ITC Ltd’s consumer products business has for long focused on growing volumes and market share, just as any fledgling business would. Of late, the focus has also been on profitability or lowering losses. Some of this shift may be due to the ripple effect of the global financial crisis which affected Indian companies in the second half of fiscal 2009. But the past few quarters have seen its losses narrow further, and the March quarter saw losses at 7% of sales compared with 14% in the year-ago quarter, and around 10% in the previous two quarters. Why this is important is that it helped check the fall in ITC’s profitability.
Graphic: Paras Jain / Mint
In the March quarter, ITC’s operating profit margin fell by 1 percentage point to 31.5%. That’s unusual for ITC, which runs a very profitable cigarette business. The hike in excise duties on cigarettes had nothing to do with this. The cigarette segment’s net sales rose by 19%, much higher than the 14% increase in gross sales (before excise). That implies a lower effective excise rate.
Still, margins on cigarettes fell, with the possible reasons being an increase in material costs, higher expenditure on promotional activities or changes in the product mix. The cigarette segment’s margin fell from 52% to 51%. Margins in other segments such as agri-trading and hotels, too, fell, and were flat in its paper business.
Input costs rose sharply during the March quarter, rising by 48% compared with a 29% increase in revenue to Rs5,132 crore. The chief raw materials by value for the company are leaf tobacco, pulp and agri inputs such as wheat, soya and edible oil. Inflation in these commodities has raised its input costs. Normally, this should have been enough to crush margins, as inputs account for nearly 40% of revenue. But the company kept increases in employee costs and other expenditure low.
The hike in excise duties in ITC’s cigarettes business is expected to affect volume growth in fiscal 2011, though margins are likely to improve as it has hiked prices to compensate.
Cigarettes contributed around 45% of sales and 83% of segment profit. The consumer products business is nearing one-fifth of sales, which is not surprising considering ITC’s aggressive approach ever since it entered this business, with products such as wheat flour, chips, personal care and stationery.
But the real surprise is that if ITC stays the course, this segment could turn in a profit in fiscal 2011. Its size now allows it to plough back profits from its profitable products into newer ones that require investment. That is the way most of the incumbents have grown in the home and personal care products market. ITC could become a bigger threat for its rivals in the coming years.
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