Re: ITC.....Thread
RAJESH DESAI
| ITC raises cigarette prices after VAT hike |
Wills Navy Cut now costs Rs 44 for a pack of 10. This is a rise of 10 per cent over Rs 40. The jump in price of the Classic was also in the same range. But, the overall pricing action has helped ITC maintain a sizeable price difference between its various brands and its rivals. This avoids cannibalisation, say market experts.
For instance, with Classic at Rs 55, or Rs 110 for a pack of 20, Gold Flake Kings, another ITC brand, which competes in the same segment, can comfortably sit at Rs 96 for a pack of 20 or Rs 48 for a pack of 10.
While Wills Navy Cut does not have another ITC brand in the same segment, industry sources say the current move is significant. "The company could also increase the price of the Gold Flake portfolio given the way it has taken up the prices of Classic and Navy Cut," said a Mumbai-based fast moving consumer goods analyst.
Gold Flake, which straddles the premium and economy ends of the market, hasn't seen a price rise for some time now. Its portfolio contributes almost 43 per cent to ITC's cigarette revenues, followed by Navy Cut at 11 per cent and Classic at 10 per cent, respectively.
The balance 36 per cent, cumulatively, comes from brands such as Bristol, Capstan, Scissors, Burkley, Bensen & Hedges etc.
Gold Flake Kings, Classic and Marlboro are 84-millimetre-size brand, while Gold Flake Regular is 69 mm in size. Priced at Rs 98 for a pack of 20, Marlboro is marketed by Phillips Morris, which is a partner of Godfrey Phillips in India. Gold Flake Regular, on the other hand, competes with the latter's Four Square in the 69-mm segment.
But the price difference again is substantial. Gold Flake Regular is priced at Rs 38 for a pack of 10 to Four Square's Rs 29 for the same pack size. ITC's Bristol, in fact, is now a rupee less than Four Square at Rs 28 for a pack of 10.
Chairman Speaks - 2011
Click here for video on demand of Chairman's AGM speech 2010
100th Annual General Meeting
Making Markets Work for Green GDP and Sustainable Livelihoods
Address by Chairman, Shri Y C Deveshwar
I have great pleasure in welcoming you today to the 100th Annual General Meeting of your Company.
On this historic milestone, I would like to once again express my warmest greetings and thank you most sincerely for your sustained encouragement, faith and support. Your continued trust and goodwill provides us immense strength as we move ahead to an even more fulfilling future.
To commemorate this momentous occasion, the Board of your Company has recommended a Special Dividend of `1.65 per share in addition to a Dividend of ` 2.80 per share for the year ended 31st March, 2011. This recommendation once again acknowledges, with gratitude, your long-standing and continued support.
As in earlier years, I would like to first present to you the highlights of your Company’s Triple Bottom Line performance during the year gone by.
Triple Bottom Line Performance:
(Figures in ` Crores)
ITC: Financial Highlights 1996-2011
1996
2011
Gross Income
5,188
31,423
Profit After Tax
261
4,988
Return on Capital Employed (%)
28
43
Net Assets Employed
1,886
16,854
Net Worth
1,121
15,953
Market Capitalisation*
5,571
1,60,636
CAGR in Total Shareholder Returns in the period 1996-2011 : 25.6%
*As on 22nd July, 2011
Your Company’s progressive investments in multiple drivers of growth continued apace together with sustaining high quality top-line and earnings growth. Gross Income in the Centenary Year grew by 16.9% to over ` 31,400 crores. Pre-tax profits increased by nearly 21% to over ` 7,260 crores while Post-tax profits registered an increase of nearly 23%.
I draw deep satisfaction that your Company is today acknowledged as one of India’s most valuable corporations. Market capitalisation, which stood at ` 5,570 crores in 1996, has multiplied 28-fold to cross ` 1,60,000 crores. Profitability measured in terms of Return on Capital Employed, also improved substantially from 28.4% to 43.4%. Total Shareholder Returns, measured in terms of increase in market capitalisation and dividends, have grown at a compound rate of 25.6% per annum during this period.
Even more significantly, your Company has demonstrated outstanding achievement in the environmental and social dimensions of the Triple Bottom Line. For the 9th year in a row, your Company has sustained its ‘water positive’status, creating freshwater potential that is twice its consumption. For the 6th year in succession, ITC is ‘carbon positive’ sequestering twice its emissions. It has also been ‘solid waste recycling positive’ for 4 years now. As a result, your Company is the only enterprise in the world of comparable size to have achieved and sustained these three global environmental distinctions.
In addition, the inclusive strategy that defines your Company’s innovative business models has also led to the creation of sustainable livelihood opportunities for over 5 million people.
Today, it gives me immense pride to announce yet another global distinction achieved by your Company. I am delighted to place on record, at this historic Annual General Meeting, that this year, all the luxury hotels of ITChave been accorded the LEED Platinum rating under the aegis of the US Green Building Council. This achievement makes ITC Hotels the “greenest luxury hotel chain” in the world and places your Company at the forefront of global environmental stewardship.
I will dwell further on the sustainability initiatives of your Company a little later as part and parcel of the subject of my address today, namely, “Making Markets Work for Green GDP and Sustainable Livelihoods.”
Towards Sustainable Economies :
Fostering Green GDP and Inclusive GrowthThere is an increasing realisation, the world over, that development in its truest sense can only take place when economic growth fosters social equity. For developing nations in particular, growth must translate into the creation of sustainable livelihoods and replenishment of scarce environmental resources. Therefore, a constructive public-private-people partnership for socially responsible growth is critically important and must also occupy a larger space in corporate strategy. Only then can we secure the future and leave a better tomorrow for the coming generations.
A few weeks ago, the Ministry of Corporate Affairs, Government of India unveiled the National Voluntary Guidelines on Social, Environmental & Economic Responsibilities of Business. The new guidelines build upon the Corporate Social Responsibility Voluntary Guidelines released in 2009 and reflect a conscious shift from what is generally termed as CSR to a more encompassing concept of “Responsible Business.” The guidelines cover an extensive landscape and the Ministry must be lauded for this comprehensive effort. From the enunciation of basic Principles to defining a broad set of Indicators for self-assessment, it also rightfully provides a Reporting framework for making disclosures to stakeholders. These guidelines indeed mark an important first step towards a movement for greater corporate contribution in creating societal welfare. Evidently, these recommendations have been inspired by a larger and urgent underlying concern.
It is now widely acknowledged that emerging nations like India will drive growth in world GDP in the years ahead. Indeed, there is already a major shift in the axis of economic power towards Asia as advanced nations grapple with the after-shocks of a deep recession. However, is this aspiration of emerging economies to grow at near double-digit rates a viable long-term proposition? Are the traditional factors of production and growth solely capable of delivering this high trajectory of growth, so critical to meet the growing needs of their massive population? Is there a larger lesson in the deep-rooted recession that overwhelmed the advanced nations and put the brakes on in their pace of progress?
There seems to be growing evidence that limits to future growth will be defined more by vulnerabilities flowing from social inequities, environmental degradation, and climate change than by any other economic factor. Admittedly, these are global challenges and a result of faulty economic growth models pursued over decades across the world. Yet, these concerns are very real today and going forward can seriously constrain the fulfillment of a nation’s aspirations.
The impatience of civil society with economic models that have not delivered social equity is apparent in the growing intolerance for injustice, corruption, bad governance and uncaring corporate behaviour. Perhaps not without reason. The magnitude of social imbalances across the world is indeed alarming. Today, the richest 1% of adults control 43% of the world’s assets. The bottom 50% has access to only 2% of world’s assets. The UNDP Human Development Report 2010 says that around 1.75 billion people, living in as many as 104 countries, are in a state of “multi-dimensional poverty”, a new indicator that reflects acute deprivation in health, education and standard of living. In addition, indiscriminate growth without environmental replenishment has destroyed a sizeable portion of the world’s eco-systems. The spectre of climate change will inexorably aggravate these miseries even further. Its impact will also be the most severe on the world’s poor, an overwhelming majority of whom live in developing countries and are dependent on agriculture for their livelihoods.
By 2030, a mere two decades from now, the world’s population will have touched 8 billion. By that time, 3 billion people are estimated to live in areas of extreme water scarcity. The world will have to produce more food in the next 20 years than it has produced in the last 3000 years to feed this large population. Energy needs will increase exponentially over this period with rising incomes and urbanisation. Clearly, a rising population of such magnitude will pose new challenges as the global demand for food, fuel, feed, and fibre increases with a consequent reduction in arable land and water availability.
