 12.2% -48.9% -0.4% 0.4%
    Total FMCG 62.0% 3.0% 2.5% 43.9% -0.2%
     Hotels 2.8% 15.7% -40.0% -2.5% 2.3%
    Agri Business 22.8% -29.5% 15.5% 10.1% 3.9%
    Paperboards, Paper & Packaging 12.4% -1.8% -7.4% 19.7% -2.0%
    Data source: Company, Equitymaster Research

  • At the operating level, ITC's margin improvement was largely a factor of better performance of tobacco and agri businesses – the key contributors at the EBIT level. The non-cigarette FMCG business reported marginal losses. ITC’s EBIDTA margins came in at 39.4% during the quarter as compared to 35.4% in same quarter last year. Net profits were higher by 4% YoY, broadly in line with the growth in operating performance.
What to expect?

At the current price of Rs 331, the stock of ITC trades at a multiple of about 27.4x its trailing twelve month earnings and at about 23x our estimated FY17 EPS.

Notwithstanding the short term implication of the strict regulatory regime, we believe the risk reward ratio continues to be favourable at current price levels. We maintain our buy view on the stock from a long term perspective given the strong integrated operations coupled with the long term potential of the FCMG business.

Investors can buy the stock of ITC at current levels. However, we suggest them not having more than 5% of their portfolio in one stock as a risk mitigation effort.

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