ITC: No huffing and puffing

The company managed to maintain margins at a time when they were expected to fall, courtesy higher excise on cigarettes.

ITC managed to grow its cigarette revenue around 12 per cent year-on-year in the June quarter, despite a 13-15 per cent rise in prices on account of a 17 per cent increase in excise duty in the Budget.

The growth rate was three-four per cent higher than expected. The management says changes in brand portfolio and new variants like Lucky Strike, Classic Menthol Rush and Gold Flake SLK boosted its presence in the premium segment, which is less sensitive to price changes. Even when revenues from other segments have been rising, the cigarette segment, which contributes around 58 per cent to revenues, remains an integral part. Analysts estimate that fixed costs of the cigarette business have risen 23 per cent over the past four years, while net cigarette revenues have risen almost 75 per cent. This is primarily due to rise in prices, as volumes have risen just 11 per cent from FY06 to FY10, reckon analysts. During the same period, the operating profit has grown more than 80 per cent. Therefore, the company’s earnings remain sensitive to price changes in the cigarette segment.

However, other segments have also been growing steadily. Non-cigarette businesses like branded packaged food, garments, stationery products, hotels, paper and agri continued to grow at an average rate of 27.6 per cent. Agri business reported highest growth of 43.5 per cent due to higher sales of soya, leaf tobacco and wheat. It was followed by a 32.5 per cent growth in the fast moving consumer goods (FMCG) segment on account of improved realisations and a richer product mix.

Cigarette, FMCG and hotels segments will be strengthened in the year ahead with a host of launches lined up. However, analysts seem to appreciate the company’s ability to generate cash. Citi analysts point that cash and liquid investments, at Rs 5,200 crore, accounted for 35 per cent of the total funds applied in the business. Profit before tax contributed around Rs 1,200 crore, while Rs 610 crore came though sharper working capital management.