The Hindu Business Line : ITC numbers show resilience to higher taxes

ITC’s financial performance for the quarter and year ended 2007-08 demonstrates that the cigarette business has held up well under the burden of new taxes, while its other FMCG forays are growing at a fast clip, amidst considerable competition. However, profit growth continues to be sedate as the company continues to spend aggressively on establishing its multiple new businesses.

Cigarettes resilient

Despite a 30 per cent increase in tax incidence on cigarettes by way of VAT, CST and other imposts, the business closed the year with a 7.7 per cent growth in gross sales. PBIT (profit before interest and taxes) margins on the business also expanded, indicating strong pricing power that has enabled the company to pass on the new taxes to consumers, without a big impact on offtake.

Going forward, the company plans to discontinue production of non-filter cigarettes (which have seen a sharp hike in duties in the recent budget). While this may cause a near term blip (non-filter segment contributes to a tenth of sales) in volumes and sales, it may prevent a significant decline in margins in this segment; ITC could also benefit from any upgrading to the filter cigarettes segment.

Traction in FMCGs

ITC’s other FMCG forays - mainly into branded packaged foods (57 per cent growth in FY08), driven by branded staples, biscuits, ready-to-eat and snack foods, have sustained a robust pace of growth, suggesting that the company has managed to gain market share in each of these categories. However, ITC continues on a high-spend path to growth, as overall losses on the FMCG business (excluding cigarettes) have swelled from Rs 201 crore last year to Rs 263 crore for 2007-08. Businesses such as paper and agri- commodities trading have improved their contribution to revenues, with accelerated growth in the March quarter relative to the first nine months of the fiscal.

Despite the scorching pace of growth in new businesses and profit margin expansion in many segments, ITC’s net profit growth at 15.5 per cent for full year (14 per cent for Q4) remains moderate, weighed down mainly by promotional spends on the FMCG businesses.

With the stock already trading at a PE multiple of 26 times its FY08 earnings, there may be limited room for re-rating relative to other FMCG companies in the near-term.

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