ITC: A case for more payout?

Court verdict could release funds for ITC

It's likely that the Supreme Court will quash a 17-year old Rs 803 crore excise claim on ITC. In relation with this case, ITC had deposited an amount of Rs 350 crore between April 1996 and January 1997. If the Supreme Court order is finally in ITC's favour, the Rs 350 crore amount would be refunded.

In per share terms, it works out to an inflow of Rs 14 per share. Further, there's a contingency reserve of Rs 360 crore (another Rs 14.5 per share) in the balance sheet, which may move to general reserves if the claim is no longer there. The ITC stock rose by Rs 55 intra-day and ended the day Rs 37 higher.

The cash inflow could trigger an increase in dividend payout from last year's level of Rs 22.5 (including distribution tax). In the recent past, the company has cited the Rs 1,400 crore worth contingent liability (on account of disputed state-level entry/luxury taxes) as the reason for its conservative dividend payout policy.

But interestingly, as on March 31, 2004, the company had Rs 1,900 crore in liquid funds, which is more than adequate to cover the contingent liability.

What's more, its free cash flow was Rs 1,450 crore or Rs 58.5 per share. Since the contingency liability excuse is out of the way, there is a strong case for an increased dividend payout this year.

LIC Housing Finance GDR issue

The LIC Housing Finance stock is now at around 15 per cent higher than its GDR issue price of Rs 138 a share. The market seems to have realised the benefits of the $50 million issue, which will lower its cost of funds at a critical time, when interest rates are on their way up and spreads are under pressure.

Last year, LIC Housing had gone in for external commercial borrowings of a similar amount, which too lowered its cost of funds. The other benefit for the company will be the increase in its capital adequacy, which will enable it to increase its loan book.

At Rs 159, the stock is available at a modest 7 times FY 2004 earnings. That's rather low, compared to the potential of the housing sector. But then LIC Housing's earnings in FY 2004 were lower than in the previous year.

First quarter sanctions are up a mere 2 per cent on a year-on-year basis, while disbursements increased by 1 per cent. Such a low growth does not augur very well for the company, but analysts say that the lacklustre performance was due to a restructuring of the company's marketing department and on account of a one-off rise in disbursements in the corresponding quarter of the previous year.

Net profits, however, were up 23 per cent y-o-y in Q1. Also, as at end-June, the company's outstanding mortgage portfolio had risen by 22 per cent year on year.

The company has brought down its NPAs, and net NPAs as at end-April were 2.37 per cent. The GDR issue will ensure that the company is well-prepared to reap the benefits in case of a hike in home loan rates, since three-fourths of the company's portfolio is on floating rates.

Overseas ventures a booster dose for Cipla

The Cipla stock has jumped around 4.2 per cent over the last 8 days as the company has entered numerous product segments overseas. The latest is a tie up with US based Pentech Pharmaceuticals. To begin with, Cipla will provide finished dosage formulations for two products to Pentech.

The American company specialises in segments such as sexual dysfunction and Parkinson's Disease. Both these segments are currently witnessing 'explosive growth', point out analysts. Analysts point out that although the initial size of the deal is small, volumes are expected to grow.

No doubt many multinationals have entered these American market segments but a rapidly expanding market is expected to enable Cipla to earn a margin of approximately 30- 35 per cent for its supplies to Pentech, say analysts.

This agreement, like earlier ones entered into by Cipla would leverage the foreign partners expertise in terms of getting the necessary registrations and also their marketing network. This would allow Cipla to grow its exports but at the same time keep its costs under tight control.

Analysts also point out that Cipla has started supplies of its asthalin inhalers to three German companies. It is understood that the initial consignments of asthalin inhaler exports were not very large, but it is expected to be ramped up in the medium term. Cipla has a technological advantage as its inhalers are CFC free.

Hence margins are expected to be quite high at around 40-50 per cent. It is anticipated that the company would leverage the initial momentum to introduce several more products in the German respiratory market segment.

With contributions from Mobis Philipose and Amriteshwar Mathur