It is clear that we cannot address the challenges of tomorrow with the policies and strategies of yesterday. The global challenges of food, energy and water security, climate change and sustainable livelihood creation will need far more impactful and innovative solutions. It is no longer a debate about making lifestyle choices, it is about finding life-changing solutions required for the world’s poor and most vulnerable.
Unfortunately, conventional methods of calculating economic growth, such as the GDP, does not take into account the costs on account of environmental depletion, degradation, or loss of biodiversity. It is said that what does not get measured does not get managed. As a result, economic growth mostly reflects the creation of material wealth, largely ignoring the environmental and social costs of that growth process.
The growing discourse on sustainability challenges has sparked a welcome attempt to recast traditional means of calculating economic growth. It is increasingly being felt that GDP calculations must now account for the cost of environmental degradation as well as its replenishment. This new approach, popularly known as the Green GDP, is expected to reflect the true dimensions of economic growth. It will also provide policymakers as well as civil society a realistic assessment of issues that need to be addressed for a more sustainable growth of the economy.
India’s sustainability challenges mirror the global challenges and are indeed even more daunting. The UNDP Human Development Report places India 119th out of 169 countries. It says that around 55% of the population suffers from widespread deprivation. Nearly 421 million live in multi-dimensional poverty. In addition, with nearly 17% of the world’s population, India has just 1% of global forest resources and 4% of water. Already, half of the country’s arable land is water-stressed. Climate change for the predominantly agri-based rural population means future loss of livelihoods apart from escalating the problem of food security. To compound matters, India will add another 500 million people by 2050. The pressure on limited resources will become even more acute.
It is abundantly clear that the challenge before India is to enlarge the size of its Green GDP while accelerating the creation of Sustainable Livelihoods. Long-term sustainability of growth of the Indian economy will depend on how effectively this twin task is achieved.
How do we therefore begin to engage on such a mammoth task ? Surely, it is not a task that any segment of society can accomplish in isolation. Challenges of this magnitude can best be resolved through collective action by all stakeholders in an economy. It calls for multi-dimensional efforts on the part of Government, Business and Civil Society – individually and collectively. The Government of India has already initiated some laudable efforts. The Missions launched under the National Action Plan on Climate Change, the initiative on Energy Certificates by the Bureau of Energy Efficiency, schemes like the Mahatma Gandhi National Rural Employment Guarantee Act and programmes such as the Bharat Nirman will undoubtedly contribute significantly to the goal of sustainable and inclusive growth.
The Co-Creation of Societal Value : Role of Business
It is, however, my belief that innovative energies of business can also be much better harnessed to deliver meaningful solutions in co-creating societal value. Businesses are represented in the frontline of economic activity with numerous touch points in society. Their physical presence in communities around their operations gives them an opportunity to directly engage in synergistic business activities that generate livelihoods and add to the preservation of natural capital. More importantly, they possess valuable managerial expertise to guide and implement projects of societal value and at far lower incremental cost to the economy. As a result, effective corporate participation in the delivery of social projects can lead to a far more optimum utilisation of scarce national resources.
Unfortunately corporates are often viewed through a very narrow lens that concentrates only on its ability to extend financial support to socially relevant projects. This approach ignores the immense transformational capacity of business in innovating business models that can synergistically deliver economic and social value simultaneously. As a result, on issues of corporate social responsibility, there is a disproportionate focus on outlays rather than on outcomes. Consequently, the “capacity to pay” far outweighs the “capacity to do good”. The net result unfortunately is grossly sub-optimal.
This misplaced perception is regrettably finding expression in proposals to measure CSR contribution in terms of financial expenditure. A case in point relates to the proposal to prescribe mandatory spends of 2% of net profits on CSR. Though well intentioned, such a proposition is not merely unimaginative in terms of its capacity to unleash corporate energies but also one with potentially undesirable consequences. Prescribing outlays is akin to an additional tax on corporates that seeks ‘compliance’ rather than ‘commitment’ in making social investments. In unscrupulous hands, such an expenditure obligation will only encourage creative accounting to channelise funds for partisan purposes. Such prescriptive spends are unlikely to tap the larger managerial and creative capacity of business organisations to create self-sustaining and enduring social upliftment. On the other hand, it may potentially enlarge the scope for corruption and personal gain.
If the focus on outlays persists rather than on outcomes, it is a matter of time before large investments are necessitated to create an enforcement machinery to ensure that funds are not diverted away from desired outcomes, rendering it a zero-sum game. I am sure that many in the business fraternity will be particularly relieved to note that the new National Voluntary Guidelines do not contain any allusion to such outlays.
Global research by renowned experts such as Prof Michael Porter and Mark Kramer of Harvard have established that societal value creation delivered through a strategic business context is more meaningful and scalable. The focus of strategic CSR is on outcomes that enhance the business context and simultaneously add value to the social dimension. A focus on outcomes spurs proactive innovation to deliver meaningful social interventions optimising resources and capacities at hand.
Incentivising outcomes, therefore, is the key to drive business innovation and managerial capacity for societal value creation. Unfortunately, it is in this area that policies and systems are woefully inadequate. As things stand today, Responsible Business practices do not evoke significant consumer support, sizeable investor interest or preference in Government policies. As a result of this ambivalent market response, corporate social action attempts the minimum, often defined by compliance to regulations, and does not ignite wider innovative capacity to accelerate social benefit. In a sense, at the current moment, the market does not differentiate between a company that follows strong sustainable business practices and one that does not. This absence of an effective incentive and reward framework for sustainable business practices is today the largest barrier in harnessing the innovative capabilities of Business.
A paradigm change can however take place if strong market drivers emerge to support corporate action for societal development. Sustainable business practices will then become an essential part of the attractiveness of the business proposition and in turn translate into a financial dimension for such companies. Delivering Green GDP and an Inclusive growth model will then become an integral part of corporate strategy and a part of balance sheet deliverables. Societal value creation will no longer be left to corporate conscience alone, but will be defined by market forces.
How do we then create a market that contributes to corporate action for Green GDP and Inclusive growth ? How can we unleash new competitive forces that will favour Responsible Business ? What is it that will continuously spur innovation, creativity, scientific capacity and temper, and also ignite entrepreneurial dynamism ?
Fortunately, there are answers and viable solutions. I have shared some of these thoughts earlier in the course of my addresses in previous Annual General Meetings. Given that these issues have now attained greater prominence, particularly with the Government enunciating new Guidelines for Responsible Business, it will be worthwhile to look at those propositions in fresh light.
Mobilising Markets for Green GDP and Sustainable Livelihoods
To my mind, the most powerful force that can bring about a dimensional change in societal value creation is the power of consumer franchise. I use the term ‘consumer’ in a broader context to include all market participants such as the Government, both in its role as a regulator and a buyer, customers, investors, employees, job-seekers and other segments of civil society.
Strong multipliers will emerge when enlightened consumers exercise a preference in favour of Businesses that contribute significantly to environmental and social sustainability. By expressing a direct and distinct choice for the products and services of such enterprises, consumers will unleash a multitude of positive actions that will eventually create greater shareholder and societal value. For one, corporates will need to vie for a larger share of the consumer spend by positioning sustainable business practices as a compelling value proposition. This will spur innovation as corporates will increasingly need to integrate social objectives into their business models. Sustainable business practices will emerge as a definitive market differentiator and consequently attract Investors, given the larger market gains accruing to such companies. Such organisations would also attract and retain better talent, enabling superior and sustained performance. The net result will also be a groundswell of corporate initiative to build natural and social capital leading to a more sustainable and inclusive future.
The key, therefore, lies in enhancing awareness of market participants with a view to empowering an enlightened choice. Consumers need to be made aware of the immense power that rests in their ability to make an informed choice, and the consequences of using this power wisely to engender huge social change. At the same time, it would be important to build an institutional framework and market mechanisms that would support the empowerment of consumers and reward the innovative capacity of corporates. Let us examine the contours of such a framework :
First, Disclosures of Triple Bottom Line Performance.
All companies operating in India beyond a threshold size, including Indian operations of multinationals, must be encouraged to make Sustainability Reporting an integral part of their annual disclosures. Such Reports could conform to the guidelines laid down by international organisations like the GRI or adopt the framework suggested by the National Voluntary Guidelines issued recently by the Ministry of Corporate Affairs.
