Stock Review: ITC

 

ITC has been on a roll since February. The company is a hot favourite of domestic institutions, given that they are overweight on the stock compared to other Nifty 50 stocks. But this bias is not without a reason.

Even as most fast moving consumer goods (FMCG) companies struggle with rising input cost, ITC is probably the only company to enjoy good margins in its core business — cigarettes — and expects to break even its personal care business in three or four years.

In the run up to the Budget, the company increased the price of some cigarette brands by 4 per cent. But the finance minister did not increase the excise duty on cigarettes due to booming sales of illicit cigarettes. Illegal activity has gained momentum as overall excise/VAT on cigarettes has jumped 43 per cent in the past five years, leading to huge tax evasion. The price rise ITC has already undertaken will help shore up the company's earnings, claim analysts. Analysts expect five per cent growth in volumes and 18 per cent growth in earnings before interest and taxes (Ebit) in FY12.

The concern of states increasing duty on cigarettes has also abated with only five states taking a move, but analysts believe the net impact would be not more than one per cent.

Almost 55 per cent states have already announced budgets and most key and large cigarette consuming states have left duty on cigarettes at earlier levels. This will give ITC headroom to absorb any decline in volume and rising input pressure.

ITC is among the few in the FMCG space to have pricing power. In FY05 and FY10, when excise hike was zero, ITC's cigarette volumes jumped 7 per cent plus yearon-year. The company reported an Ebit of 12.5 per cent and 18 per cent, respectively, in FY05 and FY10.

But the good news was not restricted to the cigarette business alone. ITC's personal care business is expected to tot up revenues of `480 crore in FY11, which compares favourably with `200-250 crore in FY09. In the soaps business, ITC's current market share in terms of volumes is approximately five to six per cent. The company's management has conveyed to analysts that in certain states like West Bengal and Orissa, its market share is in double digits.

A report by Citi says: "The personal care portfolio is expected to break even around three-four years from today. According to our understanding, gross margins are in line with industry players, but lack of scale results in losses at the EBIT level." Analysts expect losses to be contained at `300 crore in the FMCG business in FY11. The company's food business has become profitable since late FY10 and the only loss-making entity is Bingo, the salted snacks brand. Next April, if GST is implemented, then ITC's tax outgo could increase by 4 per cent, if tax is levied at 20 per cent.