There`s no reason for the market to value ITC lower than HLL

ITC reported an increase of 13.12 per cent in net sales, lower than the 24.22 per cent growth recorded in the June quarter. The drop in growth rate, however, was entirely on account of lower growth in the company's agri business, which has seasonal variations. The core cigarettes business grew revenues by 11.25 per cent, on the back of a 10.8 per cent growth in the June quarter.

This is significant because last quarter's double-digit growth was attributed by some analysts to pushing of stocks to dealers prior to the budget. The fact that the double-digit growth has continued not only disproves that theory, but also means that ITC's growth rate in the first six months of the fiscal has reached levels not seen for the last five years.

ITC's other FMCG businesses continue to grow at a healthy pace and cut its share of losses (as a percentage of sales). The hotels business grew revenues by 21 per cent and improved margins by 11 percentage points. While the paper business grew revenues at a healthy pace of 25 per cent, it reported a 200 basis points drop in margin.

Interestingly, ITC's trailing 12-month profit stands at Rs 1715.44 crore, 22 per cent higher than that of HLL. Just in the March quarter, ITC's trailing 12-month profit was 7 per cent lower than HLL's. The difference will only widen with HLL's profit falling at a fast pace and ITC's profit rising at a steady pace.

Yet, the two companies have a similar market capitalisation and HLL enjoys a PE of over 18 times estimated CY2005 earnings compared with a valuation of less than 13 times for ITC. With ITC now enjoying a much higher profit, it probably deserves a higher market cap as well.