The top-line growth for both the cigarette and FMCG segment is disappointing.
The fact that cigarette major ITC’s FMCG business has posted losses in the region of Rs 100 crore for five quarters in a row now is worrying.
The Street has been hoping for some time now that losses would shrink, but for 2008-09 they’re adding up to Rs 483 crore, possibly even beyond the management’s assessment. What’s even more disappointing is that the top line for the FMCG business, after growing at 30 per cent in the first half of the year, has grown at 11.5 per cent in the December 2008 quarter and now13.5 per cent in the March 2009 quarter.
Given that the base is not really so very large, the numbers are rather muted. Industry watchers believe that while the foods business is doing well, with the company now comanding fairly strong market shares in categories such as atta and biscuits, the personal-care products line is probably struggling in a competitive market. On the one hand, revenues aren’t coming in as expected, while on the other, spends on advertising and promotions are hurting the bottom line.
Meanwhile, gross revenues from cigarettes in the March 2009 quarter were up just 10 per cent, implying that the fall in volumes which was built in because the company isn’t selling non-filter cigarettes is sharper than expected. Both the agri and hotel segments saw a drop in revenues, as a result of which ITC’s sales have stayed flat for the March 2009 quarter.
While the dip in revenues from hotels wasn’t surprisin, given the global economic downturn, the fall in agri revenues — partly because of the sharp fall in soya prices — was higher than expected. However, significantly lower raw material costs have helped ITC post better operating profit margins of 32.4 per cent and consequently a rise in net profits.
It’s true that ITC does have pricing power in cigarettes and volumes could bounce back. However, the FMCG business needs to be scaled up quickly and losses need to start reducing. Right now, there’s little to suggest that earnings will grow more than 17-18 per cent in the next couple of years. At Rs 184, the stock trades close to 18 times estimated 2009-10 earnings — near its historical mean.
Analysts estimate a sum-of-the-part value of Rs 190-195 per share.
