ITC-Equity Master say to sell

While regulatory headwinds have led to a moderation in ITC's cigarette business, the impact has been partially offset by the brisk growth in its FMCG business. Despite a structural rise in taxation, ITC has been able to expand margins in its core cigarette business, thanks to the huge pricing power enjoyed by it. Even cigarettes launched in the new filter segment (cigarette length not exceeding 65 mm) have met with reasonable success and the company is rolling out the products across the country. The company has been consistently reducing losses in the FMCG segment. All these factors have enabled ITC to grow its topline as well as earnings at a robust pace. 

At the current price of Rs 287, the stock trades at a P/E multiple of 23 times its estimated FY15 earnings. At current valuations, the stock still appears overpriced and we maintain a SELL view on the stock.

Cigarettes pull ITC off growth plateau Published: Saturday, Jan 19, 2013, 10:00 IST  By Nupur Anand | Place: Mumbai | Agency: DNA

After four quarters of stagnant growth, conglomerate ITC, the country’s largest cigarette-maker which also runs hotels and is an FMCG and paperboard major, beat street estimates as its October-December profit jumped 21% up on-year to Rs2,050 crore on sales of Rs7,630 crore (up 23% on-year). Four key factors explain the better-than-expected performance: pan-India launch of smaller (64mm) and cheaper cigarettes during the quarter; welcome growth in cigarette sales volume after a sluggish July-September quarter; a 7% price hike on its mass-selling Gold Flake brand which accounts for about 35% of ITC’s cigarette sales; and pruning of administrative and other costs. ITC, which is 30.8% owned by British American Tobacco, makes four out of every five cigarettes sold in India, but does not reveal cigarette volumes. Well-informed analysts, however, estimated a 1.5-3% rise. Cigarette margins being as high as 35-50%, additional volumes must have boosted profit significantly, they said. That performance came against a backdrop of higher taxes and tighter anti-smoking regulations in several Indian states which impacted ITC’s sales from a long-term perspective.  “The cigarette industry in India continues to be impacted by a discriminatory taxation and regulatory policy framework,” said ITC. Net sales from ITC’s non-cigarette consumer business grew 30% on-year to `1,780 crore. The FMCG segment’s loss narrowed by 49% on-quarter to `24 crore (from `47 crore), suggesting that in spite of the economic slowdown, sales of wheat flour, biscuits and snacks recorded a robust 34-36% growth, said an analyst with a foreign brokerage said. Naveen Kulkarni, analyst at Phillip Capital, said “If the ITC tries hard, the FMCG loss can be stemmed in a couple of quarters.” Analysts have been estimating that ITC’s FMCG business will break even by the end of next fiscal. ITC’s agri business grew 43% on-year, but hotels continue to be a drag with no signs of a turnaround. V Srinivasan, analyst at Angel Broking, said ITC’s paperboard business has been under pressure as well due to rising costs of raw material, particularly wood. Impressive successive quarterly shows have earned the ITC stock a ‘buy’ rating from most analysts. Shares gained about 0.67% to close at `287 in Mumbai on Friday.

ITC’s December quarter profit rises 21%

Net revenue grows 23% to Rs.7,627 crore on robust sales of cigarettes, farm commodities, consumer goods

Manish Basu

First Published: Fri, Jan 18 2013. 01 36 PM IST

Revenue from consumer goods such as food, apparel and personal care products rose 30% to `1,782.70 crore. Loss from the segment during the quarter was cut to `23.98 crore from `46.63 crore last year, and from `30.31 crore in the September quarter. Photo: Indranil Bhoumik/Mint

Updated: Sat, Jan 19 2013. 12 46 AM IST

Kolkata: ITC Ltd posted a 20.6% increase in net profit for the December quarter as it cut losses in the consumer goods business and sustained a high operating profit margin in the cigarette segment.

Net profit rose to Rs.2,051.85 crore, or Rs.2.57 per share, for the three months ended December from a year ago. Net revenue grew 23% to Rs.7,627 crore, thanks to robust sales of cigarettes, farm commodities and consumer goods such as food and personal care products, the firm said in a note on Friday.

Operating profit margin narrowed 75 basis points to 36.4% from the year earlier, Angel Broking said in its earnings analysis. One basis point is one-hundredth of a percentage point.