Over a pre-determined time-line, such Reporting could be made mandatory. Third-party verificationwould lend reliability and credibility to such disclosures.
Second, Creating Institutions for Measurement & Rating.
How do consumers make an informed choice for the products and services of responsible corporates ? It would be critically important to create new Institutions that can design, develop and award Ratings to companies based on their triple bottom line performance.
I had, in my earlier addresses, suggested that Government support the development of a Responsible Business “Trustmark” Rating System that could be used to convey to the consumer a company’s environmental and social performance. An enterprise could be awarded ‘Credits’, based on an objective evaluation of its triple bottom line performance, and an accumulation of such Credits could earn the enterprise Trustmark Ratings on a progressive scale. These Ratings could then be displayed on products and services of the company to help consumers make an informed choice.
Apart from establishing new institutions to administer the Trustmark Rating Systems, it will also be essential to create a new cadre of social auditors who would be better placed to evaluate a company’s sustainability performance. Either existing financial auditors will need to be re-skilled or a new discipline will need to be created.
Going forward, it may even be possible to trade in these Credits, if a system similar to carbon credits or energy efficiency certificates can be developed so that organisations with surplus credits are able to monetise their efforts.
Third, the Creation of Preferential Incentives.
Government must consider the provision of a differentiated and preferential set of incentives, fiscal or financial, to companies that demonstrate leadership in sustainability performance. Priority fast track clearances, purchase preferences and other such incentives could be extended to corporates with high Trustmark Ratings. This would spur powerful market drivers that will incentivise innovation for larger triple bottom line impact.
Banks and Financial Institutions could also factor in the Trustmark Ratings in their lending operations providing benefits to more responsible corporations.
Fourth, Spreading Awareness and Empowering Decisions.
Civil society organisations and consumer bodies can play a vital role in spreading awareness among consumers so that their buying preferences are channeled towards sustainable enterprises.
Schools and educational institutions could also promote awareness amongst its constituents or design elements in their course curriculum to groom citizens of tomorrow as enlightened consumers.
As one of the most influential forces of shaping public opinion, Media can also play an extremely effective role in raising awareness for a responsible buying movement.
I firmly believe that by aligning policies, regulations, civil society action and corporate efforts, powerful market drivers can be created to make societal value creation an integral part of corporate strategies. Responsible Business will then move from a realm of conscientious philanthropy to one that is driven by a competitive value proposition.
As markets evolve, it is also possible to envision the emergence of social entrepreneurs who would specialise in the execution and delivery of socially relevant projects. Corporates who are otherwise unable to execute social ventures would then find ways of buying Credits from the social entrepreneurs to strengthen their own triple bottom line, thereby creating sustainable financial markets for social entrepreneurs.
Recognising the critical importance of enabling transformational change through the larger adoption of responsible business practices, your Company, in partnership with the Confederation of Indian Industry, has supported the creation of a unique institution – the CII-ITC Centre of Excellence for Sustainable Development. The Centre provides thought leadership, promotes awareness and builds capacity of Indian enterprises on issues of sustainable development and inclusive growth. Over time, the Centre has emerged as a focal point among Business, Civil Society and Government helping shape policy and corporate action in this area. Its Annual Awards seek to recognise outstanding efforts in sustainable business practices celebrating not only the achievements of these progressive corporations but inspiring others to follow as well.
ITC : Inspiring action for a better tomorrow
As global citizens we may either remain passive bystanders as half the world reels under poverty and irreparable environmental destruction or stand up and champion efforts to create a better world for future generations. I do not think we are really left with a choice anymore. It is time that we rally together to champion positive outcomes that can create a better tomorrow.
Your Company takes pride in pursuing a super-ordinate commitment that goes beyond the market to create new benchmarks in Sustainable and Inclusive business practices. ITC’s social investments are implemented in the strategic context of its businesses. As a result, it has been possible to meaningfully scale up these initiatives to ensure large-scale impact in terms of sustainable livelihoods and creation of natural capital.
Given the predominantly agricultural base of ITC’s businesses, your Company has engaged proactively with rural communities to support and nurture the creation of self-sustaining economic organisations. This manifests itself in diverse initiatives such as self-help groups for women, water-user groups, village development communities and even forestry groups that have been successful in registering a project under the Clean Development Mechanism of the United Nations Framework Convention on Climate Change. Concerted efforts have been made over several years to organise these communities into self-sustaining entities by empowering them with know-how, resources and training. All these rural-based projects require significant managerial resources and a large commitment of time to acquire scale and stability. This value of human effort and time is seldom taken into account by those who propound only financial outlays for social projects. Such value can only be measured in terms of the substantial outcomes accruing from social and environmental contribution.
The substantial positive impact of your Company’s large-scale sustainability initiatives is well acknowledged. ITC’s e-Choupal initiative has pioneered rural transformation and benefited over 4 million farmers in over 40,000 villages.The Social and Farm Forestry Initiative of ITC has greened nearly 1,15,000 hectares, creating 51 million man-days of employment among poor tribals and marginal farmers. Addressing the problem of critical water shortages particularly for irrigation, ITC’s Watershed Development Programme provides soil and moisture conservation to nearly 65,000 hectares in rural India. In a manifestation of constructive public-private-people partnerships, your Company has forged partnerships with the Governments of Maharashtra, Rajasthan and Madhya Pradesh to bring nearly 100,000 hectares under soil and moisture conservation over the next five years.
Recognising the need to broad-base farm based livelihoods, ITC’s Animal Husbandry Programme has reached out to nearly 5,00,000 milch animals leading to a significant increase in milk yields. In the course of time, it may also form part of your Company’s value chains in the FMCG sector. To help expand off-farm income opportunities, over 37,000 sustainable livelihoods have been created through focussed Women Empowerment Programmes in rural areas. Many of them are engaged in the value chain of your Company’s Agarbatti business. Around 2,50,000 children have also been provided Supplementary Education to help shape a better future for them.
Demonstrating your Company’s commitment to pursue a low carbon growth path, over 35% of energy consumed in ITC is now from renewable sources and carbon neutral fuels. You will also be happy to know that ITC’sWealth-out-of-Waste programme, that promotes Recycling, is supported today by over 3 million citizens including 500,000 school children and over 1500 commercial organisations.
Indeed, a passionate commitment to serve a larger national purpose is at the core of your Company’s business strategy. Your Company is today an acknowledged exemplar in triple bottom line performance contributing significantly to the national goals of sustainable and inclusive growth. It is my strong belief that, going forward, your Company’s relentless endeavour to create new benchmarks in sustainable business practices will lend it a unique source of competitive advantage in an increasingly challenging socio-economic environment.
Conclusion
Your Company continues to remain engaged in building a portfolio of world-class businesses leveraging enterprise strengths, new technologies and carefully nurtured competencies. A strong rural connect which has earned the trust of millions of farmers, a spirit of innovation, and a focus on game changing R&D sharpen your Company’s competitive strengths as it moves into the future. In addition, unique strengths in trade marketing and distribution, world-class manufacturing, superior service delivery, together with a rich experience in branding and deep consumer insights add enduring vitality to your Company. It is this bouquet of competitive strengths that provide us the confidence as we step ahead into an exciting future.
As I conclude this address at the 100th Annual General Meeting, it is indeed satisfying to witness a fulfilling journey of an enterprise that is so deeply motivated by its commitment to create value for the Indian society. Your Company looks to the future with confidence, driven by an inspiring Vision, Values of Trusteeship and Vitality powered by a dedicated world-class team of human resources.
May I once again thank all of you for being a pillar of support in helping accomplish our shared aspirations. On behalf of the Board and the employees of your Company, I will look to you as always for your continued goodwill and encouragement.
Thank you, Ladies & Gentlemen.
Click here for video on demand of Chairman's AGM speech 2010
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EQUITY BULL
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EQUITY BULL
RAJESH DESAI
EQUITY BULL
RAJESH DESAI
Strong rebound in volumes & superior Product mix drive cigarette revenues & margins: ITC’s cigarette segment reported strong revival with volume growth of ~8%, resulting in net sales growth of 16% y-o-y to Rs2873 crores. EBIT margins improved by 233 bps y-o-y on the back of price hikes, lower excise payout & effective product mix. KR Choksey expects the core business to continue to deliver healthy volume growth (7-8%) for FY12, driving the overall revenue growth for ITC.
