ITC: A mixed bag

Sluggish cigarette sales mar ITC's numbers

ITC reported a strong operating profit growth in the March quarter, but this was marred by sluggish cigarette sales. In fact, except for the hotels business, all of ITC's segments reported disappointing growth numbers.

Cigarette revenues were up 6.41 per cent backed by a modest volume growth of an estimated five per cent. The segment's profit, however, was up 20.77 per cent as margins improved by 266 basis points.

Having won the case against state luxury taxes, the company no longer needs to provide high amounts for this purpose, which seems to have boosted profit.

Both revenues and profit from the hotels business were up significantly post-amalgamation with subsidiary ITC Hotels. The segment's profit margin jumped to 31.37 per cent from 23.56 per cent in the previous quarter.

But profit of the paper business slipped despite healthy growth in sales. The agri-business reported a marginal drop in profit, while the company incurred higher losses on other consumer businesses (Rs 68 crore compared to Rs 61 crore). For the whole year, the company ended with a sales growth of 18 per cent and a net profit of 15.33 per cent (before exceptional items).

The company surprised the markets, announcing that it would consider a bonus issue and a split of its shares. Further, it increased dividend by 55 per cent to Rs 31 per share. These factors led to 2.5 per cent jump in ITC's share price to Rs 1,570.

But there was another surprise in the results announcement. Despite the huge one-time writeback of Rs 1,365 crore on account of the favourable verdict in the luxury tax case, the entire amount did not quite trickle down to the bottomline.

ITC has utilised the exceptional income to make provisions for restructuring costs and mark-to-market loss on investments. Net of taxes, the exceptional income was just Rs 354 crore, way below what analysts had estimated.

ITC now trades at 21 times FY05 earnings, indicating a substantial re-rating in the past year. While favourable court hearings were among the main reasons for this, a steady operating profit growth of 18 per cent and increased dividend payout also helped improve valuations.

Deccan Chronicle

Deccan Chronicle's announcement of the Asian Age acquisition coincided with that of rather impressive results for the quarter and year ended March 2005.

The Deccan Chronicle stock, however, has been flat this week at around Rs 200. Having issued its IPO at Rs 162 per share, the stock is now about 24 per cent higher than its issue price. Also, it gets a valuation of around 22 times FY05 earnings.

On the face of it, the valuation seems rather high for a newspaper company.

But it's important to note that Deccan Chronicle has not only reported high growth rates in FY05, but it also expects the trend to continue in the coming fiscal. Net profit jumped by 83 per cent last fiscal, on the back of a 42 per cent increase in revenues. In FY06, the company expects both revenues and earnings to grow by around 70-80 per cent.

Of course, this year's numbers would be boosted by the Asian Age acquisition (which is expected to account for 10-11 per cent of FY06 revenues) and the company's entry into Chennai.

The Chennai business is expected to account for 20-21 per cent of FY06 revenues. The existing business, according to the company, would grow about 15 per cent, which seems achievable.

Last year's growth came mainly from an increase in the number of colour pages and the resultant increase in advertising revenues. This increase happened in mid-November, which means the full impact of the move would be seen this fiscal.

For perspective, operating margin stood at 30.6 per cent in the first half of FY05, before the new printing facility came up. In the second half period, margin jumped to 39.3 per cent.

On the flip side, the newly launched Chennai operations and the acquired Asian Age business could lower overall margins. The company, however, doesn't seem to think it will have an impact on earnings growth "" it expects earnings to grow by 75 per cent.

EPS growth, because of the dilution last fiscal would be lower at about 47 per cent, which is more than double the company's trailing PE.

Larsen & Toubro

The upturn in the capex cycle was expected to drive revenues for Larsen & Toubro, so it's not really surprising that revenues grew 21 per cent last quarter.

The key factor to look out for was how well the company would be able to manage rising input costs, especially that of steel. Interestingly, the company's operating profit margin expanded by 105 basis points to 9.62 per cent.

In contract, for the first nine months of FY05, the company's operating profit margin had expanded a mere 24 basis points to 3.92 per cent on a y-o-y basis.

The company' s senior management explained that escalation clauses in their contracts and cost management techniques have shown signs of paying in the March quarter. As a result, the company's operating profit grew 35.6 per cent last quarter, much higher than the revenue growth.

Growth of the key engineering and construction (E&C) division was helped by the company's emphasis on the oil and gas, power and infrastructure sector.

The electrical and electronics (E&E) division reported a mere 0.5 per cent growth in segment profit, despite revenue growth of 14.15 per cent to Rs 357.4.

While demand was strong, this division was hit because of higher input costs. But considering that the E&E division is less than a tenth of the E&C division in size, its performance didn't really affect overall performance.

The order backlog of the E & C division rose about two per cent on a y-o-y basis at the end of FY05 to Rs 17604 crore. Going forward, the company is expected to benefit from a further strengthening of the capex cycle in the medium term.

In addition, prices of steel have recently eased in developed markets and domestic players are also evaluating price cuts.

This is expected to help the company improve operating margins even further.

With contributions from N Mahalakshmi, Mobis Philipose and Amriteshwar Mathur