ITC: The farmland drag

There's no reason for the market to value ITC lower than HLL

ITC reported an increase of 13.12 per cent in net sales, lower than the 24.22 per cent growth recorded in the June quarter. The drop in growth rate, however, was entirely on account of lower growth in the company's agri business, which has seasonal variations. The core cigarettes business grew revenues by 11.25 per cent, on the back of a 10.8 per cent growth in the June quarter.

This is significant because last quarter's double-digit growth was attributed by some analysts to pushing of stocks to dealers prior to the budget. The fact that the double-digit growth has continued not only disproves that theory, but also means that ITC's growth rate in the first six months of the fiscal has reached levels not seen for the last five years.

ITC's other FMCG businesses continue to grow at a healthy pace and cut its share of losses (as a percentage of sales). The hotels business grew revenues by 21 per cent and improved margins by 11 percentage points. While the paper business grew revenues at a healthy pace of 25 per cent, it reported a 200 basis points drop in margin.

Interestingly, ITC's trailing 12-month profit stands at Rs 1715.44 crore, 22 per cent higher than that of HLL. Just in the March quarter, ITC's trailing 12-month profit was 7 per cent lower than HLL's. The difference will only widen with HLL's profit falling at a fast pace and ITC's profit rising at a steady pace.

Yet, the two companies have a similar market capitalisation and HLL enjoys a PE of over 18 times estimated CY2005 earnings compared with a valuation of less than 13 times for ITC. With ITC now enjoying a much higher profit, it probably deserves a higher market cap as well.

Tata Steel, SAIL

The quarterly results of steel majors Tata Iron & Steel Company and SAIL have been overshadowed by China's central bank raising its benchmark interest rates by 0.27 per cent.

This hike has been small but it signals that the Chinese government wants to reign in the construction boom and if indeed Chinese demand slackens, this will lead to lower prices for steel. The last time China's benchmark lending rate was raised, growth slowed and it lead to steel prices crashing at the turn of the last century.

Meanwhile, Tata Steel's profit before tax and exceptional items has grown 143 per cent to Rs 1,479 crore in the last quarter despite the company cutting prices by Rs 2,000 per tonne in the last quarter.

Even after the recent price cuts, domestic steel prices are still around 40 per cent higher year-on-year and in addition, in overseas markets like USA, HRC prices in the last quarter had reached approximately $650 a tonne.

Also the Tata group company has kept a very tight check on costs "" staff costs have declined 14.5 per cent and expenditure on power has grown merely 4 per cent.

Thus helping operating profit to grow 115 per cent to Rs 1,628. 92 crore in the last quarter while operating profit margins rose 1,460 basis points to 43.5 per cent. Even Tata Steel's nearest competitor SAIL has reported an almost 200 per cent growth in its profit after tax to Rs 1,513.15 crore.

Going forward, to prevent a possible slow down in China affecting profit growth for Indian steel companies, it is anticipated that domestic steel manufacturers would be increasing their focus on customers in the US, Europe and the home market, as investment demand kicks in.

Tata Motors:beating the rise in costs

Tata Motors has done well in Q205 with net profits up 50 per cent at Rs 309 crore yoy, considering the rise in steel prices. Importantly, the company has been able to grow not just volumes, which have increased 22 per cent, but the 30 per cent rise in net sales also shows the company has pricing power.

At the operating level, the EBITDA has grown 18.5 per cent to Rs 520 crore, though. the EBITDA margin has slipped by 100 basis points to 12.5 per cent from 13.8 per cent in Q2FY04. Higher raw material prices have taken their toll, with the total expenditure having risen by 32.5 per cent.

Clearly, the rise in the expenditure has outpaced the increase in the topline. While raw materials as a percentage of sales has gone up 67.6 per cent compared with 65 per cent in Q204 , there has been a 20 per cent rise in staff costs and 24 per increase in other expenditure.

Moreover, interest costs are up 50 per cent this quarter at Rs 260 crore, ostensibly the result of funding higher cost inventories. When compared with the quarter ended June, when steel price hikes had already come into effect, the EBITDA margins have moved up slightly to 12.5 per cent from 12 per cent in Q1.

With volume growth continuing to be robust and the company able to pass on some of the higher costs, Tata Motors should continue to fare well given that the economy is growing at a healthy pace.

With contributions from Mobis Philipose, Amriteshwar Mathur and Shobhana Subramanian