ITC

ONE OF the last few FMCG companies to announce its March quarter results, ITC did not disappoint its investors. The company offered the twin benefits of a strong financial performance along with a hefty dividend to its investors. Net sales growth of 28% for the fourth quarter exceeded market expectations while the 27% rise in net profit was just a tad lower than average estimates. Consequently, the company's stock closed 3.4% higher on Friday following the announcements.

   The earnings for the quarter were slightly impacted due to the significant rise in raw material cost. The input cost as a proportion of net sales rose by close to 600 bps year on year. At 32%, the operating profit margin therefore took a marginal hit of 85 bps y-o-y.

   Its dominant business of cigarettes, contributing over 44% to its total revenues and nearly 85% to its operating profit, has grown at a healthy rate of 18.5% in revenues and 16% in operating earnings. Differential taxation on cigarettes across states and increased regulation have posed challenges to the growth of this division.

   Its non-cigarette FMCG business has logged a robust growth of 34% in revenues. Despite being a late entrant in this business, ITC has been able to steadily garner market share across most of its segments such as biscuits, atta, confectionery, salt, soaps and shampoos. While this loss making division is yet to turn profitable, it has been able to reduce its losses quarter after quarter.

   ITC's hotels business has shown a smart recovery in the fourth quarter against the earlier three quarters of FY10. With the economic conditions improving and travel and tourism picking up, the segment posted a sales growth of 16% and modest earnings growth of 10% y-o-y.

   ITC continues to aggressively invest in the segment. The agri business, despite logging the highest sales growth of 88%, witnessed a modest jump of 10% in earnings. The paper board division, which had registered a stellar performance in the preceding December quarter, posted a muted growth of 12.5% in revenues and 11% in earnings during the March quarter.

   With yet another good quarterly show, ITC continues its trajectory of growth quarter after quarter. Its strategy to reduce dependence on its core cigarette business is steadily gaining ground. For investors, considering the consistent growth in performance, steady capital appreciation, limited downside risk and good dividend yield this FMCG stock is a safe investment bet.

   However, there could be likely headwinds that the company may face, going forward. Poor or deficient monsoon for the second consecutive year can impact the performance of an agro-based company like ITC. Rising food inflation also can hurt consumer sentiment with its attendant impact on demand for mass-market FMCG products as well as premium hospitality. Besides the competition in the FMCG segment is intensifying. This may tell on the prospects of the company's consumer products business in the near term.