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ITC Net Rises 18% on FMCG Sales Growth
The Economic Times - 26 Jul 2013

Cigarettes-to-hotels conglomerate ITC Ltd on Thursday reported an 18% jump in net profit for the quarter to June, driven by good performance in fast moving consumer goods (FMCGs) and agri-verticals.

The company said net profit rose to Rs. 1,891.33 crore from Rs.1,602.14 crore in the year-ago quarter. While the profit was largely in line with street expectations, the 10.3% growth in net sales to Rs.7,338.52 crore lagged forecasts.

This pulled the company's stock down by 4.57% to close at Rs. 358.80 on the Bombay Stock Exchange on Thursday, a day when the exchange's benchmark index, Sensex, lost 1.42%. The stock, which has been on a roll for the past few months, had touched an all-time high of Rs.380 on Wednesday.

"It has been a mixed bag for ITC," said Kaustubh Pawaskar, research analysts at Mumbai-based brokerage Sharekhan. "The company's revenue growth was below our expectation due to weak performance of the cigarette business and moderation of sales growth of non-cigarette business from earlier pace of 25% to 18%, but operating margins improved substantially, which boosted the bottomline."

ITC's businesses are divided under four segments-FMCG (including cigarettes and non-cigarette FMCG), hotels, agri-business, and paperboards, paper and packaging. Net sales at the cigarette business grew 7% to Rs. 3,537.39 crore during the quarter. Analysts attributed the tepid growth to a 15-20% rise in cigarette prices because of higher taxes. This resulted in a 2% drop in the sales volume of cigarettes. The company, however, improved profitability of the cigarette vertical by 18% to Rs. 2,241.72 crore by increasing focus on premium brands and larger packs.
 
Non-cigarette FMCG business, comprising packaged foods and personal care products, managed to cut loses by half over the year-ago quarter to Rs. 18.93 crore. Sales in this vertical jumped 18.4% to Rs.1,744.66 crore with the company launching new brands such as Engage deodorants, Sunfeast Delishus cookies and Yumitos chips.

"The non-cigarette FMCG business may not have overcome losses in the first quarter after a spectacular performance in the last quarter, but we still expect the business will be closer to breakeven in this fiscal," said Gaurang Kakkad, vice-president of institutional research at Religare Capital Markets.
 
Kakkad said muted margin pressure in other businesses like hotels, paper and packaging dragged down the company's overall profitability. In a statement, ITC said its performance during the quarter had been commendable given that it was delivered against the backdrop of a challenging business environment, slowdown in private consumption expenditure and steep rise in excise duty on cigarettes announced in the Union Budget.
 
The company accepted it was facing a tough time in the cigarettes market because of the increase in taxes, which it said has led to wider price difference with other tobacco products.
 
ITC said it undertook several strategic initiatives during the quarter such as modernization of cigarette packs, launch of new variants and augmenting the entry-level sub-65 mm length cigarette portfolio with three new brands-Flake Galaxy, Flake Liberty and Silk Cut Virginia. The company said its hotels vertical remained under stress amid weak macro economic environment and high levels of room inventory. ITC, which has the country's second largest hotel chain, reported a 66% decline in profit in its hotels business to . 8.94 crore. Net sales, however, grew 7.5% to Rs. 249.86 crore.

The agri-business, driven by higher trading volumes and improved realization in leaf tobacco and wheat, saw sales and profit grow 29% and 16%. Revenue at the paperboards, paper and packaging business rose 10%, aided by capacity addition, while high price of wood and coal impacted profitability.