Analysts had been saying that ITC Ltd was shifting its focus from topline growth to managing profitability. Even so, they had not reckoned with a 1% drop in the company’s net sales in the March quarter, compared with the year ago period. Profit after tax, though, was up 10%.
The company’s operating profit margin (OPM) was at 32.4% in the March quarter, higher than in the same period last year, but lower than OPM in the December quarter. The year-on-year (y-o-y) profit growth has been buoyed by a 7.9% decline in total expenditure.
The main reason for the lower revenue lies in the lower volumes in the agri-business section, with revenues in the divisions falling 51%. That’s a continuation and a deepening of the trend in the December quarter, when lower soya volumes and a rationalization of the product portfolio was blamed, but the decline has been much worse in the March quarter.
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Also expected were the lower revenues in the hotel business, which analysts attributed to lower occupancies and a decline in room rates on account of the economic slowdown. The drop in revenues in the hotels segment is also a continuation of trends in the December quarter, but again the y-o-y decline was worse in the March quarter. While profits in the hotel business declined, they rose substantially for the agribusiness segment, on account of a steep rise in leaf tobacco prices.
The company’s non-cigarette fast moving consumer goods businesses appear to show signs of stabilization, although analysts point out that it’s too early to draw a firm conclusion on that.
Revenues in the business rose by 13.5% y-o-y, a rate of growth higher than in the December quarter. Most importantly, the losses in the segment are the same as that incurred a year ago and lower than in the December quarter.
Revenues in the paper segment rose significantly, thanks to capacity expansion, as did margins on account of lower fuel and coal prices.
But the cigarette segment has not done as well as in the December quarter. Year-on-year revenue growth in the segment was 16.3%, compared with a y-o-y growth of 17.7% in the December quarter. Net revenues as well as profits from the segment during the March quarter were lower than in the December quarter. That raises a question mark over the company’s famed resilience in cigarette volumes. Margins too declined compared with the December quarter.
Also, as Vijay Chugh, analyst at Ambit Capital points out, the most important influence on the stock will be the impact of regulatory changes, especially any changes in taxation in the forthcoming budget.
The pictorial warnings on cigarette packs may also have some impact, though some analysts point out that the company has so far been able to make up the impact on volumes through higher prices.
It’s true that the stock has underperformed the market. But it currently trades at 21 times trailing earnings, which looks rich seen against the net profit growth of 4.6% in fiscal 2009 and 10% in the March quarter.
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Graphics by Ahmed Raza Khan / Mint