Strong margin improvement in the Non-Cigarette FMCG businesses: Non-Cigarette FMCG business showed healthy topline & EBIT growth, revenue from FMCG Others grew by 20% y-o-y driven by led by Packaged food, Personal care & Stationary segment. Losses declined by 15% y-o-y to Rs76.3 crores. In the FMCG category, packaged foods business grew by 21% y-o-y led by strong performance of its key brands Aashirvaad, Bingo & Sunfeast, improved product mix & better realizations. Agri business reported growth of 26% y-o-y led by higher soya & coffee sales & EBIT improved by 20% y-o-y. Paper segment saw double digit growth in revenue as well as EBIT on account of product mix & improved realizations. Hotel business grew by 10% y-o-y to Rs230 crores (ARR improved by 10%) & margins improved by 391 bps y-o-y. Overall ITC’s EBITDA improved by 17% y-o-y, partially impacted by higher RM costs. However improved realizations & decline in other expenses as a % to sales resulted in OPM contraction of 66bps y-o-y only. KR Choksey believes ITC would continue to invest behind brands, enhancing manufacturing & distribution network in order to tap the emerging opportunities in these segments. With strong branded portfolio & growing consumer franchise they expect the FMCG business to deliver sales CAGR of 17% & EBIT CAGR of 24% over FY11-13E.
Net profit grew by higher rate of 25% y-o-y to Rs 1332 crores on the account of 46% y-o-y increase in other income (improved yields) & 63 bps y-o-y decline in effective tax rate.
Stock valuation
ITC continues to post strong performance across all its segments. KR Choksey expects cigarette volumes & margins to improve going forward on the back of product mix. Also Noncigarette FMCG business would continue to post strong growth driven by superior product mix, continued investments behind brands & enhancing manufacturing & distribution network. ITC remains their top bet in the FMCG space due to its diversified business model & pricing power. KR Choksey expects ITC’s earnings to grow at a CAGR of 19% over FY11-13E.
Stock recommendation
KR Choksey recommends a BUY on ITC with a SOTP based target price of Rs226, an upside potential of 14%.
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EQUITY BULL
RAJESH DESAI
ITC has announced its second quarter results. The company's Q2 net profit was up 21% at Rs 1,514 crore versus Rs 1,246.7 crore, year-on-year, YoY.
Its net sales were up 18% at Rs 5,974 crore versus Rs 5,061.2 crore, YoY.
Its OPM was at 35.28% versus 35.35%.
CA. Rajesh Desai
RAJESH DESAI
ITC 's second quarter net profit surged a better than expected 21.5% year-on-year at Rs 1,514.31 crore, helped by strong sales, especially in cigarettes and other FMCG business. Lower losses in the other FMCG business also boosted overall earnings.
The cigarettes to hotels to FMCG major said net sales for the July-September quarter rose 17.5% from a year ago at Rs 5,974.18 crore.
Net sales of cigarettes, ITC’s bread and butter rose over 16% at Rs 2,968.14 crore in the three-month period. Other FMCG sales jumped 27% year-on-year at Rs 1,340.66 crore, it said Monday.
The quarter also saw losses in the company’s other (non-cigarette) FMCG business decline 16% at Rs 55.90 crore.
Amongst ITC’s other divisions, agri business sales rose near 13% year-on-year at Rs 1,434.54 crore, and paper division sales were up 9.4% at Rs 1,005.42 crore in the second quarter.
Net sales in ITC's hotels division, however, rose just 1% at Rs 211.14 crore as second quarter is seasonally a weak quarter for the hotel industry.
Overall operating margins for the company were at 35.28% in July-September, compared with 35.35% earlier.
ITC's total expenses during the quarter rose near 17% from a year ago at Rs 4,036.38 crore.
CA. Rajesh Desai
RAJESH DESAI
| Good set of numbers | |
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The company posted a good set of numbers for Q2FY12, with YoY net profit up 21.5% at Rs.1514.31 crore on a 17% rise in revenue at Rs.5974 crore. This was mainly driven by branded packaged foods, education &stationery products, lifestyle retailing, agri and cigarettes businesses. OPM was at 35.28% v/s 35.35%. Operating expenses were up 17%. Its hotel business growth was flat, with net sales up just 1% but being seasonally a quarter, this does not come as a surprise. The main contributor remained cigarette reporting a 16% rise in net sales and FMCG sales were up 27%. Losses in non-cigarette FMCG business declined 16%. Agri business sales were up 13%, primarily driven by better realisations and higher volumes in soya, coffee and wheat. Paper division net sales were up 9.4%, aided significantly by improved realisation, richer mix and higher volumes. The company is apparently on a sound footing. Being market leaders in cigarettes, the company has the pricing power and will thus be able to pass on the costs to the consumers. The other businesses have also grown well. Hotel segment usually does in H2 and probably we could see a significant contribution from that segment in the second half. ITC remains a very sound company and its well diversified product mix makes it a good, safe bet. |
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CA. Rajesh Desai
RAJESH DESAI
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CA. Rajesh Desai
RAJESH DESAI
7 questions shareholders would like to ask ITC top brass
By Sunil Damania
Just as is the case with too many cooks spoiling the broth, ITC �s different businesses, apart from its core expertise in producing cigarettes, have been pulling the company down. Surprisingly, the company has preferred to continue with losses in these 'other' segments than find a way out. After a thorough analysis of the conglomerate, Sunil Damania raises seven crucial questions that shareholders need to ask the company�s management to find out what�s cooking.
ITC, India�s largest company by market cap in the FMCG space, has been one of the topmost wealth creating companies over the last decade or so. Its market cap improved substantially from Rs 20000 crore as of March 2001 to the present Rs 1.56 lakh crore. One of the main reasons for the company to outperform on the bourses is that, a decade ago the company made an announcement to diversify into other FMCG products so as to reduce its dependence on the cigarettes business.
This de-risking strategy was appreciated by the investing fraternity since cigarettes as a product has been facing a lot of regulatory pressures from across the world. Very recently ITC was in the news as one of the NGOs raised questions about LICs investment in the company even as the government is spending huge amounts on tobacco related illnesses.
LIC is the second largest shareholder in ITC with a 12.72% stake in it. But even after more than 10 years the 'FMCG-Others' segment (as defined by ITC) has not yielded the desired results and hence the obvious question that comes to mind is whether ITC can repeat its outperformance on the bourses over the course of the next one decade? We have our doubts.
It is time that the more than four lakh shareholders of the company ask the ITC management several questions that will help them understand about the kind of growth that can be expected from the company going forward. Our sincere efforts to meet YC Deveshwar, chairman of ITC, could not bear fruit due to his �several pre-commitments�.
Even our detailed questionnaire sent to him and the head of the company's corporate communications department was not responded to on the pretext that the company�s shareholders knew everything that needs to be known.
"We believe that our shareholders have been adequately and comprehensively informed of all developments including all the statutory requirements," the corporate communication head replied. Shareholders of the company can decide for themselves, after reading this story, whether they were aware about the information that has been spelt out here.
When will the 'other than cigarettes' business start contributing in a substantial manner to the company�s financials?
ITC is a hugely diversified company having various revenue streams ranging from paper to hotels, packaging boards to soaps, branded flour to garments, and the IT & ITES business. The company has been making constant efforts and more so from 2001 to diversify its revenue streams so that it can have a good and balanced portfolio. In fact, in most of the interviews granted by the management to the media, emphasis has been placed on how ITC has a well diversified business. However, our study of the last 10 years� balance-sheet of the company paints a different picture altogether.
ITC continues to rely heavily on its cigarettes business which is its core, to be its revenue driver. Our study shows that for the year ending March 2002, revenue from cigarettes (excluding trading in tobacco) contributed up to 81% to the company�s consolidated topline. Even after 10 long years the scenario is not much different. The cigarettes business continues to dominate the topline with a share of 65% in revenues.
This is despite the fact that ITC has launched a host of new products in the non-cigarettes segments in the last 10 years to drive its topline as well as its bottomline. The picture is more worrisome when we look at the bottomline since the company's dependence on cigarettes continues to be very high with more than 80% of its profit (earnings before interest and tax) comes from the cigarettes business.
In the year 2002, its cigarettes business contributed up to 94% of the company�s earnings before interest and tax and in 2011 this works out to a whopping 82%. In other words, hotels, FMCG-Others (that includes many various sub-businesses), agri-products, paperboards, paper and packaging and its IT business put together contribute a little over 15% to its profits despite many of them being in the field for a decade or so.
