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ITC: Strong revenue growth - Views on News from Equitymaster
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ITC: Strong revenue growth
Oct 14, 2014

ITC Limited has announced its fourth quarter results for financial year 2014-2015 (1QFY15). The company has reported 25% YoY growth in sales and 16% YoY increase in net profits. Here is our analysis of the results.

Performance summary
  • For 1QFY15, revenues grew by 25% aided by double-digit growth in all segments barring hotels.
  • However, operating margin contracted by 2.2% due to sharp jump in cost of goods sold.
  • Net profit grew by a relatively slower 15.6% as compared to a 17.4% rise in operating profit due to higher tax incidence.

(Rs. m) 1QFY14 1QFY15 Change
Total income 74,107 92,483 24.8%
Expenditure 46,194 59,707 29.3%
Operating profit (EBITDA) 27,913 32,776 17.4%
EBITDA margin (%) 37.7% 35.4% -2.2%
Other income 2,032 2,346 15.4%
Interest 170 152 -10.6%
Depreciation 2,153 2,313 7.4%
Profit before tax 27,622 32,657 18.2%
Extraordinary inc/(exp) 0 0  
Tax 8,709 10,793 23.9%
Profit after tax/(loss) 18,913 21,864 15.6%
Net profit margin (%) 25.5% 23.6% -1.9%
No. of shares (m)   7955  
Diluted earnings per share (Rs)*   11.3  
Price to earnings ratio (x)   30.8  
* trailing 12 month earnings

What has driven performance in 1QFY15?
  • Led by double-digit growth in all segments except hotels, ITC recorded a 25% topline growth in 1QFY15. In FMCG, the cigarette business recorded a growth of 18.8% whereas the non-cigarette business grew by 10.9% during the quarter. The agri business remained the fastest growing segment clocking a growth of 50.6% for the quarter. Among other businesses, the paper business recorded a growth of 10.8%. The hotel business posted a 0.5% fall in revenues in 1QFY15.

    All round picture
      % contribution to sales Revenue growth PBIT growth PBIT margin (%) PBIT margin gain/(decline)
    in basis points
    Cigarettes 38% 18.8% 21.4% 64.8% 142
    Others 18% 10.9% -17.6% -0.8%  
    Total FMCG 56% 16.2% 21.7% 44.1% 202
    Hotels 2% -0.5% -235.2% -4.9%  
    Agri Business 30% 50.6% 1.6% 6.1% -296
    Paperboards, Paper & Packaging 12% 10.8% 9.3% 23.6% 411

  • But the operating margin contracted by 2.2% during the quarter due to 4.3% increase in cost of goods sold ratio partially offset by 1.8% fall in other expense to sales ratio. Only cigarette and paper businesses have been able to report incremental margins for the quarter. The non-cigarette FMCG business has curtailed EBIT losses from 1.1% to 0.8% of sales. The agri business saw its EBIT margin contract by 3% to 6% for the quarter.

  • At the net level, profits grew by relatively slower 15.6% as compared to a 17.4% increase in operating profit due to 24% jump in tax outgo. The tax incidence increased to 33% in 1QFY15 from 31.5% in 1QFY14. The interest outgo was down by 10.6% for the quarter.
What to expect?
ITC has clocked robust revenue growth in June 2014 quarter. Growth in the cigarette business was unaffected as excise duty hikes were effected in the Union Budget for 2014-15 in July. The micro (< 65 mm) and regular (65-70 mm) filter segments were subject to the steepest duty hikes of 72% and 17%, respectively in the Union Budget. The longer length filter segment cigarettes saw a moderate increase of 11% in excise duty. But we believe that as ITC has strong pricing power with a major presence in the long length filter segment, growth in its offtake will not be impacted substantially. However, the government's strong stance against cigarette smoking with proposals such as ban on sale of loose cigarettes, higher fines of Rs 20,000 on smoking in public, raising the age limit on smoking from 18 to 25 years and making it a cognizable offence can act as a dampener in the long run.

At the current price of Rs 350, the stock trades at a P/E multiple of 24 times its estimated FY17 earnings. The current high valuations do not provide any significant upside. We would therefore recommend a SELL on stock at current levels.

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