ITC: The non-tobacco drag

Low-margin businesses have affected ITC's financials

ITC's sales jumped 24.2 per cent in the June quarter, but operating profit grew just 14 per cent and growth in profit before tax was even lower at 11.7 per cent.

This was despite the fact that margins of the mainstay cigarettes business were maintained. Also, except for the agri business (which accounts for just 4 per cent of total segment profit), all other segments saw an increase in profitability.

Overall profitability fell because much of the incremental sales came from non-tobacco businesses, which operate on relatively lower margins. Gross revenues of the cigarettes business grew 10.8 per cent, but the other businesses put together grew revenues by 37.8 per cent.

Together, they now account for over 28 per cent of total segment revenues. But the EBIT (earnings before interest and tax) margins of these businesses is just 7.5 per cent, compared to 23.1 per cent for the cigarettes business.

Effective May 2004, the government has banned tobacco advertising through the print media and hoardings. Analysts expect this move to benefit ITC and its established brands, since it will make it difficult for new entrants to promote their brands.

What's more, the company spent over 4 per cent of its sales on advertising in FY04. While some of this may shift to promotional activity at the point of purchase, there would be savings on the advertising cost front.

Further, excise rates have been untouched for three years, and the education cess will have only a marginal impact on prices. This augurs well for the company, and coupled with the continued improvement in the other segments, should lead to steady growth in the full year as well.

Tata Motors

With a 41 per cent growth in volumes in Q1FY05, Tata Motors has managed to notch up net revenues of Rs 3574 crore, a growth of 42 per cent yoy. Net profits are up 123 per cent at 223 crore.

Although at first sight there appears to be a fall in the EBITDA margin, the company has booked a Rs 90 crore forex loss, which has been accounted for in Other Expenses. Adding back the Rs 90 crore, the EBITDA margin would rise to 14.5 per cent, a rise of 130 bp.

This explains the other expenses number of Rs 576 crore which should have been much lower for a volume of just 85,000 vehicles in this quarter compared with the other expenditure in Q4FY04 of Rs 592 crore, when the volumes were higher at over a lakh. Also, sequentially, the percentage of raw materials to sales at 65.5 per cent has not changed much.

The numbers are impressive and unless the monsoons are very weak, the demand for CVs both from replacement and new segments should continue to be strong. Passenger vehicles growth at 30 per cent in Q1 has been good and the momentum should hold even if diesel and petrol prices are hiked.

There is a cash surplus of over Rs 3000 crore and with a negative working capital a profit of Rs 1100 crore, an EPS of Rs 30 (on a fully-diluted equity of Rs 364 crore) should not be difficult to achieve. A conversion from GDRs to ADRs, and a listing on the NYSE will make the stock more accessible to investors.

Input cost pinch for GE Shipping

GE Shipping's June quarter results show that core earnings of the company from transporting freight have shown strong growth. While freight rates in the last quarter have shown signs of cooling from the peak recorded in March - April 04, they are still considerably higher than the previous year. However, key input costs have risen upward sharply.

The upshot has been that GES' June profit before tax has grown at a much more sedate pace, compared to the sizzling growth in the fourth quarter of FY 2004. Excluding "other income", which has declined on account of losses incurred on sale of ships, y-o-y PBT growth was 22.8 per cent, compared with the last quarter's 96 per cent.

The same story has been repeated for the topline""-net sales rose by 42.5 per cent in the last quarter, compared with a y-o-y growth of 73 per cent in Q4, FY 2004.

Meanwhile, staff costs have jumped 38 per cent in the last quarter "" salary increases are essential to ensure the company is able to overcome high attrition levels. Also repair and maintenance costs have gone up by 43.4 per cent""-this is true for all shipping companies due to shortage of capacity at international dockyards.

Operating profit margins rose 33 basis points to 50.97 per cent, slightly lower than that recorded in Q4 FY04. With the recent budget removing tonnage tax, the tax liability of the company is expected to fall substantially.

Also the company is keen to expand its market share in the high growth segment of transporting petroleum products, given the growing crude imports in the country. Clearly the emphasis is on protecting operating margins, going forward.

With contributions from Mobis Philipose, Shobhana Subramaniam and Amriteshwar Mathur.