ITC: No shortage of smokers

Competition at the higher end of the Indian cigarette market is tipped to increase with the national rollout of Malboro and Philip Morris expected to bring in more global brands. However, that should expand the market and in any case, ITC’s volumes have been growing at 5-6 per cent.

Neither the higher VAT nor the modest price hikes have impacted volumes negatively and the weak monsoon too hasn’t hurt the business so far. That’s one reason why the ITC stock has been re-rated, the other reason being losses for the non-cigarette FMCG business should come down to around Rs 400 crore this year, with the profitability of the biscuits and retailing businesses improving.

In the June 2009 quarter, ITC reported losses of around Rs 100 crore for the non cigarette FMCG business, the sixth consecutive quarter of losses. But ITC’s personal care portfolio revenues, which were around Rs 200-250 crore last year are expected to grow to around Rs 300-320 crore in the current year, according to analysts, and the business should break even sometime in 2011-12, once it achieves scale.

Currently, high ad spends are eating into profits, though industry watchers say ITC has picked up a share of 3.5 per cent of the soap market with both Vivel and Superia doing well. The low brand loyalty in soaps, especially at the lower end, will however, remain a challenge for the company. Also, the high-end Fiama brand appears to be facing some competition from Hindustan Unliver’s Dove, which has gained market share.

ITC’s retailing business has been restructured and that should pay off; already, with the economy recovering, same store sales are picking up. Indeed, the better environment is helping the hotels business too with both occupancies as well as Average Room Rates (ARR), improving though margins would continue to be under pressure for some more time. That apart, the rationalisation of the agri-commodities business, with a focus on more profitable crops such as wheat and tobacco, will help expand margins for this segment.

In fact, the impact of some of the changes was seen in the June quarter when ITC’s operating profit margins rose 400 basis points to 33.6 per cent. Analysts have a price target of between Rs 255 and Rs 265 for the stock which currently trades at Rs 234.