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FMCG boost for ITC
Business Standard - 25 Oct 2011

While the outlook remains healthy, the threat of a spike in duties on cigarettes could act as an overhang for the stock.

ITC has done it again. After delivering better-than-expected results for the June quarter, the company has reported higher-than-estimated numbers for the September quarter too. Not surprising, the company’s stock rose 1.6 per cent on Monday, compared to 0.9 per cent gain by the Sensex.

The numbers were driven by good performance of cigarettes, FMCG (others) and agri segments, and improvement in margins across a majority of businesses. While analysts expect ITC’s cigarette volumes to grow in high single-digits in at least the next two quarters, the agri and hotel businesses, in the ongoing quarter, are also likely to witness higher profitability from depreciation of the rupee against the dollar. Besides, it is also the start of the peak season for the hospitality industry. Driven by overall growth in its business segments, analysts at JPMorgan expect ITC’s earnings to rise at a compounded annual growth rate of 17 per cent over FY11-13.

In Rs crore Q1, FY12 % chg y-o-y Q2, FY12 % chg y-o-y
Net sales
FMCG (cigarettes) 2,874 16 2,968 16
FMCG (others) 1,198 20 1,341 27
Hotels 231 10 211 1
Agri business 1,707 26 1,435 15
Paper* 960 21 1,005 9
Total net sales 6,968 19 6,960 16
FMCG (cigarettes) 1,577 21 1,729 19
FMCG (others) -76 -15 -56 16
Hotels 51 33 43 9
Agri business 157 21 239 18
Paper * 227 20 289 10
Total Ebit 1,936 23 2,244 18
Ebit: Earnings before interest and tax
* Paperboards, paper & packaging
The negative figure (y-o-y chg) for the FMCG (others) business indicates a decline in loss
Source: Company

On the flip side, analysts say, given that there was no increase in taxes on cigarettes last year, the upcoming Budget may raise taxes which could impact volumes. In view of this and given that the stock (now at Rs 206.50) has outperformed the broad markets by over 30 per cent this year so far, analysts say the upsides could be limited in the near term. Most of them have price targets in the Rs 225-240 range.


Though ITC’s net sales were broadly in line with Street expectations, it posted better-than-estimated net profit for the quarter ended September 30. The growth in profit was aided by a 36-basis-point rise in operating profit margin, and a jump in other income. The margins were driven by judicious price increases across segments, as well as cost control measures. For instance, the aggregate cost of goods sold — including the cost of raw materials, purchase of finished goods and the adjustment to inventories — as percentage to sales rose by 221 basis points to 38.8 per cent in the quarter, compared with 36.6 per cent in the period a year ago. This was offset partly as the company was able to keep a tab on employee costs and other expenditure (up just 1.5-9.3 per cent).

While other income jumped 45 per cent to Rs 181 crore, helping the bottom line increase 21.5 per cent annually, the operational performance was reasonably good and the key driver in the quarter.

FMCG analyst at Angel Broking, Sreekanth PVS, says: “The results were in line with expectations. Margins have improved across all business segments.” While Sreekanth is neutral on the stock, he expects ITC to post similar growth across all business segments for the December quarter too.

Among all its businesses, the FMCG segment (excluding cigarettes) posted the highest annual revenue growth, of 27 per cent, in the September quarter. It was followed by cigarettes and agri businesses. An estimated 7 per cent volume growth, coupled with price increases undertaken across all product lines, boosted the performance of the cigarettes business. While new product launches across all categories (especially foods and personal care) and geographical market expansion fuelled growth in other FMCG businesses (including branded packaged food, garments, personal care, stationery, etc), better product mix boosted sales in the paper segment. Besides, improved realisations led to profit expansion in agri and paper segments. However, the hotels business saw subdued growth, reflecting the slowing expansion in both international and domestic economies.

While the company witnessed across-the-board growth in segmental profits, it also continued to trim losses in other FMCG business (to Rs 56 crore). Higher profitability in the foods, education and lifestyle retail segments enabled ITC to reduce these losses. The new launches and foray into new markets, however, seem to have restricted the improvement in losses, which were lower than the growth in sales. Sreekanth PVS expects the company’s other FMCG business to break even by FY13.


In addition to concerns over a likely increase in excise duty on cigarettes, the company could also face a further rise in the rate of value-added tax (VAT), say analysts. Thanks to a spate of upticks in VAT rates on cigarettes in most states, ITC’s blended VAT rate has risen to 17.5 per cent, from 15 per cent in FY11. The impact on ITC’s cigarette volumes could be adverse if taxes are raised beyond the 10 per cent level. In the last decade, it has been seen that any rise in excise duty beyond 10 per cent has affected volumes in the following financial year.

Analysts at JPMorgan believe that the industry can absorb excise duty increases of up to 10 per cent (implying price rise of 4-6 per cent) without impacting demand significantly. However, in the near term, this uncertainty will act as an overhang on the stock. This concern apart, the outlook for most of its businesses, including cigarettes, looks healthy, with margins expected to remain stable.