ITC: No new highs

Higher losses posted by the non-cigarette division and the lower profitability of the cigarettes business have resulted in the Rs 13,948 crore ITC’s net profit for the June 2008 quarter coming off by about 4 per cent.

Losses for the non-FMCG segment—foods, lifestyle and personal products – have nearly trebled to Rs 123 crore during the quarter from Rs 45 crore in the corresponding period of the previous year.

Thus, even though the company’s top line grew by a smart 17.3 per cent — the highest in several quarters — the operating profit margin came off by 500 basis points to 28.9 per cent, leaving the operating profit flat at Rs 1,130 crore.

ITC has been able to pass on higher levies imposed on cigarettes last year to consumers and has done well to grow the business at 5.7 per cent during the quarter. The fall in the volumes, which was expected because non-filter cigarettes are being phased out, was limited to just three per cent.

Should some smokers want to upgrade to filter cigarettes, ITC would be a gainer. However, the larger population of tobacco consumers may now find it difficult to upgrade to cigarettes because of the huge price differential between filter cigarettes and tobacco.

However, it’s the consumer division, which grew at just 28 per cent in the June quarter, that has disappointed the Street. This is the first time that ITC has reported a growth of less than 40 per cent and given that the base is still not large, the pace is not encouraging.

The branded packaged foods segment, in particular, isn’t quite displaying the kind of momentum that was expected. At the same time, the cost of being in the business of personal products appears to be high—spends to promote the personal products brands have ostensibly contributed to the losses.

ITC’s hotels, though appear to have been full, reflected in the higher 17 per cent top line and better margins up 380 basis points. However, evidence on the ground suggests that hotels are seeing a fall in both the average room rates as also occupancies in a slowing economy. That could mean lower profitability for this segment in the quarters ahead.

ITC is expected to end FY09 with revenues of Rs 16,200 crore and a net profit of Rs 3,500 crore. At the current price of 187, the stock trades at 20 times estimated FY09 earnings and appears to have priced in near-term upsides.