ITC fires expectations on all counts

Steep price hikes in cigarettes and robust growth momentum in other FMCG businesses helped ITC exceed analysts’ expectations in September 2012 quarter (Q2) and report better financial performance than June 2012 quarter (Q1).

Total net operating income grew close to 19% (expectations of 13-16%) to Rs 7,227 crore as cigarettes business and other FMCG business (which form about 70% of total revenues) reported significantly better than revenue growth of 17% and 26.4% respectively. While agri business (18% of sales) reported highest growth of 41%, hotels (around 3%) and paper (6.4%) disappointed.

As expected, price hikes in cigarettes helped sustain segment margin (32.4%) and lower losses in other FMCG business (Rs 30 crore compared to Rs 56 crore in the same period previous year) helped improve operating profit margin by 73 basis points to 37.2%. Share of cigarettes in total earnings before interest and tax has jumped 300 basis points to almost 80%.

Net profit growth of 21.2% (Rs 1836 crore) was also better than expected thanks to good operating performance and stable interest and depreciation charge. A lower effective tax rate also helped in higher profit growth.

Investors, who had low expectations, have cheered the company’s financial performance and the stock is up 2% while Sensex is marginally down (0.6%) and BSE FMCG index is up 0.84 %. With exhibition of strong pricing power, analysts should be less worried about cigarettes sales growth going ahead.

Venture into entry level category (64 mm cigarettes currently test marketed and launch expected in the current quarter) will help prop up volume growth and further price hikes (if any) will help sustain segment margin. In short concerns of cigarettes business is behind and stock, which has underperformed Hindustan Unilever and BSE FMCG index in last six months, should see a re-rating. Further reduction in losses of other FMCG business will be an icing on the cake.