News Analysis

ITC Q1FY21: FMCG saves the day, but remains low on profitability

Parvatha Vardhini C BL Research Bureau | Updated on July 25, 2020 Published on July 25, 2020

File photo   -  Rupak De Chowdhuri

ITC does not command premium valuations like pure-play consumer companies, given its dependence on cigarettes rather than staples for profits

Much like other FMCG players such as Britannia and Hindustan Unilever which saw the foods segment doing well in the June 2020 quarter, ITC’s food portfolio has also played white knight in an otherwise dull quarter for the company.

Cigarettes dull, others shine

ITC’s FMCG business consists of cigarettes (which has contributed to about 32 per cent of total revenues during the quarter) and other FMCG products such foods, personal care, matches & incense sticks and stationery products, which brought in another 28 per cent of the total revenues. The cigarette business has struggled due to the lockdown restrictions and inability to commence manufacturing until mid-May. Consequently, segmental revenues for cigarettes is down 30 per cent over the June 2019 quarter and segmental profits, down by 39 per cent. On the other hand, the company put up a good show in the ‘FMCG – others’ segment with revenues going up by 10.3 per cent and segmental profits, by 60 per cent. What has worked in favour of ITC is the strong demand for staples such as ‘Aashirvaad’ atta, and packaged foods such as ‘Yippee!’ noodles, ‘Sunfeast’ biscuits and cakes, ‘Aashirvaad Svasti’ range of dairy products as well as the ‘B Natural’ range of juices. Hygiene products such as hand sanitisers, handwash (Savlon) and floor cleaners ( Nimyle) also saw good off-takes. Food and hygiene products constitute three fourths of the ‘FMCG-others’ portfolio for the company.

Also read the article about the ITC results

Outlook

While FMCGs (including cigarettes) bring in 60 per cent of the revenues, cigarettes bring in over 80 per cent of the profits for ITC and also scores on the margin front. 'FMCG – others' continues to remain low on profitability after having turned the corner only in 2013-14. Segmental margins stood at 3.7 per cent for 'FMCG-others', compared with the 61.1 per cent margin clocked by the cigarette business.

For these reasons, ITC does not command premium valuations like pure-play consumer companies. It trades at 17.16 times its trailing twelve-month earnings now, compared with the 50-70 times trailing earnings that other FMCG majors such as HUL, Dabur, Britannia, Marico and Godrej Consumer trade at. In-home consumption is expected to continue to be robust in the near-term and hence, prospects for the 'FMCG-others' business look promising. However, given that ITC has been a late entrant and competes with well-entrenched players in the listed space, the valuation gap may not narrow soon, unless the profitability for this segment improves.

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Published on July 25, 2020
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