Why has the company not been able to delink its growth from cigarettes after putting in so much of efforts is a haunting question?
We, at Dalal Street Investment Journal, believe that its cigarettes business would continue to drive the bottomline at least for the next one more decade, if not more. It would be right to conclude therefore that ITC is more of a cigarettes player rather than a well diversified FMCG company and that it has failed to reduce its dependence on the cigarettes business despite its many assurances to the shareholders. LIC must take a note of the same and should not make people believe that ITC is no longer a tobacco company.
|
Cotribution of Cigarettes to over all profits | |
|
FY |
% PBIT |
|
2002 |
94.42 |
|
2003 |
91.96 |
|
2004 |
90.03 |
|
2005 |
85.69 |
|
2006 |
82.98 |
|
2007 |
80.93 |
|
2008 |
81.77 |
|
2009 |
86.58 |
|
2010 |
82.67 |
|
2011 |
81.14 |
The present industry age is that of developing core competency and so companies across the world are becoming leaner and fitter and focusing on what they understand the best. Ironically then, ITC has businesses which have no synergy with each other and yet continue to operate under one company.
While we understand that ITC has a stronghold over the retail chain since cigarettes are sold through big and small vendors, yet it is difficult to see what is common between hotels or sale of branded stationery books for school children or for that matter the production of branded flour for housewives or garments stocked in upmarket malls or its IT and ITES business.
Very recently in the US, Indra Nooyi, chairman and chief executive of PepsiCo, came under criticism as PepsiCo slipped to the number three position in the aerated beverages market with the critics alleging that the management was not paying enough attention to its flagship brand because of its diversification into other products.
We are not sure how much of its management bandwidth is ITC able to provide to each of its verticals. In our opinion, ITC has opened too many frontiers, each of which faces tough competition, and this can create problems for the company going forward in terms of defining and achieving growth.
It would therefore make more sense for ITC to demerge its
non-synergistic businesses into various companies and offer shares to
its shareholders the same way Reliance did a few years ago. This would
usher in a clear and focused approach for each of its business segments
and the shareholders of the company would be rewarded in a much better
manner.
When will the 'FMCG-Others' segment report profits?
Those who are not aware need to be told that ITC, as a part of its diversification plan to reduce the company's dependence on its cigarette business, had ventured into the 'FMCG-Others' segment way back in FY2001-02 with the launch of ready-to-eat packaged foods under the brand name 'Kitchen of India'.
The following year it launched branded staples under the tag 'Ashirvaad', confectionery with the introduction of 'Mint-O' and biscuits with the name 'Ibischips'. The Sunfeast brand of biscuits was launched much later. Every year the company has been launching new products in this category to be able to take its topline forward.
However, despite putting their best foot forward, the performance has been devoid of any shine or glitter. The bad news is that a study of the annual reports of the past 10 years reveals that nowhere has the management spelt out clearly when this division will see a turnaround in its fortunes.
Over the years, its product portfolio has increased to include �clairs, spices, soaps and shampoos and, surprisingly, also has academic books under the brand name 'Classmate' which, the company claims, has a record reach. There is also the apparel business with tags like Wills Classic and John Players. For each of these products, ITC has to compete with giant players. For example, it has to compete with HUL for soaps and shampoos and with Parle and Britannia for its biscuits.
Our study points to the fact that this overloaded portfolio has resulted in the accumulation of losses year after year. There has been no sign of profits at all since FY2002 with the collective loss of this division at its EBIT level totalling up to Rs 2394.95 crore. This implies that a huge amount of money has been spent by the company to build this business with very few positive outcomes. To gain a wider perspective on this loss, consider the fact that Colgate India has an annual turnover of Rs 2394 crore.
How long will it take this segment to wipe out its accumulated losses?
It is high time � at least for the sake of the company�s shareholders - that this segment started posting profits. After all shareholders have a right to aspire for good returns on their investments. Unfortunately, the management continues to remain pretty non-committal. What is even more disconcerting is the fact that the company has gone all out to promote its brands with endorsements from some of the best known celebrities.
Shah Rukh Khan promotes the Sunfeast brand of biscuits while Hritik Roshan promotes John Players (very recently they roped in Ranbir Kapoor for the same brand). Deepika Padukone and Kareena Kapoor endorse the personal care products and Sachin Tendulkar does it for the Fitkit range of healthcare products of the company. While sales are yet to come in (which is reflected in the poor profitability of this segment), the high cost of endorsements are surely hitting the company hard.
Comparing the company�s topline graph in this segment for the past four years along with that of its competitor Godrej in the personal care product segment, we find that in the last four years ITC's topline grew at a CAGR of 27.3% while Godrej saw its topline grow at a CAGR of 33% and that too with a strong bottomline growth unlike ITC. Another cause for concern is that none of ITC�s products are leaders in their categories. This is true of branded garments as it is in case of other categories like soaps and shampoos.
Similarly, it is in a distant third slot in the biscuits category with just about 10% of the market share. New players like Cadbury have entered this segment further creating a strain on an overcrowded market and pushing ITC away from the target of achieving a turnaround. The only segment where the company could gain leadership position is with staple flour sold under the �Aashirvaad� brand with its turnover in the region of Rs 1000 crore. We are unable to understand why the company is not consolidating its present verticals rather than launching more products every year, thus creating bandwidth problems for itself.
|
Last 10 years "FMCG-Others" sales and Accumulated losses | ||
|
FY |
Sales (Rs/Cr) |
Accumulated Loss (Rs/Cr) |
|
2002 |
21.5 |
73.44 |
|
2003 |
109.2 |
195.88 |
|
2004 |
303.84 |
370.37 |
|
2005 |
563.9 |
565.54 |
|
2006 |
1090.49 |
738.53 |
|
2007 |
1713.46 |
934.53 |
|
2008 |
2526.6 |
1193.49 |
|
2009 |
3035.47 |
1683.09 |
|
2010 |
3661.26 |
2063.43 |
|
2011 |
4495.06 |
2394.95 |
It comes as a surprise to us that ITC does not declare consolidated quarterly numbers. The company discloses its consolidated numbers only at the end of the year in March.
Why is this so, despite it being a constituent of the Sensex and the Nifty?
A majority of the professionally managed companies declare their
consolidated numbers so that investors at large can gain a better
understanding about the company and its performance. In this case,
shareholders are forced to come to their own conclusions on
the basis of only stand-alone numbers. The consolidated numbers are
important
for the simple reason that ITC has a very complex corporate structure
with its 10 subsidiaries and the various companies under its
subsidiaries, not to forget the JVs.
Hence numbers would matter a lot to the shareholders. Since ITC has a major chunk of its operations in the domestic market (92% of its revenue are derived from within India), it should be relatively easy for the company to declare its consolidated results. If Tata Steel , Tata Motors and Infosys , just to name few, can do so despite having widespread global businesses, we see no reason why ITC cannot do it.
Why is the company reactive when it comes to launching its products rather than being proactive?
When we look at the products that have been launched by ITC under its FMCG-Others� segment, it becomes apparent that these have been inspired by its competitors. Take, for instance, the 'Bingo� brand of potato chips. This product was launched by ITC in FY2007 and we believe that this was launched after looking at the success of �Lays� from PepsiCo.
Even the company's entry with 'Tedhe Medhe' in FY 2010 was after the success of 'Kurkure'. The company this year has launched a product called �Sunfeast Yippee Noodle�, an instant noodle inspired, no doubt, by the popularity of Maggie from Nestle.
Why doesn�t the company come up with innovative products on its own and become a trend-setter for a change?
The company in its annual report claims that over the years it has invested significant amounts in R&D for product development. It is high time then that these efforts provide positive results. According to the figures available, over the past five years the company has spent Rs 483.62 crore on R&D but there is no clarity about how much of this was spent exclusively on FMCG-Others.
The scenario is also similar in its personal care products where the branding exercise with the use of leading actresses from Bollywood was an imitation of the strategy employed by Hindustan Unilever for its Lux soap. The same is the case with biscuits too.
In fact, Britannia, its competitor in biscuits, has now come out with many new products that harp on good health and our sources suggest that they have been well accepted by consumers. Shouldn�t ITC feel the need to show some catching up? Consumers need something new all the time and ITC needs to learn from its competitors like PepsiCo (Kurkure) or Nestle (Maggie) or Marico (Saffola) to create a niche for itself in a highly competitive industry.
