ITC’s performance in the December quarter has been far better compared with the first half of the year sales grew at 10.6 per cent last quarter against a mere 3 per cent in the first half. Gross revenues of the cigarettes business increased 6.8 per cent, well above the 3.7 per cent growth in the first half. This clearly indicates that volumes have picked up strongly, because there have been no price increases after April. What’s more, EBIT margins of the division improved 50 basis points year-on-year, thanks to the price increases taken earlier in the year. With rural incomes having picked up after the good monsoons, potential consumers (currently bidi users) are expected to turn to cigarettes.

The company’s new businesses have been doing well - the Branded Garments, Greeting Cards, Stationery & Gifts, and Packaged Foods businesses put together grew revenues by 139 per cent last quarter and accounted for a fourth of incremental revenues. What’s important is that the division’s losses have been pruned to 42 per cent of sales, compared to 84 per cent of sales same time last year. Since the initial product development and brand building expenses have, more or less, been absorbed, losses are expected to drop further going forward. The hotels business has benefited from the upturn in tourist arrival - revenues grew 31 per cent and EBIT margins jumped 540 basis points, leading to a 98.4 per cent jump in the segment’s earnings.

The performance of the agri-business segment was impacted because of last year’s high base, while the paper business suffered because of inventory correction by end users and a plant shutdown for maintenance & repairs. However, last quarter’s acquisition of a paperboard manufacturing facility will result in a 32.5 per cent expansion in the current capacity, which is expected to result in higher growth going forward.

The ITC stock now trades at 16 times FY04 earnings, still at a discount to peers in the FMCG sector. One trigger for a rerating would be a favourable hearing in the dispute relating to luxury taxes, for which the company has made a provision of Rs 1260 crore. A favourable hearing would not only result in a huge write-back, but also cause the company to increase its dividend payout considerably.