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ITC: Profitability jumps - Views on News from Equitymaster

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ITC: Profitability jumps
Nov 6, 2013

ITC Limited has announced its second quarter results for financial year 2013-2014 (2QFY14). The company has reported 8.8% YoY growth in sales and 18% YoY increase in net profits. Here is our analysis of the results.

Performance summary
  • Topline increased by a subdued 6% as downfall in agri business revenues offset double-digit rise in other segments.
  • Backed by reduction in all operating expenses (as a proportion of sales), the operating margin expanded by 2.7%.
  • Net profit grew by a faster 17.9% backed by 13.8% jump in operating profit and write-back of interest charges on provisions due to a favourable High Court order
(Rs. m) 2QFY13 2QFY14 Change 1HFY13 1HFY14 Change
Total income 74,107 78,625 6.1% 139,328 152,732 9.6%
Expenditure 46,194 46,867 1.5% 88,684 93,061 4.9%
Operating profit (EBITDA) 27,913 31,758 13.8% 50,644 59,672 17.8%
EBITDA margin (%) 37.7% 40.4% 2.7% 36.3% 39.1%  
Other income 2,032 2,462 21.2% 3,539 4,494 27.0%
Interest 170 -327   371 -157 -142.4%
Depreciation 2,153 2,209 2.6% 3,837 4,362 13.7%
Profit before tax 27,622 32,338 17.1% 49,977 59,961 20.0%
Extraordinary inc/(exp) 0 0   0 0  
Tax 8,709 10,033 15.2% 15,591 18,742 20.2%
Profit after tax/(loss) 18,913 22,305 17.9% 34,386 41,219 19.9%
Net profit margin (%) 25.5% 28.4%   24.7% 27.0%  
No. of shares (m)         7920  
Diluted earnings per share (Rs)*         10.1  
Price to earnings ratio (x)         31.8  
(* On a trailing 12-month basis)

What has driven performance in 2QFY14?
  • ITC registered a subdued 6% increase in revenues during the quarter. The non-cigarette FMCG segment clocked the fastest growth of 16% backed by strong growth in branded packaged foods and personal care products. The cigarettes segment grew by 10%. The hotels business segment posted growth of 13.8% driven by ITC Grand Chola that commenced operations in September 2012. The company signed contracts for operating four properties, two in Kerala and one each in Dwarka and Chandigarh under the ‘WelcomeHotel’ brand. The paper business grew by 11.3%, led by robust growth in paperboards and flexible packaging. The agri business segment revenues fell by 12.4% on a high base arising from high level of wheat exports in the year-ago quarter.

      % contribution to sales Revenue growth PBIT growth PBIT margin (%) PBIT margin gain/(decline) in basis points
    Cigarettes 42% 10.0% 23.5% 69% 756
    Others 22% 16.1%   -1%  
    Total FMCG 64% 12.0% 24.7% 45% 458
    Hotels 3% 13.8% -43.0% 4% -352
    Agri Business 20% -12.4% 9.6% 16% 322
    Paperboards, Paper & Packaging 13% 11.3% -21.9% 21% -312

  • The operating margin increased by 2.7% aided by easing input costs and other expenditure as a proportion of sales. During the quarter, the company has written back provisions to the tune of Rs 1926.8 m towards rates, taxes and interest thereon pertaining to earlier years after a favourable High Court order. This coupled with a 13% drop in staff costs led to a 13.8% jump in operating profits during the quarter translating into a steep rise in operating margin. Only cigarette and agri business segments reported incremental EBIT margins for the quarter. The EBIT margin of the paper business was adversely impacted by sharp escalation in wood costs. The profitability of the hotel business continued to be hit by the weak macroeconomic environment. The non-cigarette FMCG business pared its EBIT loss to Rs 127 m as compared to EBIT loss of Rs 303 m in the year-ago quarter.

  • Net profits surged by 18% aided by a 13.8% rise in operating profit and write-back of interest provision due to favourable court ruling.
What to expect?
ITC continued to report robust growth in profits backed by strong pricing power enjoyed in its cigarette business. Even its non-cigarette FMCG business is moving towards break-even. At the current price of Rs 322, the stock trades at a P/E multiple of 22 times its estimated FY16 earnings. Although the stock holds good potential from its rapidly growing FMCG business, the current high valuations do not provide enough room to earn decent returns. We would therefore recommend a SELL on stock at current levels.

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