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ITC Vs PTC: Brothers under the skin! - Views on News from Equitymaster
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ITC Vs PTC: Brothers under the skin!
Sep 29, 2005

ITC has been in the limelight from sometime now, not for its core business, but due to its success in its other businesses. We decided to compare Indian Tobacco Company ((ITC) with our neighbours largest tobacco company, Pakistan Tobacco Company (PTC) who too is the child of the same parent, British American Tobacco (BAT). In this article, we compare the two brothers who are also the largest tobacco companies in their respective countries. Background

Indian Tobacco Company: ITC, earlier known as Imperial Tobacco Company, commands about 72% of India’s Rs 140 bn domestic cigarette market (value terms). Out of the top 10 brands in India, 6 belong to ITC. BAT, the world’s second largest tobacco company, behind Altria Group (Philip Morris), holds a 32% stake in ITC.

However, with the growing awareness on harmful effects of tobacco as well as the government’s punitive tax policy, ITC has moved towards de-risking its revenue profile and now has a presence in other businesses like paperboards, hospitality (hotels), retailing, packaged foods and IT. Further, ITC, through its wholly owned investment subsidiary, Russell Credit Limited, recently acquired Wimco Limited from a Swedish company. Wimco dominates the highly fragmented Rs 13 bn matchstick market and has a 13% share. The result of this diversification has helped bring down the tobacco business’ contribution to total revenues from over 88% in FY01 to 73% in 1QFY06.

(INR m) FY04 FY05 Change
Gross Sales 120,399 135,854 12.8%
Excise Duty 55,695 59,460 6.8%
% of gross sales 46.3% 43.8%  
Net Sales 64,704 76,395 18.1%
Expenditure 41,099 48,469 17.9%
EBITDA 23,606 27,926 18.3%
Operating margin % 36.5% 36.6%  
Other Income 2,249 2,358 4.9%
Net profit after Tax(Loss)* 15,929 18,371 15.3%
Net profit margin % 24.6% 24.0%  
EPS 4.3 5.9  
P/E ratio (x)   23.9  
*excludes extradordinary income in FY05

Pakistan Tobacco Company: PTC was incorporated in 1947, immediately after India’s partition. BAT holds a 94% stake in the company and enjoys an 80% market share in Pakistan. The Group's principal activities are to manufacture and market cigarettes and edible oils.

(INR m) CY03 CY04 Change
Gross Sales 16,597 18,715 12.8%
Excise Duty 10,183 11,539 13.3%
% of gross sales 61.4% 61.7%  
Net Sales 6,414 7,176 11.9%
Expenditure 5,671 6,114 7.8%
EBITDA 743 1,063 43.1%
Operating margin % 11.6% 14.8%  
Other income 5 11 117.2%
Net profit after Tax(Loss) 236 489 107.2%
Net profit margin % 3.7% 6.8%  
EPS 0.9 1.9  
P/E ratio (x)   17.9  
1 Indian rupee = 1.36 Pakistani Rupees

As can be seen from the above tables, PTC is about 10% the size of ITC in terms of net revenues. However, it must be noted that ITC has a much more diversified business and the figures above include figures for all its businesses. However, even if we consider only the tobacco business of both the companies, PTC’s sales (excluding excise) would still amount to only about 15% of ITC’s tobacco net sales. Further, excise duty in the case of ITC is lower than that of PTC because of the formers diversified business profile.

Major Brands
Will's Benson and Hedges
Goldflake John Players
India Kings Capstan
Navy Cut Gold Flake
Bristol Embassy
Sunfeast (biscuits) Sundrop (edible oil)
Just to put things in perspective, while around 73% of ITC’s revenues come from its core business, over 90% of PTC’s revenues come from cigarettes and hence excise duty as a percentage of gross sales is higher in the case of latter. Thus, the margins for ITC (37% in FY05) are much higher as compared to PTC (15% in CY04). It must be noted here that ITC’s hotel’s division margins are amongst the highest in the industry at 35%+ levels.

A look at the costs side…

as % net of sales FY04 FY05
Material cost 36.8% 36.3%
Staff cost 6.4% 6.1%
Other exp. 20.2% 21.1%
Total expenditure 63.5% 63.4%
as % of net sales CY03 CY04
Material cost 46.7% 46.6%
Staff cost 7.0% 6.6%
Other exp. 34.7% 32.0%
Total expenditure 88.4% 85.2%

As can be seen from the above tables, raw material costs as percentage of net sales is much higher for PTC as compared to ITC mainly due to ITC’s e-choupal initiative. ITC sources tobacco directly from farmers thus eliminating any middlemen and thus saving money in the process. Also, other expenditure is considerable lower due to economies of scale.

What to expect?

At the current price of Rs 140, ITC is trading at a price to earnings multiple of 21.8 times our estimated FY07 earnings and market cap to gross sales of 3.1x, which is at the higher end of our valuation spectrum. We believe that strong business fundamentals, aided partially by the stock-split and bonus issue, have helped the stock command such high valuations. However, we would remain cautious on the stock at the current valuations, as it seems to have factored in much of its future growth.

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