Stock Review: ITC

 

ITC Ltd put up a strong show in the December quarter, with sales growth of 20.4 per cent year-on-year (y-o-y) to `5,514 crore compared to 16 per cent in the first half of 2010-11. The cigarette business bounced back, with volumes rising around two per cent compared to a decline in the first half. This, along with the earlier price increases, resulted in gross sales growth of 18.4 per cent (highest in any quarter for the last four years) to `5,236 crore. The non-cigarettes FMCG business ( `1,104 crore) continued to report robust performance, with the branded packaged foods business pushing up revenues by 24 per cent. The agri business registered 18 per cent growth in sales due to higher realisation in soya and coffee, followed by higher leaf tobacco exports. Sales in hotels and paper segments increased at lower-than-expected rates of 14.3 per cent and 8.5 per cent, respectively, courtesy moderate improvement in average room rates as well as occupancy and packaging inventory depletion due to uncertainty around the pictorial warning.

Profitability has been in line with expectations. The operating profit margin has been maintained at about 37 per cent, helped by almost all businesses and benign tobacco prices (biggest raw material). The net profit margin has been flat at 25 per cent due to a 15 per cent increase in interest, depreciation and taxation (cumulative `833 crore, or 15 per cent of revenues).

Though the uptrend in volume growth in the cigarette segment is expected to continue, analysts are waiting for the announcement on taxes in the upcoming Union Budget.

The non-cigarette business is expected to benefit from new launches in biscuits (Sunfeast Dark Fantasy variants), noodles (Sunfeast Yippee), skincare (fairness cream and winter care soap) and shampoos. Hotels and paper businesses will also improve performance on the back of upcoming sports events (IPL and ICC World Cup) and clarity on pictorial warning, along with strong growth in the stationary business. Margins are likely to be maintained, even though the company is witnessing cost pressures, especially in agri-based raw materials (except tobacco).

While volumes in the cigarette segment bounced back, hotels and paper performed below expectations