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ITC Vs Altria - Views on News from Equitymaster
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  • Oct 7, 2004

    ITC Vs Altria

    In the past couple of years, cigarette major ITC, has made significant moves to de-risk its revenues. The company is now a strong No. 2 in terms of room capacity in India's hospitality sector (hotels). It also runs the largest packaged board business in Asia. It is one of the largest exporters of agri/marine products in Asia. Its new businesses include garment retailing, packaged foods, greeting cards, matchsticks and incense sticks. In a way, the company is modelling itself on the US tobacco giant, Altria (erstwhile Philip Morris). Let's compare the two.

    With over US$ 81 bn of operating revenues, the Altria Group includes some of the world's most successful companies and brands. The group (through Philip Morris) is the largest tobacco company in the US and is also amongst the largest tobacco companies globally. The group owns 7 of the top 20 cigarette brands globally, led by its No. 1 brand 'Marlboro'. Apart from tobacco, Kraft Foods (a subsidiary) is the largest branded food and beverage company in the US and the second largest globally. The group also has a 36% stake in SABMiller Plc, one of the world's leading beer and alcoholic beverages company.

    Altria snapshot
    Business 2003 Revenues (US$ m) Contribution to sales Contribution to operating profits Top brands
    Tobacco 50,390 61.6% 61.0%

    Marlboro, Virginia Slims, Merit, Philip Morris, Benson & Hedges, Parliament, Basic (leading discount brand), Lark, L&M, Chesterfield, Cambridge, Red & White

    Food business 31,010 37.9% 37.1%

    Kraft, Philadelphia cream cheese, Starbucks coffee, Milka chocolate, Maxwell House, Oscar Mayer Lunchables, Tang, Oreo, Chip Ahoy!, Ritz, Boca Foods meat alternatives, Balance snack bars , Post cereals, Taco Bell, Jacobs Coffee

    Financial services 432 0.5% 1.9%


    Beer and spirits

    Has 36% stake in SABMiller Plc, one of the world's leading beer and alcoholic beverages company

    Miller Lite, Foster's, Linenkugel's, Henry Weinhards's, Olde English, Mickey's, Hamm's, Milwaukee's Best, Icehouse

    In comparison, ITC commands about 70% of Indiaís 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 governmentís punitive tax policy forced ITC to move towards de-risking its revenues. Consequently, it merged the paperboards subsidiary with itself and invested in growing the hospitality, retailing, packaged foods and IT businesses. The ITC group (including ITC Hotels) 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.

    ITC snapshot
    (Rs m) FY04 Contribution to sales Contribution to PBIT
    Cigarettes 92,303 72.4% 92.0%
    Others* 3,042 2.4% -7.9%
    Total FMCG 95,344 74.8% 84.1%
    Hotels 2,575 2.0% 1.5%
    Paperboards, paper & packaging 12,533 9.8% 10.4%
    Agri business 17,088 13.4% 4.1%
    Total turnover 127,540 100.0% 100.0%
    *Includes retailing, processed foods, biscuits, agarbatti, match sticks, greeting cards

    As can be seen from the above tables, a bulk of both Altria's as well as ITC's revenues and profits is contributed by the tobacco business. The surplus cash generated from this business is funding their non-tobacco initiatives. The erstwhile Philip Morris seemed to have identified the risks and the stigma attached with the tobacco business very early on. It entered the spirits business in the 70ís and processed foods business in the mid-80ís. This helped the company de-risk its revenues in recent times. Contribution to revenues from its foods business consequently, has gone up from 33% in 2000 to nearly 38% in 2003 (December ending).

    Similarly, in ITC's case, the contribution of cigarettes to total revenues has come down from over 77% in FY02 to about 74% in FY04. Contribution to PBIT too, has come down from around 95% to 92% during this period. We expect this contribution from cigarettes to keep declining in ITC's case to 67% of revenues by FY08.

    How the numbers stack up...
    Altria ITC
    Cigarette sticks sold (bn) 923 65
    Revenues (US$ m) 81,832 2,597
    Excise as % of revenues 25.8% 45.2%
    PAT (US$ m) 9,204 350
    Operating profit margin (%) 20.4% 36.5%
    Net profit margin (%) 11.2% 24.6%
    Dividend payout (%) 58.4% 31.1%
    EPS (US$) 4.5 1.4
    P/E (x) 10.6 17.4
    Market Cap. to sales (x) 1.2 2.3
    Net cash from operations (US$ bn) 10.8 0.4
    *Altria: 2003 numbers, ITC: FY04 numbers. Conversion rate: Rs 45.5 = US$ 1

    In terms of sheer size, Altria sells 14 times more cigarettes than ITC and its revenues are almost 32 times that of the Indian company. Its dividend payout is also higher than ITC's. However, despite this, ITC commands a higher valuation as compared to its US peer. This may be because ITC is more profitable and the fact that it is in the growth stage. In the last 7 years (since FY98), ITC's revenues (net of excise) have clocked a CAGR of 12.8%. Profits have shown an even faster 18.1% CAGR during the period. In contrast, Altria has clocked a 2.1% topline and 6.5% profit CAGR during the same period.

    With India ranked 6th among the top tourist destinations, ITC's hospitality business is likely to see encouraging times. Also, cigarettes account for only 14% of total tobacco consumed in India, as opposed to 90% in the US and 100% in China. Going forward, as the Indian per capita income increases and the demographic profile changes, cigarette consumption may start growing again. Moreover, the company's e-choupal initiative is likely to help it in stamping its footprint across rural India. This will be a key positive in the long run. However, punitive excise duties, as well as the threat of tobacco litigation will continue to be key worries.



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