It’s the same old story at ITC Ltd, with the company’s new businesses burning away a large part of the incremental profit generated by the cash-cow cigarettes business.
In the quarter ended December, the cigarettes business grew earnings before interest and tax (Ebit) by 18%, or Rs173 crore. Losses of its fast moving consumer goods (FMCG) business, at the same time, rose by Rs62.5 crore. And thanks to a slowdown in business activity and Mumbai terror attack in November, profit of the hotels division fell by about Rs46.7 crore.
At the company level, Ebit grew by just Rs79 crore, or 6.7%, as a result. Losses in the consumer goods business have mounted this fiscal year due to the launch of personal care products such as soaps, shampoos, conditioners and shower gels. Analysts are hopeful that losses have peaked and will soon stabilize.
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For now though, losses seem to be mounting. ITC had indicated to analysts at the end of the September quarter that consumer goods losses would be capped at Rs400-420 crore this fiscal. In the first three quarters, the losses have totalled Rs366 crore, at a quarterly average of Rs122 crore, and it seems like the company will overshoot its target.
According to an industry expert, ITC is aggressive in its pricing strategy at the time of a new launch in the consumer goods business, but when volumes stabilize, it is known to price products more reasonably. He gives the example of Sunfeast Special biscuits, that were launched at a very low price of Rs5 and Rs6 in two variants. While the company retained the price, it lowered the weight of the packs a few months ago, thereby improving its realization.
The cigarettes business seems to have recovered from the blow on volumes after high taxes on non-filtered cigarettes earlier in the fiscal year. Revenues of the division grew by 17.7% last quarter, compared with 10.6% in the first two quarters. This division accounts for 40% of revenues, but as much as 87% of profit.
The outlook for the division, however, is not as bright as at other consumer goods firms. Most consumer goods manufacturers will benefit from the sharp fall in commodity prices and are set to report a substantial rise in margins in the coming quarters.
ITC’s core business, however, will have a relatively low benefit, since raw material costs account for a small portion of its revenues. With an Ebit margin of 56%, the drop in commodity prices will not lead to much improvement in its margins.
Given these concerns and the fact that net profit has been pretty much flat in the first three quarters of this fiscal, the valuation of 20 times past earnings looks rich.
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Graphics by Ahmed Raza Khan / Mint