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Business News/ Opinion / Online-views/  ITC results disappoint, Ebitda margin at 26.5%

ITC results disappoint, Ebitda margin at 26.5%

ITC results disappoint, Ebitda margin at26.5%


India’s largest cigarette company ITC Ltd’s stock tumbled 4.2% on Friday at the Bombay Stock Exchange after the company’s profits for the fourth quarter disappointed analysts. The company’s profit before tax rose Rs143.73 crore to Rs1,084.16 crore, while “other income" went up by Rs61.4 crore.

However, ITC has always had a strong “other income" growth, and it’s not something that will worry the market. After adjusting for income-tax refunds, profit after tax (PAT) growth in the March quarter was 14.1%.

Earnings before interest, taxes, depreciation and amortization (Ebitda) margin at 26.5% was a tad lower than the 27.59% notched up a year ago, and this was a key disappointment, as the market expected some of its new consumer products to show improved margins.

Cigarettes accounted for 39% of net sales and 82% of net profit in the March quarter. In the same quarter of the previous year, they accounted for 42.4% of net sales and 80.9% of profit. This is because of the higher losses from ITC’s other consumer goods businesses, which are new, but growing at a rapid pace. Apart from strong growth in the foods business, the firm has launched new initiatives in the personal care segment.

Margins in the cigarettes segment were higher than a year ago on the back of price hikes. Analysts point out that despite a 20% hike in prices during the past year, cigarette volumes have dipped just marginally.

Profits in hotels and paper, too, have improved, with the company being able to neutralize rising raw material prices in the paper business by “optimizing opportunity buying and increasing sales realizations."

The company’s agribusiness, plagued by government intervention, ban on experts, etc., during the first half of the year, has done rather well in the fourth quarter. Although margins are low in the business, they’re higher than they were a year ago and revenue growth is high.

But ITC’s stock depends primarily on how the cigarette business performs. While it has been riding high because it’s seen as defensive in uncertain times, Anand Mour, senior research analyst at Prabhudas Lilladher Pvt. Ltd points out that the key uncertainty lies in whether ITC will be able to upgrade its non-filter cigarette smokers into customers who will switch to its filtered cigarettes.

Since non-filter cigarettes made for 12% of the total value in ITC’s cigarettes business in the fiscal year that ended on 31 March, and since the company has discontinued production of non-filter cigarettes, this conversion is critical.

The market also expects the company to announce price hikes soon, which could act as the next trigger for the stock.

Federal Bank registers sharp rise in Q4 net interest income

Results of Federal Bank Ltd were another disappointment for the market, with net profit for the fourth quarter that ended on 31 March up a mere 3.6%. In fact, profit before tax in the quarter actually fell compared with a year earlier, and it was only lower tax provisions that enabled profit after tax to show growth.

At the operating level, growth has been much stronger, with net interest income up an excellent 21.8%, driving operating profit growth of 16.3%. Advances grew 26.89% for the entire fiscal year, well above the rate of growth in Indian banking. It raised Rs2,141 crore through a rights issue last January, which helped the lender push down its cost of funds. Net interest margin is at a very high 3.76%.

The bank has also been able to improve the quality of its assets, with improvements in both gross and net non-performing assets (NPAs). Gross NPAs have improved to 2.42% from 2.76% at the end of December, while net NPAs have moved from 0.29% to 0.23%.

At its current price of around Rs236, the stock is just a bit above its current book value per share of Rs229.53. But the present combination of slowing growth with inflation does not augur well for banking stocks.

Oil subsidies in Asian countries

A reason why developing countries are supposed to be hit harder by rising crude oil prices is because, unlike the developed nations, manufacturing makes up a larger proportion of their gross domestic product (GDP).

A Citigroup research report has data on the oil intensity of Asian economies. Rather surprisingly, India is one of the countries with a much higher oil intensity, despite the nation’s much larger services sector. The data, which is for 2006, shows that India consumed 137.1 tonnes per million dollars of GDP, against China’s 131.6 tonnes.

Thailand has the highest oil intensity, consuming 214.3 tonnes per million dollars of GDP. For the US, the figure is a mere 71.1 tonnes and Japan’s consumption is even lower than that. What about the burden of oil subsidies? In 2007, the Citigroup report says that oil subsidies in India were 0.9% of GDP, well below that for Indonesia at 1.6%, or Malaysia at 1.4%, although higher than that for China at 0.2%.

The Citi report goes on to say, “However, Indonesia has already indicated an imminent fuel adjustment, possibly by 20-30%, in June. Malaysia also announced a possible price adjustment, possibly also by 20%. This would leave India, whose fiscal deficits are already close to 6% of GDP, as the only major economy to tangle with higher fiscal subsidy."

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Published: 24 May 2008, 12:36 AM IST
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