Investor reaction indicated earnings were largely in line with expectations. The stock rose 0.67% to Rs.287.05 on BSE. The benchmark Sensex rose 0.38% to 20,039.04 points.

Net revenue from cigarettes rose 13% to Rs.3,657.36 crore, while pre-tax profit from the segment jumped 21% to Rs.2,233.54 crore. Sequentially, cigarette sales by value grew 8%.

Operating margin from cigarettes (calculated on net revenue) was at 61.06%, marginally lower than 61.4% in the quarter till September.

Though a well-diversified conglomerate with interests in hotels, farm products and paper, 75% of ITC’s pre-tax profit of Rs.2,957.19 crore in the quarter ended 31 December came from cigarettes. This is a shade lower than the previous quarter, in which cigarettes contributed 78% of pre-tax profit.

The company said its newly launched cigarettes—less than 65mm in length—were being rolled out nationally.

Revenue from consumer goods such as food, apparel and personal care products rose 30% to Rs.1,782.70 crore. Loss from the segment during the quarter was cut to Rs.23.98 crore from Rs.46.63 crore last year, and from Rs.30.31 crore in the September quarter.

The company could break even in the consumer goods segment in two-three quarters, said V. Srinivasan, an analyst at Angel Broking.

Though revenue from the hotel business grew 11% to Rs.309.46 crore from the year ago, pre-tax profit plunged 45.45% from last year to Rs.55.49 crore. The company said the segment was affected by poor tariff due to a spurt in the supply of hotel rooms and a decline in tourist traffic.

Revenue from farm commodities such as leaf tobacco, soya and wheat jumped 43.4% from last year to Rs.1,630.97 crore because of improved exports. Net profit from the segment rose 21.85% to Rs.172.63 crore from the year earlier, but dropped 33.5% sequentially.

Revenue from the paper and paperboards segment at Rs.1,061.55 crore was 8.5% higher than the same period a year ago, while pre-tax profit from it remained almost unchanged at Rs.228.58 crore, showing a decline in operating margin. Compared with the September quarter, net profit from the paper and paperboards segment was 19% lower.

Once again, the topic of discussion in offices, during tea breaks, or at social gatherings is centred about how much the stockmarket has gained and how everybody is investing in equity. It is the same pattern being repeated all over again.

Herd mentality can hurt you

Since your financial needs are different, it is important to have a strategy that is tailor-made to meet them

Steven Fernandes / Jan 20, 2013, 00:44 IST

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Lata Desai, a school teacher in Pune, has recently started a monthly recurring deposit scheme with her jeweller. Her inspiration: A neighbour, who told her that a lot of people were doing this, because gold prices have gone through the roof. Desai hopes to buy jewellery by saving small amounts of money this way. The thought that this jewellery, accumulated over the years can become a good investment was also an attractive proposition for Desai.

Similarly, Rajeev Gupta, a vice – president with an FMCG firm recently sold all the equity investments he had been holding for the last two years, as they had not performed as per his expectations. He invested the money in a real estate project along with his friends who convinced him that real estate was the best investment currently. They based their decision by the returns generated by real estate in the last couple of years.

It is not uncommon to find such instances. Often we are influenced by the latest trends and, thereby, end up investing in assets which might be in vogue at that point of time. We believe that since a lot of people are doing the same thing, we won’t be wrong.

TO CHOOSE THE RIGHT PRODUCT

Select investment products based on your goals   Do thorough research about the past performance of the product   Remember that higher returns come with higher risks   Don't fall for sales pitch by distributors

This behaviour can be attributed to the lack of financial literacy. It is seen even among investors in countries which have highly sophisticated financial markets, like the USA, for instance. This is the same reason why even Ponzi schemes succeed, as people get comfort in the fact that they are in the company of several like minded people who have invested and, therefore, the element of risk is also perceived to be lower.

Take the case of equity markets. When equity markets were going through a bad patch and most days the indexes are falling, the tendency of most retail investors was to sell and get out. Their fear was that it may fall further, thereby increasing losses.

Similarly, when equity markets start rising, investors who had bought gold and real estate, failed to see the signs of the revival in the equity market and continued to ignore it. But now that the index has moved up to dangerously high levels, it is attracting the attention of investors once again. Now investors are talking about putting money in equities once again and hoping that they don't miss the bus.

