ITC: consumer biz turning profitable could be a key investment trigger - Mint
May 26, 2012
ITC Ltd's March quarter results demonstrate once again how crucial its cigarette business is to both sales and profit growth. Net sales rose by 17.6% year-on-year (y-o-y) to Rs 6,861.4 crore, while operating profit rose by 18.8% to Rs 2,263.4 crore. The firm complains about how taxes affect cigarette sales, shifting consumption to illegal products and non-smoking forms of tobacco.
Still, its cigarettes business saw sales rise by 17.4% to Rs 3,249.9 crore in the March quarter. If it can achieve this growth despite the obstacles it claims lie in its path, its real growth potential could be much higher. The business did well to grow profits, too, with segment profits for cigarettes rising by 19.5%.
Segment margins rose by 94 basis points y-o-y, but they declined by just under 3 percentage points on a sequential basis. One basis point is one-hundredth of a percentage point. This could indicate some pressures either due to a change in product mix (more contribution from mass market products) or higher costs.
Excise duties were hiked in the budget, from mid-March, and this may have had an effect. This affected overall operating profit margins, too, which improved by half a percentage point y-o-y, but declined by a massive 5.4 percentage points sequentially. If margins do not improve in the next few quarters, investors may have to revise their base-line profit margin downwards.
The consumer products business continues to do well, with sales rising by 23.2% y-o-y, and the segment loss coming down to Rs 16.7 crore, significantly lower compared with the Rs 46.6 crore seen in the December quarter. At this rate, the business may well creep into positive territory in 2012-13 and it suggests some of its sub-categories-foods, personal care, retail and stationery-are already profitable at the Ebit level. Ebit, or earnings before interest and taxes, is a measure of a company's earning power from ongoing operations.
The hotels and paper business both have suffered both on the sales growth and profitability front, apparently due to the economic slowdown both globally and in India.
In 2012-13, a key investment trigger could be the consumer products business turning profitable, while sustaining high sales growth rates. Its ability to counter excise duty hikes is proven, and investors would like to see it successfully cope with the recent hikes as well.
The scrip trades at about 29 times its 2011-12 earnings per share, which is relatively expensive and reflects the premium it gets for its ability to grow even in tough operating environments. The risk is if its operating profit margins step down to a lower base level in 2012-13, which could affect its valuation.
