ITC: It's an all-round performance

The stock could see further re-rating, given that almost every segment has chipped in with better numbers.

The highlights of ITC’s sterling set of numbers for the September 2009 quarter are the strong performance of the cigarettes and agri businesses and smaller losses from the non-cigarette FMCG segment.

Not surprisingly, the stock closed 5 per cent higher at Rs 260 on Friday, with operating profit margins rising by 620 basis points year-on-year, to just under 36 per cent, on revenues of Rs 4,293 crore, up 14 per cent year-on-year.

The strong profitability pushed up the operating profit by nearly 38 per cent to Rs 1,537 crore. The cigarettes business has been remarkably resilient despite the ban on smoking in public places, the hike in value-added taxes in several states and the modest price hikes taken by the company.

In fact, the ITC stock was re-rated a few months back since cigarette volumes were seen to be growing at a good clip of 4-5 per cent and industry watchers believed the momentum would sustain. Moreover, the management has indicated that non-cigarette FMCG losses would be brought down to Rs 400 crore this year; while ITC posted a loss of around Rs 100 crore in each of six consecutive quarters, the loss in the September 2009 quarter was Rs 85 crore.

The company continues to enjoy a fair share of the branded packaged foods space and that’s evident from 13 per cent revenue growth during the September quarter. Brands across the various categories including staples, biscuits, confectionery and snack foods appear to be gaining salience.

Moreover, the company’s retailing venture is doing well after a recent restructuring exercise, while the personal care portfolio is expected to clock revenues of Rs 300--320 crore this year and should break even in 2011-12.

Also, the focus on more profitable cash crops such as wheat and tobacco is clearly paying off; the September quarter saw tobacco exports fetch good realisations.

Meanwhile, a sequential comparison of ITC’s hotels segment with the June quarter suggests that occupancies and average room rates (ARRs) may be improving, though it could be a while before they head back to levels seen before the global financial crisis broke out.

In the current year, ITC is expected to post revenues in the region of Rs 17,500 crore, while net profits are expected to come in at around Rs 3,800 crore, implying a growth in earnings of about 17-18 per cent over 2008-09.

While analysts have been valuing the stock on a sum-of-the-parts basis and attributing a price of between 235-250, it’s possible the September quarter numbers will result in a further re-rating.