ITC: Cigarettes steal the show

The June 2009 quarter is the sixth consecutive quarter in which ITC has reported losses of around Rs 100 crore for the non-cigarette FMCG business. While the losses in themselves are about 19 per cent, what is disconcerting is that the foods segment isn’t quite gaining the kind of momentum that it should be.

Analysts believe this could be due do a focus away from glucose in the biscuits space and competitive pressures in the salty snacks segment. The personal products segment, however, continues to do reasonably well, albeit on a small base, but the 9.6 per cent growth in non-cigarette FMCG businesses is disappointing. Despite the cigarettes business posting a strong revenue growth of 14.4 per cent (net sales were even more impressive at 23 per cent), driven by 5-6 per cent rise in volumes, ITC’s sales for the June 2009 quarter were up just over 5 per cent to Rs 4,130 crore. The performance of hotels was expected to be weak given the downturn in the economy and resulted in a sharp drop in margins; occupancies and average room rates (ARRs) are expected to pick up in the second half of the year.

Meanwhile, ITC has been rationalising the agri-commodities business to focus on certain crops such as wheat and tobacco. This led to a drop in revenues of close to 50 per cent for the segment, though margins have expanded. The better profitability in cigarettes, agri-commodities and lower losses in the FMCG business helped push up operating profit margins for the company by 400 basis points to 33.6 per cent.

At Rs 240, the stock trades at 23 times estimated 2009-10 earnings and 20 times estimated 2010-11 earnings. After a couple of difficult years, when volumes were virtually stagnant, cigarettes should continue to do well with most of the action on the tax front behind it, and volumes should sustain at 4-5 per cent. Also, the non-cigarette FMCG businesses should see losses reducing as they build scale. However, analysts believe that some of the other businesses appear to be overvalued vis-a-vis peers and attribute a sum-of-the-parts value to the stock of Rs 237.