Shares of ITC Ltd have rallied from around Rs190 before the Budget to around Rs230 at present, a rise of 21%, easily beating the rise in the Bombay Stock Exchange FMCG Index over the period. This was because the markets were pleasantly surprised that the Union Budget didn’t increase excise duty on cigarettes. The rally has been supported to some extent by the company’s results for the June quarter. The company announced on Thursday that its earnings per share (EPS) increased 17.8% to Rs2.32 per share in the June quarter. That’s much better than the 10.9% rise in EPS in the March quarter.
The non-cigarette business of the company comprising businesses such as branded packaged foods, lifestyle products and personal products did improve, with segment losses reducing not only compared with the year-ago period, but also compared with the March quarter. But year-on-year (y-o-y) volume growth in this business has been a weak 10%. The hotels business continued to suffer, with revenues continuing to slide while profits before interest and tax from the segment fell by 64% y-o-y. Nevertheless, as the economy improves, so should the hotels businesses.
Profit from agribusiness improved, despite the much lower turnover. On the other hand, margins were squeezed in the paper business, where, despite a substantial jump in revenue, PBIT (profits before income and tax) for the segment was almost flat, possibly on account of costs absorbed by the changes made on introduction of graphic warnings on cigarette packs.
ITC’s cigarette business did well, with net revenues rising 23%, but PBIT increased at a lower rate of 17% compared with the same period last year, implying pressure on margins. The company’s overall Ebitda (earnings before interest, tax, depreciation and amortization) margins, though, improved to 34% from 30% in the year ago period, owing mainly to improved margins on agribusiness and the non-cigarette consumer goods business.
Looking ahead, although excise duty was not increased at the Centre, several states—for instance Maharashtra, Delhi and Rajasthan—have increased the value-added tax on cigarettes.
ITC trades at around 23 times fiscal year 2010 estimated earnings, which is not cheap. Moreover, when the markets rally, defensive stocks such as ITC usually underperform. There, thus, seems to be little upside for ITC from current levels.
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