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Advantage ITC

Sep 15, 2000

The tobacco industry continues to be in the docks. Punitive taxation, ban on sale and /or smoking on railway premises or other such public places has taken the wind out of cigarette manufacturers. Ban imposed in states like Kerala and Goa has further added to their vows. As a result volumes declined by 5-6% in FY2000. The scenario is unlikely to change the next year too. Both the tobacco majors in India, ITC and Godfrey Phillips felt the pressure on their margins in FY2000. Though ITC managed to hold on and in fact produced more cigarette sticks (from 52.1 bn sticks in FY99 to 56.4 bn in FY00), Godfrey Philips saw a 19% decline in cigarette production to 5.7 bn sticks.

FY2000 (Rs m) ITC Godfrey Godfrey/
Sales 79,531 10,826 13.6%
Other Income 1,699 115 6.7%
Expenditure 66,093 10,222 15.5%
Operating Profit (EBDIT) 13,437 604 4.5%
Operating Profit Margin (%) 16.9% 5.6%  
Interest 1,661 25 1.5%
Depreciation 1,185 55 4.6%
Profit before Tax 12,290 639 5.2%
Tax 4,365 220 5.0%
Profit after Tax/(Loss) 7,925 419 5.3%
Net profit margin (%) 10.0% 3.9%  
No. of Shares (eoy) (m) 245.4 10.4  
Earnings per share 32.3 40.3  

Both companies’ margins were under pressure in FY2000. But here too ITC’s margins (10%) were much better compared to Godfrey (4%). This is not only because ITC dominates this 97 bn cigarette sticks market with a 70% share but also because over the years it has spread its risks by entering other businesses.

ITC operates in five principal businesses, namely, tobacco and cigarettes, hotels, paper and packaging, software and international trading. It is the industry leader in its core business of cigarette manufacturing and tobacco leaf procurement, processing and exports in India. It is also one of India’s largest foreign exchange earners. Whereas Godfrey’s lone diversification is into packaged tea. The tea business is itself under a lot of pressure due to decline in prices.

So the diversification has in fact come as a boon for ITC, which is likely to show sustained growth despite adverse business conditions in its core business of cigarettes and tobacco. The same cannot be said for Godfrey Phillips.

On the back of all this, the markets have treated ITC better than Godfrey. While ITC trades at Rs 825, a P/e ratio of 27 times its FY2000 earnings, the Godfrey stock trades at Rs 407, a P/e ratio of 10 times. While ITC is down only 20% compared to its 52 week peak, Godfrey is down a whopping 56% from its 52 week peak.

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