ITC: Boom time

ITC's growth momentum will continue as its businesses are doing well

Though ITC's top line improved a smart 32.3 per cent y-o-y in the September 2006 quarter to Rs 2,888 crore, the growth in operating profit was stunted at 18.7 per cent.

But analysts aren't worried as they had expected operating profit margin to decline as many of ITC's non-cigarettes businesses are in a growth phase. ITC's operating profit margin declined 387 basis points y-o-y to 33.7 per cent.

In the June quarter, ITC's sales had risen 26 per cent, while its operating profit had declined almost 250 basis points. There has been no change in the ITC stock price after the results.

The non-cigarettes businesses grew 53 per cent y-o-y and accounts for 51.2 per cent of the company's net sales. Growth in packaged foods (54 per cent) and lifestyle retailing (64 per cent) businesses helped the 'FMCG-others' segment revenues rise 66 per cent.

The growth in agri business too was impressive at 86.6 per cent, owing to exports of leaf tobacco and higher trading volumes in soya, rice, chana and coffee.

Cigarette sales grew an impressive 14.9 per cent, with the segment margin improving nearly 30 basis points y-o-y in Q2. The 'FMCG-others' segment continues to be loss-making at the PBIT level, but that is because the businesses are growing rapidly.

The hotel business continues to do well. In Q2, the segment profitability improved by 1086 basis points as the revenue per available room improved by 37 per cent.

In paper, higher contribution of value added paperboards (50 per cent of total paper sales) resulted in a 170 basis point improvement in segment profitability.

All its businesses are doing well, so the momentum will continue going forward. As the company focuses on improving its product mix, margins should improve, though the growth businesses of retailing and packaged foods will continue to make losses over the next few quarters. The stock trades at a reasonable 26 times estimated FY07 earnings and 21 times FY08 earnings.

ACC: cementing gains

ACC, like other players in the sector, has benefited from the well-documented surge in cement prices in the September 2006 quarter.

As a result, the company's standalone operating profit improved by 140.4 per cent y-o-y to Rs 366 crore in the September 2006 quarter compared with 35.8 per cent growth in net sales to Rs 1373.5 crore.

However, the results of the last quarter are not strictly comparable with previous year, as the company had divested its refractory business with effect from September 30, 2005. Nevertheless, ACC saw its operating profit margin expand 1155 basis points y-o-y to 26.6 per cent in the last quarter.

Earlier, UltraTech's operating profit margin grew by 1514 basis points y-o-y to 25.3 per cent in Q2 FY07.

Meanwhile, ACC's cement sales grew 8.4 per cent y-o-y to 4.27 million tonne in the last quarter. Its realisation grew an estimated 36.4 per cent y-o-y to Rs 3052.8 per tonne in the September 2006 quarter and it helped offset rising input costs.

Earlier, UltraTech saw its realisations improve by 34 per cent y-o-y in the last quarter.

Cement demand is expected to pick up substantially over the next few months, given the traditional pick-up in activity post-monsoons. Also, prices are expected to improve further, say analysts.

However, most of the growth opportunities seem to be factored in as the stock trades at about 20 times estimated CY06 earnings, leaving little scope for appreciation.

IOC: Bonds to the rescue

IOC has been able to report substantially improved results in the September 2006 quarter on a y-o-y basis, owing to the oil bond issue of Rs 7168 crore from the central government.

As a result, the company's operating profit has grown a whopping 166.5 per cent y-o-y to Rs 4035.9 crore in the September 2006 quarter compared with 44.1 per cent growth in total operational income (including oil bonds from the government) to Rs 57,766.5 crore.

In addition, operating profit margin also rose 320 basis points y-o-y to 7 per cent in the last quarter.

IOC's refineries division saw its crude throughput rise 11.9 per cent y-o-y in Q2 FY07. However, IOC's gross refining margins weakened on a y-o-y basis.

Meanwhile, upstream players such as ONGC, as part of the subsidy sharing burden to oil marketing companies, provided Rs 3,084 crore to IOC in Q2 FY07 compared with Rs 1,682 crore a year earlier.

Oil bonds and subsidy sharing helped offset under-recoveries for IOC in its auto fuels, LPG and kerosene business in the last quarter.

IOC has been making a marginal profit on blended sales of auto fuels, for the past few weeks.

However, with global crude oil prices dipping 20 per cent in the recent past, analysts point out that the government may need to rework the quantum of additional oil bonds for OMCs such as Indian Oil.

As a result, the stock looks expensive at 12 times estimated FY07 earnings, given the uncertainty about oil prices and the government's next step.