Low-margin businesses have affected ITC's financials

ITC's sales jumped 24.2 per cent in the June quarter, but operating profit grew just 14 per cent and growth in profit before tax was even lower at 11.7 per cent.

This was despite the fact that margins of the mainstay cigarettes business were maintained. Also, except for the agri business (which accounts for just 4 per cent of total segment profit), all other segments saw an increase in profitability.

Overall profitability fell because much of the incremental sales came from non-tobacco businesses, which operate on relatively lower margins. Gross revenues of the cigarettes business grew 10.8 per cent, but the other businesses put together grew revenues by 37.8 per cent.

Together, they now account for over 28 per cent of total segment revenues. But the EBIT (earnings before interest and tax) margins of these businesses is just 7.5 per cent, compared to 23.1 per cent for the cigarettes business.

Effective May 2004, the government has banned tobacco advertising through the print media and hoardings. Analysts expect this move to benefit ITC and its established brands, since it will make it difficult for new entrants to promote their brands.

What's more, the company spent over 4 per cent of its sales on advertising in FY04. While some of this may shift to promotional activity at the point of purchase, there would be savings on the advertising cost front.

Further, excise rates have been untouched for three years, and the education cess will have only a marginal impact on prices. This augurs well for the company, and coupled with the continued improvement in the other segments, should lead to steady growth in the full year as well.