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Food: Riding on extraordinary effect

Nov 29, 2001

At first glance, the food processing sector seems to have done well in the September quarter despite the pressure companies faced on the topline growth. During the quarter, the top five companies in the sector reported a 6% rise in topline growth but managed to record a significant 22% growth in net profits (including extraordinary items).

(Rs m)SepQFY01SepQFY02Change
Net Sales35,83138,1036.3%
Other Income1,0701,30121.6%
Total expenditure30,05331,7465.6%
Operating Profit (EBDIT)5,7776,35710.0%
Operating Profit Margin (%)16.1%16.7%
Interest143135-5.4%
Depreciation54166522.9%
Profit before Tax6,1636,85811.3%
Extraordinary items-112340
Tax1,5201,69111.3%
Profit after Tax/(Loss)4,5315,50721.5%
Effective tax rate (%)24.7%24.7%
Net profit margin (%)12.6%14.5%
No. of Shares (eoy) (m) 2,434.3 2,434.3
Earnings per share*7.49.0
Current P/E of the sector25.4
*(annualised)

The sample of top 5 companies includes Hindustan Lever (HLL), Nestle, Cadbury, Tata Tea and SmithKline Consumer. The sector focused on cost controls to improve operating efficiencies. Thus, operating margins improved by 60 basis points to 16.7% during the quarter.

The companies seem to be bullish on India and have added capacities. Thus, their depreciation charge showed a significant 23% growth YoY during the quarter. This trend was seen in the June quarter too.

However, if one were to exclude the extraordinary items effect from both the quarters then, profits are up by only 11%, which is not too encouraging. The companies seem to be realiging operations and thus exiting from non-core businesses to lend focus to their operations. The extraordinary income is a result of this realignment.

The sector's current P/E stands at 27x annualised September quarter earnings (excluding extraordinary items). The market cap. to sales ratio stands at 3.7x. The sector seems evenly valued, as compared to other Indian sectors. This is because the investors are positive on the sector considering the sector's consistent performance in the past. They are also encouraged by the low penetration and per capita consumption and are just waiting for the recovery to set in.

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