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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) 2QFY03 2QFY04 Change 1HFY03 1HFY04 Change
Gross Sales 28,278 29,257 3.5% 55,756 57,383 2.9%
Net Sales 14,703 15,363 4.5% 28,783 29,651 3.0%
Other Income 493 698 41.6% 753 1,269 68.5%
Expenditure 8,980 9,182 2.2% 17,376 17,350 -0.1%
Operating Profit (EBDIT) 5,723 6,181 8.0% 11,407 12,301 7.8%
Operating Profit Margin (%) 38.9% 40.2%   39.6% 41.5%  
Interest (net) 84 40 -52.8% 170 94 -44.4%
Depreciation 586 599 2.2% 1,120 1,193 6.6%
Profit before Tax 5,545 6,241 12.5% 10,871 12,282 13.0%
Tax 1,740 1,962 12.7% 3,627 4,031 11.2%
Profit after Tax/(Loss) 3,805 4,279 12.4% 7,244 8,251 13.9%
Net profit margin (%) 25.9% 27.9%   25.2% 27.8%  
No. of Shares (eoy) (m) 247.5 247.5   247.5 247.5  
Diluted Earnings per share (Rs)* 61.5 69.1   58.5 66.7  
Current P/e ratio (x)   12.4     12.9  
*(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) 2QFY03 2QFY04 Change 1HFY03 1HFY04 Change
Cigarettes 22,077 22,843 3.5% 44,125 45,753 3.7%
Others (retailing) 162 749 362.3% 267 1,266 373.6%
Total FMCG 22,239 23,592 6.1% 44,393 47,019 5.9%
Hotels 403 566 40.4% 815 1,067 31.0%
Paperboards, paper & packaging 2,959 3,082 4.2% 5,694 6,039 6.0%
Agri business 4,633 4,029 -13.0% 8,960 7,342 -18.1%
Total turnover 30,234 31,269 3.4% 59,861 61,466 2.7%
Less: Inter segment revenues 2,449 2,711 10.7% 4,858 5,352 10.2%
Gross sales 27,785 28,558 2.8% 55,003 56,115 2.0%

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) 2QFY03 2QFY04 Change 1HFY03 1HFY04 Change
Material cost 5,584 5,255 -5.9% 10,909 9,744 -10.7%
Staff cost 863 913 5.8% 1,679 1,850 10.2%
Other exp. 2,533 3,014 19.0% 4,788 5,756 20.2%
Total expenses 8,980 9,182 2.2% 17,376 17,350 -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
  2QFY03 2QFY04 1HFY03 1HFY04
Cigarettes 22.2% 22.9% 22.4% 23.1%
Others (retailing) -168% -53% -179% -60%
Total FMCG 20.8% 20.5% 21.2% 20.9%
Hotels -0.8% 2.7% -0.3% 2.2%
Paperboards, paper & packaging 19.8% 20.0% 18.4% 19.0%
Agri business 9.5% 10.8% 8.9% 9.2%
Total PBIT 18.7% 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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