ITC Ltd’s annual report shows that cigarette volumes were affected by the 17% hike in excise duties in budget 2010-11. Cigarette sales fell by 2.8% to 81.7 billion sticks after the company raised prices sharply to recover the higher levy from customers and improve margins.
The company also changed its product mix to increase the share of premium products, since its mass market products get more affected by the price increases. ITC’s per unit realization for cigarettes rose by about 17%, but sales in value terms rose by a lower 13.4% due to the fall in volumes.
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The outlook for the current year is relatively better as excise duties were left unchanged in this year’s budget. That should result in volume growth returning to normal levels eventually.
In ITC’s consumer goods portfolio, the packaged foods business (products such as flour and chips) grew by 24%, with per unit realization rising by 14%. Sales of its non-food consumer business (personal care, stationery and retail) rose by 28%, but quantitative details are not available.
On the input cost front, the company did rather well, using its forecasting and procurement skills to protect itself from higher costs. ITC’s per unit cost of wheat rose by just 5.3% during the year and that of wheat flour by just 1.4%. Its leaf tobacco procurement cost rose by only 7%, partly due to a good crop in 2010, which rose by 14%.
ITC’s skills on the cash generation front are also visible in its annual report. Operating profit before working capital changes rose by about 17% to Rs7,720 crore, partly due to the increase in product prices.
But inventories rose sharply during the year, which could have resulted in an increase in the working capital funding. But the company leaned on its creditors, resulting in a jump that offset the increase in inventories. Its cash generated from operations rose by 18.4% during the year to Rs7,732 crore; after paying income tax of Rs2,278 crore, around Rs5,454 crore was left for capital expenditure and investments, with the largest chunk going towards paying dividends to shareholders.
A high dividend payout ensured its cash and investments did not bloat, otherwise its total return on capital employed would have been affected. Instead, the company managed to increase it by about 4 percentage points during the year.
Graphic by Yogesh Kumar/Mint
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