Stock Review: ITC

SINCE the Union Budget spared cigarette makers from afresh rise in excise duty, ITC has been the darling of the bourses and has outperformed the Sensex by 18 per cent. Domestic mutual funds have been overweight on the stock for the same reason. However, the fourth quarter numbers of the company have disappointed the Street a wee bit. Revenues in the fourth quarter ended March 31 grew 15.5 per cent to `5,836 crore and net profit grew 24.6 per cent to `1,281 crore year on year, due to better realisations from cigarettes on account of price rises at the beginning of the year. Analysts were expecting the company to grow revenues by 19 per cent, to `6,011 crore.

However, against the Streets expectations of 6-7 per cent volume growth, Standard Chartered Securities expects volume growth of only 4.5 per cent. Sharp price increases in the past few years has slowed the pace of up-trading and also lowered the 'bandwidth' to increase prices resulting in lower realisation growth in FY12. Interestingly, the average PBIT (profit before interest & taxes) growth in years with no excise increase is around 12.5 per cent vis-à-vis 16.5 per cent PBIT growth in years when excise increased.

While the cigarette division registered a 13.2 per cent growth in gross revenue (12.8 per cent annual growth in net revenue), the agri business posted 9.5 per cent growth, which dragged quarterly revenues a bit. The fast moving consumer goods (FMCG) business grew 14.2 per cent, while hotels and paperboards registered growth of 18.2 per cent and 15 per cent, respectively. Fourth quarter agri revenues were `1,082 crore, contributing 23 per cent to total revenues. For the full year, the segment clocked revenue of `4,748 crore.

On the positive side, earnings for the quarter grew a robust 25 per cent over the year to `1,282 crore. This has been aided by high other income, up 52.2 per cent to `226 crore.

Unlike others in FMCG, the company managed to hold on to margins, which remained flat. Operating margins improved by 18 basis points year on year to 30.7 per cent. For financial year 2011, operating margins have come in at 33.8 per cent.

In segment performance, the cigarette margin expanded 107 basis points over the year to 28.8 per cent (27.7 per cent in the corresponding one), aided by price rises. Losses in the non-cigarette business reduced by 183 basis points annually and 66 basis points sequentially. Non-cigarette FMCG losses came in at `68 crore in the quarter, against `79 crore in the corresponding quarter last year. This shows improved profitability, says Chitrangda Kapur, analyst at Angel Broking. The FMCG business is expected to break even by 2012-13. Hotels and agri business registered margin expansion by 219 basis points annually, while paperboard margins fell. Analysts don't expect the margins to come off, as tobacco prices are expected to remain benign.