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ITC: Strategy on course

Oct 29, 2003

Tobacco major, ITC Limited, has reported over 4% net revenue growth and just over 12% bottomline growth in 2QFY04. As per the company's release, adjusting for a one-off basmati export opportunity last year (worth Rs 1,920 m), the underlying net turnover was up nearly 17% YoY.

(Rs m)2QFY032QFY04Change1HFY031HFY04Change
Gross Sales28,27829,2573.5%55,75657,3832.9%
Net Sales14,70315,3634.5%28,78329,6513.0%
Other Income49369841.6%7531,26968.5%
Expenditure8,9809,1822.2%17,37617,350-0.1%
Operating Profit (EBDIT)5,7236,1818.0%11,40712,3017.8%
Operating Profit Margin (%)38.9%40.2%39.6%41.5%
Interest (net)8440-52.8%17094-44.4%
Depreciation5865992.2%1,1201,1936.6%
Profit before Tax5,5456,24112.5%10,87112,28213.0%
Tax1,7401,96212.7%3,6274,03111.2%
Profit after Tax/(Loss)3,8054,27912.4%7,2448,25113.9%
Net profit margin (%)25.9%27.9%25.2%27.8%
No. of Shares (eoy) (m)247.5247.5247.5247.5
Diluted Earnings per share (Rs)*61.569.158.566.7
Current P/e ratio (x)12.412.9
*(annualised)

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. However, the current quarter saw the company extend its market coverage owing to the recently launched brands such as Insignia and Wills Silk Cut. The cigarette revenues were up 3.5% for the quarter and the profitability of this segment improved YoY to nearly 23%.

Turnover snapshot
(Rs m)2QFY032QFY04Change1HFY031HFY04Change
Cigarettes22,07722,8433.5%44,12545,7533.7%
Others (retailing)162749362.3%2671,266373.6%
Total FMCG22,23923,5926.1%44,39347,0195.9%
Hotels40356640.4%8151,06731.0%
Paperboards, paper & packaging2,9593,0824.2%5,6946,0396.0%
Agri business4,6334,029-13.0%8,9607,342-18.1%
Total turnover30,23431,2693.4%59,86161,4662.7%
Less: Inter segment revenues2,4492,71110.7%4,8585,35210.2%
Gross sales27,78528,5582.8%55,00356,1152.0%

On the retailing front, ITC's foray into the mid priced shirting under the John Players brand name now extends to nearly 2,800 outlets. The branded packaged foods business saw the company's entry into the biscuits market under the Sunfeast brand. In confectionery, the company's mint brand 'Minto' seems to be doing well. The company has pegged its market share at 40%. As a result of all this, the company's other FMCG category, which comprises of all the above segments, grew by over 360% YoY (on a smaller base) to nearly Rs 750 m. Also, the segment's loss margins have reduced, which is an encouraging trend.

Cost break-up
(Rs m)2QFY032QFY04Change1HFY031HFY04Change
Material cost5,5845,255-5.9%10,9099,744-10.7%
Staff cost8639135.8%1,6791,85010.2%
Other exp.2,5333,01419.0%4,7885,75620.2%
Total expenses8,9809,1822.2%17,37617,350-0.1%

The company's hotel revenues were up over 40% to Rs 566 m during the quarter. The business continued to improve on the profitability front (PBIT margin of 2.5%). However, the segment's profitability would have been better, but for ITC Sonar Bangla's depreciation and gestation costs. ITC continues to ramp up its e-choupal initiative (IT backed rural distribution and sourcing infrastructure). Currently, it has 2,600 installations, reaching more than 1.5 m farmers in 13,000 villages in states like AP, MP, UP, Maharashtra and Karnataka.

PBIT as a % of sales
 2QFY032QFY041HFY031HFY04
Cigarettes22.2%22.9%22.4%23.1%
Others (retailing)-168%-53%-179%-60%
Total FMCG20.8%20.5%21.2%20.9%
Hotels-0.8%2.7%-0.3%2.2%
Paperboards, paper & packaging19.8%20.0%18.4%19.0%
Agri business9.5%10.8%8.9%9.2%
Total PBIT18.7%18.9%18.8%19.0%

ITC seems to have done well in its non-tobacco businesses like hotels, packaged foods and even readymade shirting. These initiatives seem to given a leg up to the company's topline growth. However, at the profit level, it seems that none of the new businesses have really added to the company's profitability. Profits still seem to be coming from tobacco, agri and paperboards business. In that sense, the company's diversification strategy seems to be working, wherein topline comes from new initiatives, while getting support at profit level from established businesses.

At Rs 860, the stock trades at nearly 13x annualised 1HFY04 earnings and market cap to sales of 3.6x. In our view, ITC has been aggressive to shore up its non-tobacco businesses. It has done quite well to emerge as one of the largest hotel majors in country. Its entry into staple foods and biscuits is also a sign of its relative aggressiveness when compared to other already established players. The company's e-choupal initiative is also likely to pay dividends in the long term. However, the company's promoter (BAT) may not view the company's diversifications from tobacco favourably over the long term.

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