ITC: FMCG blues

With operating margins under pressure, profits may grow at a slower pace this year.

ITC’s net profits may grow in single digits — 8-9 per cent — in 2008-09 before picking up momentum next year. The net profit in 2007-08 was Rs 3,120 crore; in the September quarter they rose just 4 per cent while in the June quarter, they had come off by 4 per cent. While revenues are growing at a reasonable pace, high costs are pressuring margins.

Revenues for the firm are expected to increase by about 16-17 per cent this year from Rs 13,946 crore in 2007-08. That would be better than the performance in 2007-08, but then the Street is pencilling in strong growth from the newer FMCG businesses, on a low base.

Cigarettes, which contribute nearly 60 per cent to total revenues, are doing fairly well though the impact of the ban on smoking in public places is yet to be seen. Volumes in the September quarter have been somewhat weak—down 3 per cent—perhaps because of the price hikes taken by the company in recent months. Industry watchers believe that the large price difference between filter and non-filter cigarettes may keep some smokers from switching to filter cigarettes.

The FMCG segment isn’t faring as well as expected —at around 30 per cent for the last two quarters, the sales performance is disappointing and suggests that the competition from multinationals in the soaps and shampoos space may be more than what ITC bargained for.

Moreover, branded packaged foods are growing at just 24 per cent. Also, the slowdown in the economy could result in lower occupancies and falling room rents at ITC’s hotels — the 10 per cent sales growth and the pressure on margins in the last quarter weren’t too encouraging.

Already, the operating margin, for the company as a whole, was lower by 240 basis points in the September 2008 quarter partly because of losses from the FMCG segment of Rs 116 crore. Given that ITC will need to maintain adspends since it is building brands, costs on this front will remain high. Which is why the bottom line will be under pressure until the FMCG business starts making money.