When will the company unlock value from its unrelated businesses?
Various companies in the past have carried out an exercise of unlocking value to help benefit shareholders. Tata Steel, which did so by divesting its non-core business of cement is a good example of this. Similar was the case with L&T when they sold their cement business and recently went public with L&T Finance Holdings. Reliance Industries has done so by giving shares of various companies to its shareholders and Bharti Airtel transferred its tower business to focus on its core segment of telephony.
We feel, ITC needs to do something on similar lines so that each of its businesses can be listed. This will help improve shareholder value. ITC should review each of its businesses and should ask itself the critical question of whether it should continue to remain in that business.
Take the case of ITC InfoTech, a 100% subsidiary of the company that has been going nowhere in terms of profit. In fact the revenue is so marginal that the company prefers to push it into the �others� category while disclosing its segmentwise revenue. It gets clubbed with income from filter rods and investments.
As such, ITC InfoTech is a complete misfit in the business plan of the company and should either be divested or put up for a joint venture to give it a bigger platform. If one looks at ITC InfoTech�s profit numbers for the last five years, they have deteriorated substantially from Rs 20.67 crore in FY2007 to Rs 7.46 crore in FY2011. In fact, the company saw a big fall in its net profit last year from Rs 34.02 crore to Rs 7.46 crore.
We are not able to recollect any other company in the infotech business that witnessed such a huge dip in net profit for FY2011. Yet the annual report of 2011 claims that ITC InfoTech is among the country�s fastest growing IT companies in the mid-tier segment. This claim is shocking, to say the least. Under what parameters has the company made such a claim? It would be in the larger interest of shareholders for the company to seriously consider bringing about a drastic change to be able to generate a decent revenue level.
Why are disclosures to shareholders lacking in transparency?
When it comes to disclosures the company has a great scope for improvement. We have mentioned how the company does not reveal its consolidated quarterly numbers. Even in its annual reports, there is a lot lacking in terms of information despite it running into more than 150 pages. For instance, the shareholders of the company are unaware of how big the 'Aashirvaad' brand is or how much revenue 'John Players' brings in for the company.
This is primarily because the company is very selective in providing
information to its shareholders. Just to continue with ITC InfoTech's
net profit drop, the annual report does not give any insight about why
it has declined despite an improvement in the topline. Worse still, the
annual report does not give any idea about when InfoTech's numbers would
start improving.
The scenario is no different when it comes to its
personal care business. How big Vivel or Fiama Di Wills brands are
remains unknown.
There is also no mention about which segment of FMCG-Others is profitable. One obvious argument here would be that the company does not wish to give away information that can help competitors. But this could be a lame excuse considering that competitors are smart enough to know what kind of sales the company's brands are generating in the market. Nielsen, a market research agency, compiles information of various FMCG products and the same is available by subscription. ITC's competitors know the ball park figure of each the brands and therefore not disclosing information for such a reason would have to be taken with a pinch of salt.
Given the fact that the shareholders are the owners of the company, it is only fair that they should have details about which of the company�s brands are growing or stagnating. What is also surprising is that ITC does not hold an analyst meet. This is something rare among the Sensex-based companies. Today transparency is essential and investors, in particular, are willing to pay premium to those companies who do not play the hide-and-seek game. Therefore, the least ITC can do is to hold an analyst meet on a regular basis. We are not sure how analysts and fund managers are valuing the company as any key data that can help evaluate the company is missing.
Since ITC is the largest market cap company in the FMCG sector, it should set standards for others to follow in terms of disclosures, even though some of the disclosures are not statutorily mandatory.
Infosys set the standards in terms of disclosures, and investors
appreciated it. In a recent interview Narayana Murthy of Infosys, said,
�If I know what I am going to do and don�t tell you, it is not fair. If
both internal and external shareholders are not informed about the
future of the company, I would be creating asymmetry of information, and
that would lead to insider trading�. There is something that ITC could
learn from these words.
Valuations (Table)
How should one value ITC as a company?
While it is possible to value the company as a sum of its parts, due to its various business streams, we would prefer to value it on a P/E basis, as it derives more than 80% of its profit from one segment, i.e. cigarettes. We have evaluated the various international cigarette companies and taken a two-pronged approach of valuations: one, with the time-tested P/E ratio, and the other, based on its ratio of sales to market cap.
Our findings suggest that the average P/E cigarette companies command
is in the region of 15-17x, with the highest being commanded by
Imperial Tobacco, at 24x. On the other hand, ITC is commanding P/E at
more than 30x.
In terms of sales to market cap average ratio, this
is 3-4x, but in case of ITC it is more than 7x. This gives a clear idea
of where ITC stands today in terms of valuations.
We have not compared the firm with any domestic cigarette manufacturing company for the simple reason that they are relatively very small players, and hence, any such comparison may not be fair. However, we did compare ITC with Hindustan Unilever, another FMCG giant.
Hindustan Unilever is commanding P/E at 29x but enjoys much better returns on net worth (RONW) at 88%, against ITC�s mere 31%. One of the reasons why ITC is commanding lower RONW is the diverse business segments pulling down the overall numbers. In fact, the company is amongst the lowest-ranked FMCG companies when it comes to RONW, as indicated by the table.
Further, we believe that the cigarette business would face headwinds going forward, on account of the regulations on smoking becoming stringent day by day. This, we believe, may impact the volume growth of the company. Since 2002, the company�s cigarette revenue has grown by 11% CAGR, while profits have improved by 15% CAGR.
We expect both the topline as well as the bottomline to grow
in single digits in the coming years. This will impact the premium that
ITC is able to command on the bourses. Looking at the valuations and the
likelihood of a slowdown in its main business, we are of the firm
opinion that ITC will underperform the broader market, and hence one
should book profit from the same. The company�s honeymoon period on the
bourses may soon be over. It is time to look for another ITC to create
wealth.
The writer is Managing Editor of Dalal Street Investment Journal
CA. Rajesh Desai
RAJESH DESAI
RAJESH DESAI
RAJESH DESAI
Total income has increased by 16.92% to Rs 69.55 billion for the quarter ended Mar. 31, 2012 from Rs 59.43 billion in the year ago period.
For the year ended Mar. 31, 2012, the company has posted 24.72% increased in consolidated net profit to Rs 62.58 billion as compared to Rs 50.18 billion for the year ended Mar. 31, 2011.
Total consolidated income has increased 17.62% from Rs 225.75 billion for the year ended Mar. 31, 2011 to Rs 265.52 billion for the year ended Mar. 31, 2012.
The board of directors of the company has recommended a dividend of Rs 4.50 a share of Rs 1 each for the financial year ended Mar. 31, 2012. The dividend, if declared at the 101st annual general meeting of the company convened for July 27, 2012, will be paid on July 30, 2012 to those members.
--
CA. Rajesh Desai
RAJESH DESAI
"ITC Q4 results came in ahead of expectations both on revenues and profits...While some may argue the cigarette's volumes are likely to slow down due to recent price hikes, key to ITC's stock performance in our view is earning resilience. Despite the recent round of taxation hikes, which effectively raised the excise duty on cigarettes by 21% , we forecast that ITC will still be able to register cigarette EBIT growth of 15% in FY13 even with an assumption of zero volume growth for the year," said Amit Sachdeva and Kuldeep Gangwar of HSBC Securities and Capital Markets India.
Cigarettes division continues to drive ITC, accounting for half of total revenues. In the last quarter, while, net cigarette sales were up 17% to Rs 3,250 crore, margin improved 233 bps to 31%.
Hotels division was, however, a drag, with net sales falling 5% and profit down 17%.
ITC's EBIT loss in other FMCG business narrowed to Rs 16 crore from Rs 68 crore and the HSBC analysts expect the segment will become EBITDA positive on a full year basis in FY13.
Sachdeva and Gangwar say ITC's valuations are attractive; it trades at 21 times FY14 PE multiple, which is lower than sector median of 24 times, despite having "much better earnings visibility" in the current uncertain environment.
HSBC has a overweight rating on ITC with target price of Rs 286.
Here are quick comments from other analysts:
ICICI Securities: We believe that volume growth in cigarettes could be tepid in first half of FY13. On a sustainable basis, we believe the company's cigarette business is poised for 3-4% volume growth driven by its kings/long products. We remain positive on ITC's robust and resilient business model. Rating: Cut to Add from Buy due to limited upside from current levels.