Once again, the topic of discussion in offices, during tea breaks, or at social gatherings is centred about how much the stockmarket has gained and how everybody is investing in equity. It is the same pattern being repeated all over again.

What are the consequences? 
Even though you have a very good intention of saving and investing, following the trend in investing without doing the due diligence can make you invest in the wrong assets or products, which eventually can lead to losses or inadequate returns. Some of the schemes may not even provide liquidity and if you have committed a bigger amount, you may end up getting into debt in case you are not able to liquidate those investments during a major emergency. How do you avoid such situations:
* Writing down your financial goals along with their time frame and value, can help you make the right start in your financial life. Based on the goals and time horizon, appropriate assets can be selected. For example, if you are planning for your child’s post graduation and if it is nearly 10 years away, then one needs to invest a major amount in equity. Similarly if funds are required for your daughter’s marriage after two years, then you should select safer assets such as fixed deposits or debt funds where there is surety of capital as well as fixed returns.

* Getting information on the product or asset and its past performance is necessary as it can give an insight into how that asset performed over different periods. With so much information available online nowadays, it is not difficult to find such information. If you don’t have the time then get it evaluated by a reliable advisor.

* If the returns expected are more than those offered by fixed deposits, then there is an element of risk involved. Ask yourself if you are in a position to take that risk in the pursuit of higher returns.

* Don’t make haste as the world is not going to end tomorrow. Sometimes the product seller or distributor may convince us to invest in a particular product by saying that the period for investing is going to end soon, or the price of the asset will rise as there is high demand. Most of us fall in this trap and we then don’t spend time to evaluate or verify whatever has been told to us else we might miss the opportunity. A little time spent on evaluating the advantages and disadvantages of the product can save you from future hassles.

ITC, the Indian MNC of the future

HARISH BIJOOR

   

1

Food fiesta, the ITC way! _ Arunangsu Roy Chowdhury

Its activity in the foods segment has other companies looking old-fashioned.

Can you think of an Indian multinational which is going to create brands for the world at large and dominate the future?

_ Gopi D., Hyderabad

Gopi, that’s simple.

I put my weight behind ITC, which has stolen the thunder in this space. ITC has done a brilliant job in the market for foods. As more and more categories get covered, existing players are emerging to be seen as fuddy-duddies in this category. Existing competitors need to get more aggressive and bring more of their “in-development” products into the market if this imagery is to be contested. There is a need to fast-pace and fast-track new launches in the foods category. The current sets of products will offer growth within the category, as growth potential from every other category outside will keep going to companies such as ITC. So watch out for this company and what it does in the next several years.

ITC net up 21% in third quarter on robust sales

• 
  Y.C. Deveshwar, Chairman, ITC Ltd (file photo)
• 

Kolkata, Jan 18: 

FMCG major ITC Ltd posted 21 per cent growth in net profit to Rs 2,052 crore for the third quarter ended December 31, 2012, against Rs 1,701 crore during the same period last year.

Net sales grew by 23 per cent to Rs 7,627 crore from Rs 6,195 crore.

According to V. Srinivasan, research analyst, FMCG – Angel Broking, the higher profits have been spurred by an all round growth across its various sectors including cigarette, non-cigarette FMCG and agri-business segments.

On a sequential basis, profits increased by 12 per cent from Rs 1,836 crore during the quarter ended September 30, 2012.

Shares of ITC closed at Rs 287.05, up by 0.67 per cent on the BSE on Friday.

While the volume growth in cigarettes has been about 1.5 per cent, the margins from the segment has increased by about 400 basis points, said a report by Motilal Oswal Securities.

“Their new cigarette launch - 64 mm segment - is shaping well and the company intends to expand to other category,” the report said.

Non-cigarette FMCG

Revenues from FMCG business stood at Rs 5,440 crore with the cigarettes category accounting for Rs 3,657 crore.

During the quarter under review, ITC managed to trim losses from the FMCG business to Rs 24 crore, against a loss of Rs 47 crore during the same period last year.

“The company is close to achieving break even in their FMCG business in the next two to three quarters,” Srinivasan said. The growth in agri-business division was aided by exports of wheat, leaf tobacco and soya, the release said

shobha.roy@thehindu.co.in