ITC: Taxing times

Hike in cigarette prices to offset VAT backfires as a drop in sales volumes hits revenues.

The price hike effected by ITC has dented cigarette revenues, which declined 5.5 per cent y-o-y in the September 2007 quarter.

Analysts have estimated a 7-8 per cent deceleration in volume sales this financial year due to the company's 20 per cent price hike in cigarettes to offset value-added tax.

While in Q1 volumes had dipped just around 3 per cent, analysts expect the volume dip in the second quarter to be closer to 7 per cent. Revenues grew 9 per cent in Q1.

The other highlight in Q2 is the segment loss in FMCG-others, its high growth business, which has declined 25 per cent even as revenues increased 43 per cent. Cigarette segment margin is up 100 basis points.

In hotels, margins improved 30 basis points, while in paper they were down 85 basis points. But its performance in the agri business segment was disappointing as revenues fell 12.5 per cent and segment margin declined 410 basis points.

The company said this was due to the ban on exports and zero duty imports, which meant that the company had to sell commodities in the domestic market at a loss.

Also, the rupee appreciation hurt realisations from older contracts. Overall sales improved by 14 per cent to Rs 3273 crore in the September 2007 quarter.

However, a 5 per cent growth in operating profit meant that the operating margin declined 250 basis points y-o-y to 28.3 per cent.

Analysts expect cigarette volumes to improve as consumers accept higher prices. The weak performance in agri business is a one-off, and should do better in future.

After its results, ITC declined over 1 per cent. It trades at 23 times estimated FY08 earnings and 19 times FY09 earnings, and is likely to be a market performer.

LIC Housing Finance: Growth to continue

LIC Housing Finance has shown strong growth in its financial performance in Q2 FY08 on both y-o-y and q-o-q basis.

The PSU major reported a robust y-o-y growth of 69 per cent and 36 per cent in sanctions and disbursements to Rs 2268 crore and Rs 1599 crore respectively leading to a loan book growth of 20 per cent to Rs 19,135 crore as on September 2007.

The company attributes a part of the growth to its lower base in the past and realistic lending rates as well. This coupled with improvement in yield on advances to 10.3 per cent (up 134 basis points y-o-y and 30 basis points q-o-q) and lower rise in interest costs (84 basis points y-o-y and 8 basis points q-o-q) led to higher growth of 43 per cent in net interest income to Rs 150 crore.

Net interest margin (NIM) was up 53 basis points y-o-y and 87 basis points sequentially at 3.21 per cent.

The company reduced its gross non-performing assets to 2.84 per cent compared with 3.75 per cent in the corresponding period last year leading to lower provisions. Thus, net profit jumped 53 per cent to Rs 116.37 crore.

LIC Housing Finance is likely to continue its growth momentum as it lends mostly to salaried and retail customers mainly in big cities. It is targeting a growth of 22-25 per cent in loan book and profit growth of 25 per cent in FY08.

Margins are likely to remain stable due to the company's ability to raise resources at competitive rates and stable rates on the lending side. It is also planning to raise Rs 500 crore through a QIP.

This will improve further its already comfortable capital adequacy ratio of 15.3 per cent to 18-19 per cent. The stock trades at little less than one time price to estimated FY08 book value, and is reasonable.