ITC’s sales down 1% in the March quarter, cigarettes still the boss

ITC would prefer to be known as a diversified company, with businesses ranging from hotels to biscuits to soaps in its portfolio. But its 2008-09 results show once again, how critical the cigarettes’ division is to revenues and more so for profit growth.

Despite the company claiming that higher duties were affecting its cigarettes business, this division reported a 24% jump in profits during the March 2009 quarter. Both the agri business (trading) and the hotels business did badly during the quarter. ITC’s cigarettes business may contribute to only 47% of revenues now, but considerably influences sales growth. It contributes nearly 90% of segment profits, and bears the burden to drive ITC’s profit growth. ITC’s results also raise a question on the drag of its consumer business on the bottom line.

March 2009 quarter performance

  • Net sales growth fell 1.1% to Rs 3,892 crore. ITC’s cigarettes and FMCG businesses did quite well, growing by 16.3% and 13.5% respectively.
  • Higher prices have been one of the key factors driving growth for cigarettes, while in FMCG ITC has launched its range of personal care products. Its paper business did quite well, with sales going up by 25.7%. But hotels, agri-business (trading) have seen sharp falls in sales during the quarter.
  • ITC’s expenses fell by a steep 9%, leading to its operating profit margin rising to 33.06% from 28.5%. Key reasons were lower raw material costs and purchases of traded goods.
  • In terms of contribution to profits, cigarettes did well with margins rising by 3 percentage points. Its new consumer businesses (food, apparel, stationery and personal care) incurred losses, but kept the level constant on a higher sales base. In paper, margins were constant, improved for agri-business and fell sharply for hotels.
  • Though its operating profit increased by 12.6% higher interest and depreciation costs brought profit growth down to 9.9%.

Full year 2008-09 highlights

  • ITC’s net sales grew by 10.3% to Rs 15,388 crore with both cigarettes and other consumer business doing well. But flat growth in agri-business and a decline in hotels pulled down overall growth.
  • The company’s full year profits have been hurt by its non-cigarette consumer business. The loss in this new division increased to Rs 483.4 crore, despite sales growing by 19% on the back of its new launches in the personal care business. Hotels’ segment profit fell due to the fall in occupancy after the terrorist strike in Mumbai and the economic slowdown.
  • ITC’s OPM dipped marginally for the full year. Its net profit grew by just 4.6% to Rs 3,263.6 crore in 2008-09.
  • The company is paying out a dividend of Rs 3.70 a share, resulting in a dividend outgo (including distribution tax) of Rs 1634 crore.

ITC’s cigarettes’ business was affected by a hike in excise levies, but still performed well. This is testimony to the price inelasticity of cigarettes and ITC’s dominant market position. Looking ahead, any new levies in the forthcoming Budget will be a cause for mild concern. Still, cigarettes will be the star performer in 2009-10 too, barring unforeseen events.

The new consumer businesses that ITC has entered are growing in size but not adding to the bottom line. ITC’s strategy has been to focus on market share, penetration and growth and not as much on profitability. So, it may be making profits in certain businesses, Aashirvaad flour for example, but losing money on others.

It will be a while before the hotels business recovers; it will follow only after the business cycle improves and tourist inflows rev up. The agri-business is a trading business, some of it for its own businesses and the rest for exports. Traded exports is an opportunistic business, prone to exchange fluctuations and can go either way in 2009-10. Last year, the steep rise in food prices had led to a clampdown on exports of staples.

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