ITC: Non-core gains

ITC's non-cigarette businesses grew an impressive 46.2% in FY06

ITC has reported a solid growth of 28.16 per cent y-o-y in its net sales in Q4 FY06, buoyed by a 15 per cent growth in its key cigarette business owing to a price hike and consumers upgrading to higher0priced cigarettes, say analysts.

Both agri-business and hotels grew at 56 and 45 per cent respectively in the quarter. Operating profit grew slightly lower at 21 per cent, but that is understandable as ITC is investing in growing its non-cigarettes businesses.

In FY06, non-cigarette businesses grew an impressive 46.2 per cent, and made up 48 per cent of net sales, compared with 42 per cent a year ago. Since profitability in its new businesses is lower, operating profit margin fell over 250 basis points to 34 per cent in FY06.

The hotel business posted an 850 basis point improvement in segment profitability with its new Mumbai property, which opened in January 2005, becoming profitable in FY06. Cigarette sales grew an impressive 13 per cent last year, twice that of FY05.

Even the FMCG-other businesses such as food products, lifestyle retailing, greeting cards and stationery items, saw a decline in segment loss, with revenues rising 80 per cent. The paper business did well owing to new capacities.

In FY07, the cigarettes business is likely to continue its present momentum. The FMCG-others segment is expected to post strong growth, though the division is unlikely to become profitable this year.

Analysts also expect the agri business segment, which includes the choupal business, to become multi-fold in the next few years, and hotels and paper should post higher margins. The ITC stock trades at an attractive 24 times estimated FY07 earnings and 20 times FY08 earnings.

IOC: Crude numbers

Indian Oil Corporation (IOC) has reported 2.1 per cent y-o-y increase in its operating profit to Rs 7400 crore in FY06 compared with 25.7 per cent growth in income (including special oil bonds received from the government in the March quarter).

IOC's operating profit margin fell 99 basis points to 4.25 per cent in FY06. Earlier, HPCL had seen its operating profit margin dip 229 basis points to 1.13 per cent in FY06.

IOC received Rs 6,440 crore from upstream players in FY06, in the form of discounts, as per the subsidy sharing mechanism. In FY05, it had received discounts of Rs 3,293 crore from upstream players.

IOC's total net under-recovery for petroleum products after the subsidy sharing mechanism was Rs 4,774 crore in FY06 compared with Rs 7,777 crore the previous year.

The refinery throughput grew 5.16 per cent y-o-y to 38.52 million tonne in FY06. IOC's average gross refining margins fell to $4.6 a barrel in FY06 compared with $6.21 a barrel in FY05.

However, the oil bonds helped the company's operating profit margin grow 647 basis points y-o-y to 10.3 per cent in Q4 FY06. With the uncertainty on petroleum product price hike, the stock looks fairly valued at about 8.8 times estimated FY07 earnings.

Mahindra & Mahindra: Rich harvest

A slower top line growth in the March quarter notwithstanding, it's been another good year for tractor and auto maker Mahindra &Mahindra (M&M), with a 23 per cent sales growth at Rs 8,222.7 crore.

However, despite operating on a higher scale, operating profit margin for the year remained flat at 11.7 per cent, thanks to input cost pressures. Both the tractor and auto segments posted similar segmental margins of around 11 per cent.

The tractor segment posted a smart 30 per cent rise in sales and M&M continues to grow share in this space, now controlling 29.7 per cent of the market.

M&M is acquiring companies overseas which would help it scale up the business globally. However, it does face some challenges in the auto segment, which grew just 15 per cent y-o-y.

While the Scorpio drove volumes posting a growth of 18 per cent y-o-y, overall utility vehicle sales did badly growing at just 3.5 per cent against the industry average growth of 6 per cent.

The large three-wheeler segment fared poorly too with sales falling 21 per cent y-o-y. M&M will launch the Logan through its 50:50 JV with Renault next year which should give its auto business a boost, though competition in this space is getting keener.

Tractors should continue to do well this year, though it would clearly be difficult to maintain the 30 per cent growth rate on such a high base.

A couple of the subsidiaries, probably Tech Mahindra and Mahindra Holidays, could get listed in the near future, resulting in some value creation for shareholders.

The stock has been an outperformer and at the current price of Rs 592, it trades at 17 times estimated FY07 earnings. Given the reasonably good core business, the potential for its auto ancillary segment and wealth in its subsidiaries, the stock is attractively valued.

With contributions from Amriteshwar Mathur and Shobhana Subramanian