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ITC: OPM dip continues… - Views on News from Equitymaster
 
 
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  • Oct 24, 2002

    ITC: OPM dip continues…

    Tobacco major, ITC Limited, has reported over 22% topline and a 12% bottomline growth in 2QFY03. The slower bottomline growth seems largely a result of a 280 basis point dip in operating margins.

    (Rs m) 2QFY02 2QFY03 Change 1HFY02 1HFY03 Change
    Gross Income 24,619 28,278 14.9% 48,336 55,756 15.4%
    Net Sales 12,067 14,703 21.8% 23,663 28,783 21.6%
    Other Income 604 493 -18.4% 807 753 -6.8%
    Expenditure 7,029 8,980 27.8% 13,519 17,376 28.5%
    Operating Profit (EBDIT) 5,038 5,723 13.6% 10,144 11,407 12.5%
    Operating Profit Margin (%) 41.8% 38.9%    42.9% 39.6%   
    Interest (net) 175 84 -51.7% 391 170 -56.6%
    Depreciation 482 586 21.7% 966 1,120 15.9%
    Profit before Tax 4,986 5,545 11.2% 9,594 10,871 13.3%
    Tax 1,593 1,740 9.2% 3,217 3,627 12.7%
    Profit after Tax/(Loss) 3,393 3,805 12.1% 6,377 7,244 13.6%
    Net profit margin (%) 28.1% 25.9%    26.9% 25.2%   
    No. of Shares (eoy) (m) 247.5 247.5    247.5 247.5   
    Diluted Earnings per share* 54.8 61.5    51.5 58.5   
    *(annualised)                  
    Current P/e ratio    10.5       11.0   

    The lower operating margins largely stem from the fact that ITC is now a diversified company with interests in tobacco, hotels, packaging, retailing, IT and food processing. In cigarettes, the company continues to be able retain high margins but other businesses are drain on profitability.

    Cost break-up
    (Rs m) 2QFY02 2QFY03 Change 1HFY02 1HFY03 Change
    Material cost 4,002 5,584 39.5% 7,925 10,909 37.7%
    Staff cost 683 863 26.4% 1,379 1,679 21.8%
    Other exp. 2,344 2,533 8.1% 4,216 4,788 13.6%
    Total expenses 7,029 8,980 27.8% 13,519 17,376 28.5%

    As per the management's statement, the cigarette industry continued to be under pressure in the wake of state level taxes and growing contraband trade. Despite this, ITC managed to record a 9.7% growth in cigarette revenues during the September quarter, led by volume growth and better product mix.

    Turnover snapshot
    (Rs m) 2QFY02 2QFY03 Change 1HFY02 1HFY03 Change
    Cigarettes 20,133 22,077 9.7% 40,150 44,125 9.9%
    Others (retailing) 52 162 211.5% 75 267 257.2%
    Total FMCG 20,185 22,239 10.2% 40,225 44,393 10.4%
    Hotels 357 403 13.2% 736 815 10.7%
    Paperboards, paper & packaging 2,626 2,959 12.7% 5,082 5,694 12.1%
    Agri business 2,031 4,633 128.1% 3,914 8,960 128.9%
    Total turnover 25,198 30,234 20.0% 49,957 59,861 19.8%
    Less: Inter segment revenues 1,183 2,449 106.9% 2,428 4,858 100.1%
    Gross sales 24,015 27,785 15.7% 47,528 55,003 15.7%

    On the retailing front ITC added 3 more 'Wills Lifestyle' stores during the quarter, taking the total tally to 48 stores across 39 cities in India. Its hotel business continues to be under pressure, but ITC is hoping for an improved scenario in the second half of FY03. Construction of hotel in Kolkata (Sonar Bangla) is near completion and Upper Worli (Mumbai) construction is progressing on schedule. Though revenues from hotel business were up by over 13% YoY in 2QFY03, ITC reported a lower loss of Rs 3 m at the PBIT level on this business. As compared to this, the company lost Rs 35 m at the PBIT level in the corresponding quarter last year. Paperboards business registered a 20% PBIT growth on the back of 13% revenue growth.

    On the agri business front, exports grew by 129% to Rs 3,000 m backed by healthy growth in exports of non-basmati rice. The e-choupal model was further ramped up to 1,200 installations covering 6,500 villages. This initiative now extends beyond soya to wheat, coffee and marine products. The ‘e-Choupal’ infrastructure is being extended to support efficient sourcing of wheat for the Branded Packaged Foods business. The management has stated that ITC's greeting cards business touched a market share of 10% during the quarter.

    Investors have been wary of the ITC stock owing to its diversification moves. Its not that investors don't understand the reasons for ITC's diversifications, but currently ITC's other ventures like hotels, retailing and greeting cards are a drain on its resources and have yet to add significantly to the bottomline (see the PBIT table).

    PBIT snapshot
    (Rs m) 2QFY02 2QFY03 Change 1HFY02 1HFY03 Change
    Cigarettes 4,296 4,907 14.2% 8,918 9,880 10.8%
    Others (retailing) -151 -273 - -306 -477 -
    Total FMCG 4,145 4,634 11.8% 8,611 9,403 9.2%
    Hotels -35 -3 - -28 -3 -
    Paperboards, paper & packaging 488 585 19.8% 798 1,050 31.6%
    Agri business 17 439 2527.5% 58 799 1275.9%
    Total PBIT 4,615 5,654 22.5% 9,440 11,249 19.2%

    The ITC stock had always been accorded premium valuations owing to its robust tobacco business, but in recent times, it has become more of a diversified company. There are also concerns that ITC may merge ITC Hotels (a 70% subsidiary) going forward and this may further affect the company's quality of earnings. At the current price of Rs 644 the stock trades at 11x 1HFY03 annualised earnings.

     

     

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