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ITC: Cigarettes stand rock solid - Views on News from Equitymaster
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ITC: Cigarettes stand rock solid
Oct 23, 2009

Performance summary
  • Topline grows nearly 13% YoY during the quarter led by strong performance of the cigarettes division
  • Operating profits grow at a higher rate of 31% YoY as the company manages to trim costs and expand its margins by nearly 500 basis points
  • Net profit growth pulls back a bit and comes in at 26% YoY on the basis of jump in interest costs and lower other income
  • Half yearly bottomline grows by 22% YoY on the back of a 9% growth in topline

(Rs m) 2QFY09 2QFY10 Change 1HFY09 1HFY10 Change
Net sales 38,627 43,453 12.5% 77,967 84,782 8.7%
Expenditure 26,473 27,552 4.1% 54,199 55,008 1.5%
Operating profit (EBDITA) 12,154 15,901 30.8% 23,768 29,775 25.3%
EBDITA margin (%) 31.5% 36.6%   30.5% 35.1%  
Other income 1,105 684 -38.0% 1,905 1,560 -18.1%
Interest (net) 28 181 552.5% 42 240 472.3%
Depreciation 1,340 1,484 10.7% 2,601 3,000 15.3%
Profit before tax 11,891 14,920 25.5% 23,030 28,095 22.0%
Extraordinary income/(expense) - -        
Tax 3,864 4,821 24.8% 7,516 9,209 22.5%
Profit after tax/(loss) 8,027 10,099 25.8% 15,514 18,886 21.7%
Net profit margin (%) 20.8% 23.2%   19.9% 22.3%  
No. of shares (m) 3,770.2 3,780.2   3,770.2 3,780.2  
Diluted earnings per share (Rs)*         9.5  
Price to earnings ratio (x)*         27.1  
(* on trailing twelve months earnings)            
* on trailing twelve months earnings

What has driven performance in 2QFY10?
    Revenue mix
    (%of net sales) 2QFY09 2QFY10 1HFY09 1HFY10
    Cigarettes 26.1% 27.1% 24.5% 27.6%
    Others 10.9% 10.6% 10.0% 10.3%
    Total FMCG 37.1% 37.7% 34.6% 37.9%
    Hotels 3.3% 2.1% 3.2% 2.2%
    Paperboards, paper & packaging 10.1% 9.7% 9.0% 9.5%
    Agri business 12.5% 12.7% 18.6% 12.5%

  • Cigarette portfolio of the company grew 21% YoY during the quarter. The sales would have been strong had the governments of Maharashtra, Delhi and Punjab not increased the VAT on cigarettes from 12.5% to 20%. Moreover, the sales would have also been affected due to graphic pictoral warnings on cigarette packs.

  • Sales of other FMCG portfolio grew by 14% YoY. The branded packaged foods business grew by 13% YoY during the quarter on the back of improved product mix, smarter sourcing of inputs, improved servicing of markets and supply chain efficiencies. The stationery business continued on its impressive growth trajectory and emerged as the largest player in the notebook segment with a market share of 12% during the quarter.

  • Sales of the Hotels segment fell by 24 YoY in 2QFY10. This is due to reduction in domestic and international corporate travel. The company witnessed de-growth in occupancies and lower average room rates which pulled down the PBIT income for this segment by 54%

  • While the Paperboards, Paper & Packaging segment revenues posted a strong growth of 13%, segmental PBIT grew by an impressive 52%. The improvement in profitability was due to a better product mix and lower input costs.

  • The revenue for the Agri business grew by 19% while PBIT grew by 128%. This impressive performance comes on the back of the leaf tobacco portfolio. However, the revenues could have been higher but for the lower throughput of soya, coffee and spices.

    PBIT margin trend…
    (% of segmental revenues)  2QFY09 2QFY10 1HFY09 1HFY10
    Cigarettes 55.6% 56.9% 55.4% 54.7%
    Others -15.4% -9.8% -16.5% -11.4%
    Total FMCG 34.6% 38.1% 34.6% 36.7%
    Hotels 30.1% 18.1% 33.0% 17.9%
    Paperboards, paper & packaging 17.5% 23.6% 18.8% 21.0%
    Agri business 8.8% 16.9% 5.7% 13.9%
    Total PBIT 29.5% 33.6% 27.7% 32.0%

  • Operating (PBIT) margins for ITC expanded thanks to an overall performance of all segment barring the Hotel business. Operating margins of cigarettes segment which is the largest contributor to the profitability of the company expanded to 56.9% while the other FMCG segment showed a lower loss YoY, pushing the overall FMCG margins to 38.1%. While the margins of agri business expanded thanks to a worldwide shortage of leaf tobacco, the margins for the hotels segment fell due falling occupancy rates and lower average room rentals. Margins for Paperboards, paper & packaging expanded as the company continues to expand its premium quality paper portfolio.

What to expect?
At the current price of Rs 258, the stock trades at a P/E multiple of 22.6x its expected FY12 earnings per share. While we are seeing a good growth in all of ITC’s businesses, the Hotels segment continues to disappoint. However, the company expects better performance from this segment in the second half of FY10. We will update our model as and when we get further clarity from the company on its businesses.

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