While growth in cigarettes is expected to be stable, other businesses will drive performance in 2010-11.
ITC’s other FMCG segment (non-cigarette division), which includes packaged foods, personal care products and apparel, among others, stole the show during the March 2010 quarter. While the divisions’ net sales jumped 34 per cent year-on-year, the highest in six quarters, to Rs 1,122.70 crore, losses fell by a third to Rs 78.7 crore compared to Rs 117.3 crore y-o-y. Apparently, the days of high expenditure required to launch new products and businesses are behind, unless the company has more plans up its sleeves. Other expenditure, which includes launch and rollout costs and brand building expenses, inched up just 8.9 per cent during the quarter.
However, ITC’s bread-and-butter cigarette business, which accounts for 60 per cent of sales and over 80 per cent of profits, showed disappointing results. The sales growth of 14.4 per cent year-on-year to Rs 4,517 crore was below expectations.
Volumes were affected as the company had undertaken price hikes in the range of 2-18 per cent (average of 10 per cent) for its cigarette brands, post the Union Budget announcement in February 2010, which raised excise duty on cigarettes by 9-18 per cent. Segment profits, however, grew 15.7 per cent. On the whole, the FMCG business was the key profit driver during the quarter.
While the hotels business reported a strong rebound, thanks to better occupancy levels and average room rates, the paper business recorded stable sales growth of 12 per cent growth to Rs 836 crore.
On the other hand, the agri business reported an 88 per cent growth in sales to Rs 988 crore and boosted ITC’s top line. The company reported better-than-expected standalone revenues of Rs 5,131 crore in March 2010 quarter, a jump of 29 per cent year-on-year, and the highest increase in eight quarters.
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Operating profit (PBIDT) margins inched up to 25.5 per cent, helping operating profits to rise almost 30 per cent to Rs 1,310 crore. This happened mainly because of lower losses in other FMCG businesses, followed by control in overall costs. Except for cigarettes, the profit growth for all other divisions was lower at an average 10 per cent. Net profit margins were stable at 20 per cent, as net profit of Rs 1,028 crore grew at a slightly lower rate of 27 per cent, but it was marginally above analysts’ expectations.
Going forward, analysts expect pressure on cigarette volumes to persist in 2010-11, due to price hikes undertaken and expect sub-five per cent growth in volumes vis-à-vis near-10 per cent earlier. However, ITC should be able to maintain its four-year average of 11 per cent in cigarette sales growth due to market leadership and strong brand equity. The outlook of other FMCG business is good with expectations of losses declining further. Hotels and paper division are likely do well, but their margins could come under some pressure due to higher input costs. Overall, it is all hunky-dory for the diversified conglomerate.
The markets also gave the results a thumbs-up. ITC’s stock outperformed the BSE FMCG index, ending with three per cent gain in a volatile market. This was partly also due to the announcement of a board meeting on June 18 for considering the issue of bonus shares.
At Rs 271.50, the stock traded at 22 times its estimated 2010-11 earnings. Despite high valuations, analysts prefer ITC over Hindustan Unilever due to strong presence across its businesses and less competitive pressures.