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ITC: FMCG segment drives growth
Oct 28, 2011

ITC Limited has announced its second quarter results for financial year 2011-2012 (2QFY12). The company has reported 17.5% YoY and 21.5% YoY growth in sales and net profits respectively. Here is our analysis of the results.

Performance summary
  • Revenues grew by 17.6% YOY in 2QFY12 backed by 19.5% growth in its FMCG business. Barring hotels that saw a marginal rise in income, all other businesses reported over 9% sales growth during the quarter. During the H1FY12, sales increased by 19% aided by double-digit growth in all segments.
  • Operating margin was maintained during the quarter as well as H1FY12 through cost control measures in staff costs and other expenditure that offset higher raw material costs during the quarter.
  • At the net level, profitability improved significantly backed by higher other income and lower effective tax rate.

(Rs. m) 2QFY11 2QFY12 Change H1FY11 H1FY12 Change
Total income 51,756 60,852 17.6% 100,344 119,281 18.9%
Expenditure 32,955 38,662 17.3% 65,106 77,330 18.8%
Operating profit (EBITDA) 18,802 22,190 18.0% 35,239 41,951 19.0%
EBITDA margin (%) 36.3% 36.5%   35.1% 35.2%  
Other income 1,245 1,808 45.2% 2,230 3,246 45.6%
Interest (net) 106 142 33.4% 230 306 32.9%
Depreciation 1,640 1,701 3.7% 3,237 3,366 4.0%
Profit before tax 18,300 22,155 21.1% 34,001 41,525 22.1%
Extraordinary inc/(exp) 0 0   0 0  
Tax 5,833 7,012 20.2% 10,831 13,055 20.5%
Profit after tax/(loss) 12,467 15,143 21.5% 23,171 28,471 22.9%
Net profit margin (%) 24.1% 24.9%   23.1% 23.9%  
No. of shares (m)         7773  
Diluted earnings per share (Rs)*         7.0  
Price to earnings ratio (x)         29.4  
*On a trailing 12 months basis

What has driven performance in 2QFY12?
  • Sales of ITC grew 17.5% YoY in 2QFY12 led by robust growth of 19.5% clocked by the FMCG segment. Cigarettes, the largest segment, grew by 16.4% YoY. Sales of the other FMCG segment increased by a faster 27% YoY driven by strong performance by branded packaged foods, education & stationary products and lifestyle retailing. Backed by higher trading volumes and improved realization in soya, wheat and coffee, the agri segment sales grew in double digits. Even the paperboard business grew by a healthy 9.4% YoY aided by better product-mix and higher realizations. Only the hotel segment sales grew marginally as the economic turmoil in Europe and US impacted operations during the quarter.
  •   % contribution to sales Revenue growth PBIT growth PBIT margin(%) PBIT margin gain/ (decline) basis points
    Cigarettes 43% 16.4% 18.6% 58% 107
    Others 19% 27.0%   -4%  
    Total FMCG 62% 19.5% 20.2% 39% 24
    Hotels 3% 1.1% 9.0% 21% 149
    Agri Business 18% 12.8% 15.0% 17% 32
    Paperboards, Paper &Packaging 13% 9.4% 17.9% 29% 209

  • ITC was able to protect operating margins from rising raw material costs by wielding control on other operational expenses. Thus while raw material to sales ratio increased by 195 basis points during the quarter, staff costs and other expenditure declined by 72 basis points and 173 basis points respectively as a proportion of sales. PBIT margin of the largest profit generating segment, cigarettes appreciated by 107 basis points YoY. PBIT margin of the hotel segment expanded by 149 basis points YoY and that of the paperboard segment increased by 209 basis points YoY in 2QFY12. While agri segment marginally improved its PBIT profitability, the non-tobacco FMCG segment curtailed its losses by Rs 100 m during the quarter.

  • At the net level, profitability improved by 70 basis points YoY backed by lower effective tax rate and higher other income earned in 2QFY12. Effective tax rate fell to 31.7% from 31.9% in the year-ago quarter. The other income earned was higher by 45% YoY.
What to expect?
At the current price of Rs 207, the stock trades at a P/E multiple of 24 times our estimated FY14 earnings per share. ITC has been growing at a robust pace thanks to its diversified presence and integrated business model. At the same time, high margins from the cigarette business have enabled the company to absorb losses from its growing non-tobacco FMCG business. Moreover, the company has been trimming losses in this segment and is expected to turn-around in future. However all these upsides have already been factored at the current valuations and we advise investors to exercise caution.

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