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ITC: Riding on growth & profitability

Aug 8, 2011

ITC Limited has announced its first quarter results for financial year 2011-2012 (1QFY12). The company has reported a 20.6% YoY and 24.5% YoY growth in sales and net profits respectively. Here is our analysis of the results.

Performance summary
  • Revenues grew by 20.6% YOY in 1QFY12 backed by over 15% growth in branded FMCG, cigarettes, agri and paper & paperboard businesses.
  • Operating margin was maintained through cuts in promotional expense of non-tobacco FMCG business that offset rising raw material costs during the quarter.
  • At the net level, margins expanded by 70 basis points to 22.7% backed by higher other income and lower effective tax rate.

(Rs. m) 1QFY11 1QFY12 Change
Revenues 48,603 58,602 20.6%
Expenditure 32,166 38,841 20.8%
Operating profit (EBITDA) 16,437 19,761 20.2%
EBITDA margin (%) 33.8% 33.7%  
Other income 985 1,438 46.1%
Interest (net) 124 165 32.6%
Depreciation 1,597 1,665 4.2%
Profit before tax 15,701 19,370 23.4%
Extraordinary inc/(exp) 0 0  
Tax 4,998 6,043 20.9%
Profit after tax/(loss) 10,703 13,327 24.5%
Net profit margin (%) 22.0% 22.7%  
No. of shares (m) 3818 7738  
Diluted earnings per share (Rs)*   6.7  
Price to earnings ratio (x)   28.97  
* On a trailing 12 months basis

What has driven performance in 1QFY12?
  • Sales of the company grew 19.6% YoY in 1QFY12. The growth was broad-based with robust sales growth reported across all segments. Cigarettes, the largest segment, improved its sales growth to 15.7% YoY from 13.4% YoY in the previous quarter. Although cigarettes were spared of additional excise duty hikes in the Union Budget FY 2011-12, higher VAT rates imposed at the state level and growing incidence of smuggling and illegal manufacture posed a dampener.

  • Non-tobacco FMCG business grew by 19.6% YoY in 1QFY12. Amongst them, branded packaged food business continued its stellar performance recording a 21% YoY growth during the quarter. The growth was led by robust performance of Sunfeast biscuits, Aashisrvad Atta, Bingo snacks and Yipee noodles. In personal care, ITC continued to expand consumer franchise through new variants and product innovations. The positioning of Classmate & Paperkraft brands on the environment-friendly plank led to healthy growth in the education & stationary product segment.

  • The agri business grew by over 20% YoY, backed by higher trading volumes and improved realizations in soya, wheat & coffee. Paperboards, specialty paper & packaging clocked growth of 21% on improved product-mix and better realisations. The hotel business grew by a healthy 10% and achieved the unique distinction of being the first hotel chain in the world to have all its premium luxury hotels certified at the highest LEED Platinum rating.
  • All round picture
      % contribution to sales Revenue growth PBIT growth PBIT margin(%) PBIT margin gain/(decline) basis points
    Cigarettes 42.49 15.70% 20.82% 55% 233
    Others 17.13 19.61%   -6%  
    Total FMCG 59.62 16.82% 23.42% 37% 197
    Hotels 3.59 9.78% 33.20% 22% 391
    Agri Business 23.21 25.82% 21.15% 9% (36)
    Paperboards, Paper & Packaging 13.58 20.90% 20.43% 24% (9)

  • Despite a 28% YoY rise in raw material expense in 1QFY12, ITC was able to keep operating margins in-tact by reducing promotional expenditure on non-tobacco FMCG business. Resultantly, other expenditure declined by 9% YoY and the non-tobacco FMCG segment cut down its PBIT loss by Rs. 130 million during the quarter. PBIT margin of the largest profit generating segment, cigarettes appreciated by 233 basis points YoY. Even the hotel segment expanded PBIT margin by 391 basis points YoY in 1QFY12. PBIT margin of the agri segment contracted by 36 basis points YoY whereas the profitability of paperboard segment remained stagnant during the quarter.

  • At the net level, profitability improved by 70 basis points YoY backed by lower effective tax rate and higher other income earned. Effective tax rate fell to 31.2% from 31.8% during the year-ago quarter. The other income earned was higher by 46% YoY.

What to expect?

At the current price of Rs 195, the stock trades at a P/E multiple of 25.3 times our estimated FY13 earnings per share. The cigarette business has been the proverbial cash cow for ITC, generating huge margins and shielding it from the vagaries of its other businesses. Thus, ITC has been able to grow as well as improve margins in this inflationary environment at a time when its other FMCG peers have witnessed declining profitability. With its relatively new packaged food and personal care businesses showing rapid growth coupled with other segments growing at a healthy pace, the stock holds good growth potential. However, at current valuations, we would advise investors to be cautious on this stock.

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