The stock could get derated if FMCG losses continue to pile up.

ITC’s FMCG business continues to pull down its profits and a break even point for this segment could be quite some time away. The disappointing 11.5 per cent growth in FMCG revenues in the December 2008 quarter — way below the 30 per cent seen in the first half of the year — indicates that the cigarette major is finding it hard to take away share from incumbents in the personal care and snack foods spaces.

These losses, together with a worse than expected fall in profits of 34 per cent from the hotels division, left the company with a net profit growth of just 8.6 per cent at Rs 903 crore. That’s despite the cigarettes business beating both price increases, and a ban on smoking in public places, to turn in a decent 11 per cent growth in the top line and 18 per cent at the segment profits level. Cigarette volumes however fell slightly. Nevertheless, the the net profit growth was better than the 3.5 per cent posted in the first half of 2008-09, which is why the stock slipped just about a per cent on Monday. Also, thanks to some checks on costs, the operating profit margin came in slightly higher at around 36 per cent y-o-y. In the September 2008 quarter, the opm had slipped 240 basis points.

The hotels business is unlikely to pick up soon and the personal care and snacks food ventures could see bigger losses before they turn around. As such, the Rs 13,947 crore ITC is likely to end 2008-09 with revenues higher by about 14 -15 per cent and a single-digit increase in the earning per share (eps) just short of Rs 9.

Analysts point out that with nearly 80 per cent of capital employed in hotels, paper, the loss-making FMCG, and the non- value adding agri-trading businesses, the stock does not deserve a valuation of 17 times estimated 2009-10 earnings.

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