ITC Ltd reported its usual 20-25% growth in net sales and profit for financial year 2006-07, but the markets weren’t too impressed. In the past year, the company’s share price has fallen by about 8%, even though NSE’s Nifty index has risen by 34% ( see graph ). On Friday, 25 May, the ITC stock inched up by 0.4% to Rs166.80.
Unmesh Sharma, FMCG analyst at Macquarie Research, says, “Last year’s results are a non-event. What’s more important is how volumes grow next year.”
This would reflect the impact of VAT (value-added tax) applicable on cigarettes in most states effective from April 2007. ITC has already raised prices in early April to adjust for the VAT impact.
In a recent report, JPMorgan said that weighted average increase in prices could exceed 20%, based on a quick scan it did of price increases in some of the company’s key brands.
It’s important to note here that the last time ITC increased prices sharply (by 14-15% in 2002), volumes had dropped by 8%. But most analysts are confident that since income levels are higher now, the price increases would be absorbed. Things would get clearer when the company announces its results for the June quarter.
Back to the results, ITC had another year of strong growth of its non-cigarette businesses.
These businesses now account for 52.3% of the company’s net sales. That indicates ITC is much less dependent on its cigarettes business and any impact of the recent price increases on volumes would be limited to less than 50% of the company’s total business.
But what’s more important is that ITC still gets 82% of its profit from its cigarettes business, because of its high margins.
Five years ago, when its share of total revenues was much higher, it accounted for 90.6% of profit. Going by the pace at which things are moving, it’ll be years before ITC will truly become a diversified company.
Centurion Bank of Punjab’s advances grew at a sizzling 72% in the March quarter. This far-above-industry growth rate had to be funded by high-cost deposits, a trend clear from the fact that low-cost Casa (current and savings account) deposits made up just 31% of total deposits at the end of March, compared with 34% at the end of December 2006.
As a result, net interest margins (NIMs) slipped, although it remained at a high 4.6% for FY2007. Shailendra Bhandari, managing director and CEO of the bank, says that while the pressure on NIMs is likely to continue, it is likely to remain well above those of its peers.
While growth at the operating profit level continues to be very high, the bottom line has been hit by higher provisions, but a part of that is on account of a one-time provision for standard assets. Bhandari says they continue to hold higher provisions than that required by the Reserve Bank of India (RBI).
Won’t the high proportion of riskier two-wheeler loans lead to more non-performing assets (NPAs)? The bank has managed quite well so far, although net NPAs have gone up from 1.13% at the end of March 2006 to 1.26%. But it’s clear provisioning requirements have increased.
Centurion Bank’s management insists that it’s not just the risk, but the risk-reward ratio that matters, a fact borne out by their high NIMs. Going forward, the merger with Lord Krishna Bank (LKB) continues to await RBI approval because of a legal case pending at the Kerala high court.
But Bhandari says that, even without the LKB branches, they have 40% of ICICI Bank Ltd’s branch network, but just 10% of the balance sheet size. The implication is there’s a lot more that can be squeezed out of the bank’s operations.
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