The Hindu Business Line : ITC: Hold

A healthy investment book, sustained cash flow from operations in the cigarettes business and robust revenue growth in its non-cigarettes business augur well for its long-term growth prospects.

Leveraging distribution network
Embracing rural markets
Acquiring an FMCG tilt
A position of strength in hotels
Big-ticket investments in paper

Leveraging distribution network to capitalise on rising rural spending power - Parth Sanyal

Investors can retain their holdings in ITC (Rs 190), which trades at about 34 times its trailing twelve-month earnings. Appreciation in the near term appears unlikely.

It may be appropriate to hold the stock with a two/three-year perspective to benefit from growth opportunities.

The money-spinner

Buoyed by a strong distribution network ITC is likely to retain its market share in the cigarettes business; the ban on advertisements is likely to work in favour of ITC thanks to the recall factor.

The company's reliable distribution network also ensures superior inventory turnover than its peers.

Cash flows from this business are susceptible to a lower degree of volatility as compared to other FMCG categories.

Though scope for growth in this business is minimal with saturated volumes, it is expected to remain a money-spinner given its low capital expenditure requirement.

Price hikes by the company on most of its popular brands in both the filter and non-filter segment are expected to bring in additional revenues that will more than offset the recent hikes in excise duty.

The company with an intention to replicate its dominance in the cigarettes business acquired in July 2005, through its subsidiary, Russel Credit, a controlling stake in Wimco, which makes matchsticks.

Fledgling FMCG play

This business division, comprising branded packaged foods, lifestyle retailing, greeting cards and stationery and safety matches and incense sticks, has been growing at a stupendous rate.

To replicate its dominance in the cigarettes business, ITC acquired in July 2005, through its subsidiary, Russel Credit, a controlling stake in Wimco, which makes matchsticks.

ITC has been on an expansion spree in the packaged food business segment introducing brands, such as Sunfeast Pasta. Lack of manufacturing facilities has been a negative for its packaged foods business, as the company operates on low margins.

ITC plans to set this right by setting up in Uttaranchal a Rs 100-crore biscuit manufacturing facility, which is to be completed in the next six months. Margins are likely to improve in the biscuits segment with the commissioning of this plant. Biscuits would remain a thrust area for ITC; supported by the sustained cash flows from the cigarettes business and the strong distribution network, it is likely to pose a threat to the dominance of Britannia and Parle.

Though Wills Lifestyle has been a drag on earnings, the expansion of the retail sector that would increase its customer base and the growing popularity of the John Players brand should help it stage a turnaround in this business.

Riding travel boom

ITC's hotels division outperformed its peers in the hospitality industry during the nine months ended December 2005 as revenues surged ahead by 31 per cent.

The growth has been helped by diversifying into the operating tie-up model in Tier-II cities. Earnings and revenue contribution from this business, however, continue to account for less than 10 per cent of the total.

ITC plans to expand its operation in Chennai and Bangalore. A buoyant economy is expected to boost business travel as also a relatively less-tapped international tourism in India compared to Asian peers. This should provide revenue growth for the company.

Other businesses

There is scope for volume and revenue growth in its paper and paperboard business. An improvement in margins is also likely with the elemental chlorine free (ECF) paperboards facility which is just into its fourth year.

ITC has lined up investments worth Rs 2,500 crore in the higher value add ECF paper business.

This business division, which also includes its packaging section, is likely to maintain a 20 per cent revenue and earnings growth in FY-07.

The agri-business, which consists of the e-Choupal network and the leaf tobacco division, has been a mixed bag in recent quarters.

Though the division has registered a sharp rise in revenues in the nine-month ending December 2004, its earnings were, however, lower by 13 per cent. The dip appears to be a temporary blip and investors may look forward to earnings growth from this division, which acts as an interface between farmers and its FMCG division, besides catering to other FMCG players.

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