Kotak Institutional Equities: Two key positives from ITC's 4QFY12 -- 1. hike in dividend payout to 66%, as expected, and 2. lower-than-expected FMCG loss; it is in line to achieve breakeven by Q4 this year, in our view. Cigarette volumes could likely be flat in first half due to high base (9% volume growth, in our view) and impact of recent price hikes. Rating: Add. Target: Rs 260.
MF Global: ITC reported good set of numbers for fourth quarter, but lower than expected volume growth in cigarettes business was not very inspiring. Also the significant decine in losses in other FMCG segment surprised positively. Rating: Neutral. Target: Rs 250.
Prabhudas Lilladher: We revise our estimates for FY13 and FY14 upwards by 2% to incorporate better-than-expected Q4 performance. Recent reversal of cigarette excise policy from ad-valorem to specific duty structure is a positive step for ITC, notwithstanding the higher FY13 effective cigarette excise increase of 21%. Reduction in losses in non-cigarette FMCG is also a medium-term positive. Rating: Buy. Target: Rs 266.
--
CA. Rajesh Desai
RAJESH DESAI
--
CA. Rajesh Desai
RAJESH DESAI
"We are starting to sense that ITC will start to be against strong headwinds - part of it of its own makings and a lot to do with what happens globally," the IDFC report noted.
"We see a 'systemic risk' starting to engulf the global tobacco space with countries such as Australia, UK, Canada and Russia starting to take stringent measures which can literally put a cap on cigarette sales and its brand franchise (packs sans logos, 40% tax increase every year)."
The research firm is of the view that regulatory concerns, escalated globally, will de-rate ITC's global peers and that is bound to rub off on the company.
The de-rating on the stock comes with the fact that ITC has "not fired" in its non-cigarette FMCG business. Hotels and paper are price/book businesses and need to be valued accordingly.
Given that 75 per cent of the company's incremental capex is in asset-intensive segments and its core cigarettes business is likely to see a material de-rate, the research firm revised its positive stance and downgraded the stock to 'underperformer'.
However, Sajiv Dhawan, MD of JV Capital Services, is of the view that the fallout of the news may have a short-term impact on the stock, but there are enough smokers who are not going to suddenly give up.
"Unfortunately, smoking it is an addiction and I don't think that (the downgrade) will have too much of an impact. The real impact on ITC will be the sharply increased prices," he added.
Dhawan is of the view that there maybe another 5-10 per cent upside on the stock based on momentum, but fundamentally the prices reflect the current fundamental value.
--
CA. Rajesh Desai
RAJESH DESAI
ITC Q2: Analysts expect strong numbers, net to grow 16%
Cigarettes to FMCG and hotels major ITC is set to announce its results for the quarter ended September 2012 today. Analysts have been expecting strong results from the company despite negative news flow (like packaging norms, changes in tax structures and competition from illicit segments) during the quarter.The profit after tax is expected to grow by 16.1 percent year-on-year to Rs 1,758 crore and net sales are likely to rise by 15.4 percent YoY to Rs 6,893 crore during the quarter.
Analysts on an average expect 15-18% YoY revenue growth in the cigarette segment, which contributes 50 percent to its total revenues, with flat EBIT margin.
The volume growth of cigarettes segment is expected to be flat to one percent for the quarter. Cigarette volumes did not fall despite price increase of around 18% in the three months ended September, which is a testimony of ITC's pricing power.
Other FMCG business (other than cigarette), which includes confectionary, personal care, foods etc, is expected to report 20% growth in revenues. Reduction in losses in this segment will continue in the second quarter as well.
In case of hotels business, weak macro environment and high supply continue to plague the segment. Occupancy rates have remained flat for around 2 years now.
Earnings before interest, tax, depreciation and amortisation (EBITDA) is seen going up by 14.3% to Rs 2,410 crore in the second quarter of financial year 2012-13 from Rs 2,108 crore. Operating profit margin is likely to increase 30 basis points YoY to 35 percent in the quarter.
Overall the street is expecting the company to remain an outperformer in the FMCG space.
Fundamentally
the stock has been riding on predictability in cash flows, despite
negative noise on packaging norms, changes in tax structures and
competition from illicit segments.
ITC has maintained superior market leadership position in cigarette business. Despite acute price hikes (following excise duty hikes in cigarettes), the company has been able to successfully pass them on to customers, without any loss in market share.
Increase in cigarette consumption from new consumers (especially growing number of female consumers) also helped the cigarette business keep the market share higher.
Over Rs 5,500 crore from FMCG (other than cigarette) business has made ITC the second largest FMCG company by sales. Analysts feel the break even in this segment in the next 4-5 quarters will be a significant positive for the company.
ITC faced a slew of negative news in the second quarter of FY13. Uttar Pradesh government increased value added tax (VAT) on cigarettes from 17.5% to 50% and Australian government introduced plain packaging norms for all cigarette companies during the quarter.
Institutional investors continue to remain overweight on ITC, despite high valuations and an underweight stance on the consumer staples sector as a whole.
IDFC was the only brokerage with a clear and strong negative view on the stock. In fact for Q2, the firm have estimated a 1% decline in cigarette volumes.
--
CA. Rajesh Desai
RAJESH DESAI
The Ministry of Health and Family Welfare said in its statement that well-designed health warnings and messages are part of a range of measures to communicate health risks due to tobacco use. Pictorial health warnings communicate health risks in a visible way, provoke a greater emotional response and increase the motivation of tobacco users to quit and to decrease their tobacco consumption, the ministry's statement said. Graphic warning labels have a greater impact than text-only labels and can be recognized by low-literacy audiences and children, the statement added.
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CA. Rajesh Desai
Rajesh Desai
On a consolidated basis, ITC's net profit rose 21.57% to Rs 7608.07 crore on 19.02% growth in total income to Rs 32505.14 crore in the year ended March 2013 over the year ended March 2012.
ITC's board of directors at its meeting held today, 17 May 2013, recommended a dividend of Rs 5.25 per share for the financial year ended 31 March 2013.
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CA. Rajesh Desai
Rajesh Desai
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CA. Rajesh Desai
Rajesh Desai
Antique
1QFY14 Results Review
ITC Limited - Profit performer
We continue to believe in ITC, post 1QFY14, primarily due to the consistent profit performance by the company backed by its cigarettes business. We believe that the market had over expectations on ITC's cigarette volume growth and the drop of 2% in the division's volumes was normal in a period of price hikes and consequent inventory corrections.
However, more importantly, the EBITDA and PAT growth of 17% and 18% during the quarter, despite moderation in non-cigarette businesses, demonstrates the advantages of its addictive pricing strength in an uncertain scenario.
ITC's cigarette PBIT at INR22.4bn grew by 18% during the quarter compensating for the lackluster PBIT growth of 4% in non-cigarette businesses to INR4.41bn. The other key profit driver during the quarter was the 2% drop in other expenditure at INR1.32bn due to lower promotional activities.
We believe that in a scenario where majority of the consumption related and non-related businesses in the country are under pressure from the economic slowdown, ITC is poised to outperform earnings growth led by its domination in cigarettes. In our view, the company will emerge stronger by gaining market share in the current scenario of relentless duty hikes.
Nevertheless, we maintain our concerns over the valuations and recommend a HOLD on the stock with a target price of INR356. At the CMP of INR359, the stock is trading at a PE of 32.4x FY14e and 27.2x FY15e.
CA. Rajesh Desai
Rajesh Desai
ITC aims Rs1 lakh crore turnover from new FMCG business by 2025
FMCG giant also targets to emerge as one of global Indian brands in years to come
Diversified conglomerate ITC is aiming to clock a turnover of Rs 1,00,000 crore from its brands in the new FMCG businesses by 2025. Y C Deveshwar, chairman at ITC told shareholders at the company’s annual general meeting here on Friday.
The FMCG giant is also aiming to emerge as one of the global Indian brands in the years to come. Company’s new FMCG businesses have gained traction with the top line having exceeded Rs 7,000 crore in the year gone by, said Deveshwar.
“With your support and all going well with a conducive environment, it is within the realm of possibility that your company can achieve a turnover of over Rs 1,00,000 crorr from its brands in the new FMCG businesses by 2025/30,” he said addressing the shareholders.
ALSO READ: Tobacco, agri businesses push ITC net up 18%
ITC’s brands such as Aashirvaad and Sunfeast have already garnered annualised consumer spends of over Rs 2000 crore each. While the former brand is clear market leader its segment, Sunfeast Dark Fantasy has emerged as a leader in the premium cream biscuits category, the chairman claimed.
