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ITC: Mixed performance - Views on News from Equitymaster
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ITC: Mixed performance
Oct 24, 2008

Performance summary
  • Topline grows by 16.4% YoY during the quarter. The topline for half year period jumps 17.5% YoY
  • Operating margins for the quarter declines by 1.1%, while the margins for 1HFY09 are down 3.1%.
  • Lower margins coupled with higher interest and lower other income restricts the bottomline growth to 4% YoY during the quarter.


Rs(m) 2QFY08 2QFY09 (%) Change 1HFY08 1HFY09 (%) Change
Net sales 33,184 38,627 16.4% 66,331 77,967 17.5%
Expenditure 22,382 26,474 18.3% 44,044 54,199 23.1%
Operating profit (EBDITA) 10,802 12,153 12.5% 22,286 23,767 6.6%
EBDITA margin (%) 32.6% 31.5%   33.6% 30.5%  
Other income 1,600 1,105 -31.0% 2,407 1,905 -20.9%
Interest 9 28 205.5% 1 42 5137.5%
Depreciation 1,062 1,340 26.2% 2,072 2,601 25.5%
Profit before tax 11,331 11,890 4.9% 22,621 23,030 1.8%
Tax 3,623 3,864 6.6% 7,083 7,516 6.1%
Profit after tax/(loss) 7,709 8,027 4.1% 15,537 15,513 -0.2%
Net profit margin (%) 23.2% 20.8%   23.4% 19.9%  
No. of shares (m) 3,757 3,770   3,757 3,770  
Diluted earnings per share (Rs)*         8.3  
Price to earnings ratio (x)         18.5  
* 12 months trailing earnings

What has driven performance in 2QFY09?
  • ITC reported a topline growth of 16% YoY during the quarter. The topline for half year period jumped 17.5% YoY. All the divisions witnessed double-digit growth during the quarter. Cigarette division grew by 15% YoY and 10.6% YoY during 2QFY09 and 1HFY09 respectively. The 2008 Union budget has made it unviable to manufacture the non-filter cigarettes in the Plain and Micro segments, which the company had to discontinue. The higher taxes have therefore led to mushrooming illegal cigarette volumes. Volumes also seem to be impacted by the ban on smoking in public places.

    Sales breakup
    (%of net sales) 2QFY08 2QFY09 1HFY08 1HFY09
    Cigarettes 42.9% 41.5% 40.6% 37.5%
    Others 15.9% 17.4% 14.2% 15.3%
    Total FMCG 58.9% 58.9% 54.8% 52.8%
    Hotels 5.7% 5.2% 5.2% 4.9%
    Paperboards, paper & packaging 15.3% 16.1% 13.1% 13.8%
    Agri business 20.2% 19.8% 26.9% 28.5%
    Total turnover 100.0% 100.0% 100.0% 100.0%

  • Branded foods division witnessed a 24% YoY growth led by new launches and product mix. During the quarter, the hotels business grew by 10% YoY despite the economic slowdown. Infact, the business registered a growth in occupancies and average room rates. Agri business revenues grew by 17% YoY during the quarter, driven by an impressive growth in leaf tobacco exports. The company is doing well to reduce its dependence on the cigarette division.

    PBIT margin trend
    (% of segmental revenues) 2QFY08 2QFY09 1HFY08 1HFY09
    Cigarettes 54.9% 55.6% 56.1% 55.4%
    Others -6.3% -15.4% -7.2% -16.5%
    Total FMCG 38.3% 34.6% 39.7% 34.6%
    Hotels 31.7% 30.1% 31.6% 33.0%
    Paperboards, paper & packaging 22.4% 17.5% 20.4% 18.8%
    Agri business 1.3% 8.8% 3.0% 5.7%
    Total PBIT 28.1% 26.5% 26.9% 24.1%

  • While the operating margins for the quarter declined by 1.1%, the margins for 1HFY09 were down 3.1%. The unprecedented increase in excise duties on non-filter cigarettes in the Union Budget, steep increases in commodity prices and store rentals, the brand building costs of the new Personal Care portfolio and the significant investments in enhancing distribution capability exerted pressure on margins. The margins are in line with our estimates.

  • On the segmental PBIT, while the cigarette division witnessed some improvements during the quarter, the same were down 0.7% during 1HFY09. The company continued to face losses in its non-cigarette division, mainly due to higher investments, inflationary pressure and higher competition. The paperboard division witnessed pressure during both the period under consideration on account of higher costs (fuel and pulp). The agri division witnessed good performance with margins improving by 7.5% and 2.6% during 2QFY09 and 1HFY09 respectively.

  • Lower margins coupled with higher interest and lower other income restricted the bottomline growth to 4% YoY during the quarter. The profits during 1HFY09 declined marginally by 0.2% YoY.

What to expect?
At the current price of Rs 152, the stock is trading at a price to earnings multiple of 13.3 times our FY11 estimates. The company has under performed our FY09 estimates. We have our concerns on cigarette, hotel and FMCG divisions. Further, the company has embarked upon one of its biggest capex plans to date, where it plans to invest a whopping Rs 200 bn towards its various businesses over a period of five years starting FY08. Since the returns from this capex are not likely to start accruing to the company immediately, our projections point towards a negative free cash flow (after accounting for capex) scenario for the company from a medium term perspective.

Although the stock has undergone correction in recent times, we believe it has still not come to levels where it will start looking attractive to us. We maintain our negative view on the stock.

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