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ITC: Robust growth in sales & profits
Oct 22, 2012

ITC Limited has announced its second quarter results for financial year 2012-2013 (2QFY13). The company has reported 19.6% YoY and 21% YoY growth in sales and net profits respectively. Here is our analysis of the results.

Performance summary
  • Revenues grew by 18.7% YOY in 2QFY13 on the back of 17.8% growth in the core FMCG business and 41% growth in agri business. For 1HFY13, topline increased by 16.7%
  • Aided by controlled staff costs and other expenses, the operating margin improved by 70 basis points (0.7%) during the quarter. During 1HFY13, operating margin expanded by 120 basis points.
  • Earnings grew by 21% for 2QFY13. For 1HFY13, earnings were up by the same magnitude.

(Rs. m) 2QFY12 2QFY13 Change 1HFY12 1HFY13 Change
Total income 60,906 72,266 18.7% 119,430 139,397 16.7%
Expenditure 38,689 45,383 17.3% 77,567 88,762 14.4%
Operating profit (EBITDA) 22,217 26,883 21.0% 41,863 50,634 21.0%
EBITDA margin (%) 36.5% 37.2%   35.1% 36.3%  
Other income 1,847 1,850 0.2% 3,435 3,549 3.3%
Interest 207 233 12.3% 408 371 -9.1%
Depreciation 1,701 1,889 11.0% 3,366 3,837 14.0%
Profit before tax 22,155 26,611 20.1% 41,525 49,977 20.4%
Extraordinary inc/(exp) 0 0   0 0  
Tax 7,012 8,247 17.6% 13,055 15,591 19.4%
Profit after tax/(loss) 15,143 18,364 21.3% 28,470 34,386 20.8%
Net profit margin (%) 24.9% 25.4%   23.8% 24.7%  
No. of shares (m)         7856  
Diluted earnings per share (Rs)*         8.6  
Price to earnings ratio (x)         34.8  
* trailing 12 month earnings

What has driven performance in 2QFY13?
  • ITC clocked a robust 18.7% rise in its topline led by strong double-digit growth in both its FMCG and agri businesses. In FMCG, the cigarette segment grew by 14% whereas the non-cigarette FMCG segment comprising of branded packaged foods, personal care products and education & stationary products grew by a faster 26%.Agri business reported a 41% jump in revenues aided by wheat exports. Paperboards, paper & packaging clocked a tepid 5.3% growth enabled by improved realizations and enhanced product-mix. However, the hotel business continued to be adversely impacted by weak demand outlook in the domestic & international markets and oversupply in room availability. This segment grew by a mere 2.8% during the quarter.

    All round picture
      % contribution to sales Revenue growth PBIT growth PBIT margin (%) PBIT margin gain/
    (decline)  basis points
    Cigarettes 40% 14.0% 20.3% 61% 320
    Others 20% 26.1%   -2%  
    Total FMCG 61% 17.8%   40% 156
    Hotels 3% 2.8% -64.8% 7% -1352
    Agri Business 24% 41.1% 8.8% 13% -381
    Paperboards, Paper & Packaging 13% 5.3% -2.5% 28% 74

  • On the back of rationalization in employee costs and other expenditure, ITC has been able to record improvement in operating margin. Among business segments, only cigarettes and paper businesses have expanded their EBIT margin during the quarter. However, steep hike in input prices particularly that of wood led to a subdued rise in the profitability of the paper business. EBIT margin of the agri business reduced by 3.8%. Hotel business saw its EBIT margin shrink by more than half to 7%. The non-cigarette FMCG segment pared losses from Rs 559 m in the year-ago quarter to Rs 303 m.

  • Earnings increased by 21% backed by healthy growth in operating income. Even the tax outgo grew modestly due to fall in the tax incidence to 31% from 31.7% in the year-ago quarter.

What to expect?
ITC's cash cow viz the cigarette business continues to face regulatory headwinds from the structural rise in taxation. Although the company's FMCG business has been growing at a robust pace, it still does not contribute to its bottomline.

At the current price of Rs 298, the stock trades at a P/E multiple of 24 times its estimated FY15 earnings. At current valuations, the stock appears overpriced and we maintain a SELL view on the stock.

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