According to him brand like Bingo!, Candyman, and Vivel are estimated to have attracted consumer spends of over Rs 500 crore each.
Stressing on the need of having a global identity, Deveshwar said, “The mission is to create unique products, born out of deep consumer insight to win growing consumer franchise and build world class brands that would progressively dominate the Indian global market.”
In his speech, Deveshwar said that the cigarette business provides the basis for the cash flows that are enabling the creation of world class Indian brands in multiple consumer segments. “They are also the basis for building capital intensive hotels and paperboard businesses,” he added.
The company has recently launched personal care brands such as Essenza Di Wills, Fiama Di Wills, Vivel and Superia which have been well received by the consumer, indicated Deveshwar.
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CA. Rajesh Desai
Rajesh Desai
ITC uses defence technology in 'Ready-To-Eat' product offerings
Company to launch Dal Bukhara, which can be prepared in 5 minutes in a pan, cutting the usual 18-hour cooking time to a few minutes
CA. Rajesh Desai
Rajesh Desai
Dear Sir/Madam,
Q2 FY14 Result
ITC LTd Net Sales increased by 9% YOY to INR7776 crore YOY (which was below Estimates) and its EBITDA increased by 18% YOY to INR3176 crore. EBITDA Margin of the company increased from 37.2% to 40.4% YOY which was above estimates. PAT increased by 21% YOY to INR2231 crore. PAT also include Exceptional Income of INR158 crore as the Liability towards Rates and Taxes is no longer required. Adjusting the Same, Profit remained in line with the Estimates.
Key Highlights of the Quarter
- Cigarettes Business (Excluding Added Income of 158 crore) contributed 79% in EBIT VS 80% YOY. Cigarettes Volume is expected to decline by ~2-3% as against 0.5% growth YOY
- FMCG Business report a Loss of INR13 crore which was disappointing
- Agriculture business Sales decreased by 12% YOY to INR1772 crore and EBIT grew by 10% YOY to INR285 crore
- Hotel Business EBIT reduced by 43% YOY to INR9 crore and is dragging the profitability of ITC LTD.
- Paperboards Business EBIT reduced by 22% YOY to INR221 crore
AT the CMP of INR340, the stock is trading at a P/E of 30.9x its FY14E EPS of INR11. The topline growth of the company remains a concern area. We Remain Neutral to the Stock at the Current level
|
DESCRIPTION |
Sep-13 |
Jun-13 |
Sep-12 |
QOQ |
YOY |
H2 FY14 |
H2 FY13 |
% change |
|
Net Sales |
7776 |
7339 |
7146 |
6% |
9% |
15114 |
13798 |
10% |
|
OPI |
87 | 72 |
80 |
|
|
159 | 135 |
|
Total Income |
7863 |
7411 |
7226 |
6% |
9% |
15273 |
13933 |
10% |
|
Total Expenditure | 4687 |
4619 | 4537 |
|
|
9306 | 8868 |
|
PBIDT (Excl OI) |
3176 |
2791 |
2689 |
14% |
18% |
5967 |
5064 |
18% |
|
EBITDA (%) |
40.4% |
37.7% |
37.2% |
|
|
39.1% |
36.3% |
|
|
Other Income |
246 |
203 |
184 |
|
|
449 |
354 |
|
|
Operating Profit |
3422 |
2994 |
2873 |
|
|
6417 |
5418 |
|
|
Interest |
-33 |
17 |
23 |
|
|
-16 |
37 |
|
|
PBDT |
3455 |
2978 |
2850 |
|
|
6432 |
5381 |
|
|
Depreciation |
221 |
215 |
189 |
|
|
436 |
384 |
|
|
PBT |
3234 |
2762 |
2661 |
|
|
5996 |
4998 |
|
Tax |
1003 | 871 |
825 |
|
|
1874 | 1559 |
|
Profit After Tax |
2231 |
1891 |
1836 |
18% |
21% |
4122 |
3439 |
20% |
|
PAT (%) |
28.4% |
25.5% |
25.4% |
|
|
27.0% |
24.7% |
|
|
|
|
|
|
|
|
|
|
|
|
Equity Capital |
790.18 |
790.18 |
785.63 |
|
|
792 |
785.63 |
|
|
Face Value (In Rs) |
1 |
1 |
1 |
|
|
1 |
1 |
|
|
No. of shares |
790.18 |
790.18 |
785.63 |
|
|
792 |
785.63 |
|
|
|
|
|
|
|
|
|
|
EPS |
2.82 |
2.39 |
2.34 |
18% |
21% |
5.20 |
4.38 |
19% |
Regards,
Team Microsec Research
CA. Rajesh Desai
Rajesh Desai
- Results disappoint: Net sales, EBITDA and PAT grew 9%, 12% and 14%. Reported PAT grew 21% due to one-off gains.
- Key positive: Cigarette PBIT up 16% as costs remained flat.
- Key negatives: (1) Cigarettes - volume decline of 4% + mix deterioration; (2) Other FMCG - sales growth moderates + continuing losses; (3) Paper - moderate sales growth + sharp PBIT margin decline; (4) Agri - sales decline.
- Despite weak results, ITC remains best placed to deliver low-teens EPS growth in the current weak macro. IER maintains Outperform with a PT of INR 350.
CA. Rajesh Desai
Rajesh Desai
ITC - Sharekhan
Recommendation: Buy
Price target: Rs369
Current market price: Rs328
Price target revised to Rs369
Result highlights
-
Revenue growth remains muted; margin expansion led to decent operating performance: ITC's Q2FY2014 performance was disappointing in terms of the revenue growth as some of the key businesses, such as the cigarette business and non-cigarette fast moving consumer goods (FMCG) business, witnessed a moderation in the revenue growth, while the revenues of the agri business declined in double-digits during the quarter. However, the significant margin improvement in the core cigarette business and commoditised agri business along with the declining losses in the non-cigarette FMCG business aided the company to post a decent operating performance with the operating profit margin (OPM) improving by above 100 basis points during the quarter.
Cigarette business' sales volume declined by ~4%: In Q2FY2014, ITC's cigarette sales volume declined by ~4% on account of the significant price increases (of around 18%) in its portfolio after the second consecutive year of 18% hike in the excise duty and value added tax (VAT) hike in some of the key states. The brands under 65mm cigarette segment gained good response and helped arrest the substantial drop in ITC's cigarette sales volume. We don't expect ITC to increase prices of the cigarette in the near term and would rather focus on improving the sales volume in the near term. With price increases getting absorbed in the coming months, we might see a gradual improvement in the sales volume of the cigarette business. The non-cigarette FMCG business' revenue growth decelerated to 16% in line with the overall slowdown in the domestic FMCG market. The hotel business is bearing the brunt of a bleak macro-economic environment.
Downward revision in earnings estimates: We have revised downward our earnings estimates marginally for FY2014 and FY2015 by 1% and 3% respectively to factor in the lower revenue growth in the core cigarette business and the agri business. We have marginally revised upward our margin expectation to factor the higher than expected margin in the cigarette and agri businesses.
Maintained Buy on account of better earnings visibility and decent valuation: A volume decline of 4% in the core cigarette business in Q2FY2014 has disappointed us as well as the Street. However, the historical trend has shown that the sales volume in the cigarette business recovered once the price increases get stabilised in the market. We expect the non-cigarette FMCG business to witness an improvement in the growth rates with the inflationary pressure easing, while the higher margin commodity exports would continue to help the agri business to score good margin in the coming years. This along with the higher yields earned on cash on books would help ITC to achieve a decent growth of close 20% over FY2013-15, which is better in comparison with some other large-cap FMCG stocks such as Hindustan Unilever Ltd (HUL).
We have revised downward our price target to Rs369, which is in line with our downward revision in our earnings estimates. After the announcement of Q2FY2014 results, ITC's stock price has corrected by almost 5% and provides a decent upside of 10% from the current levels to our price target. In view of the better earnings visibility, strong cash generation ability and a decent upside from the current levels, we maintain our Buy recommendation on ITC and maintain it as our top pick in the large cap FMCG space. At the current market price, the stock trades at 29.7x its FY2014E earnings per share (EPS) of Rs11.1 and 24.9x its FY2015E EPS of Rs13.2.
CA. Rajesh Desai