Fire beneath ITC Ltd

Diversified consumer company ITC Ltd returned stellar numbers for the quarter ended March, with profits growing 27% to Rs 1,028.2 crore and sales 30% to Rs 5,131.6 crore, though expenditure too was rose 33.6% to Rs 3,513.6 crore.

The market gave a thumbs-up to the ITC stock, pushing it up 3.41% to Rs 271.50 per share on a day the broader Sensex shed 0.5%.

The bulk of the profits came from the cigarettes business with the division’s profit before income and tax growing 17.9% to Rs 1,251.22 crore. Cash generated by this business continues to subsidise ITC’s other FMCG businesses, which include branded packaged foods and personal care products. These businesses continue to incur losses, though the losses have come down to Rs 78.69 crore from Rs 117.3 crore in the corresponding quarter a year ago.

ITC does not want to go the way most Western cigarette companies have and is gradually reducing its dependence on the business. Contribution of the cigarettes business has fallen from 63% of gross revenues in Q4FY09 to 58%.

The company had effected a 20% price hike across its cigarettes portfolio in March, following an increase in excise duty on cigarettes in the budget. This was on top of a pre-budget hike of 5-8% in anticipation of a hike in excise duty.

Very few companies are in the envious situation that ITC is in. It is the undisputed national leader in its primary business —- cigarettes —- and faces little competition, more so because of the ban on foreign direct investment in cigarettes announced in April. The ban put paid to the plans of global majors such as Japan Tobacco International and Altria Group, which were looking to enter India.

Analysts believe ITC will soon launch micro-cigarettes, priced at Rs 1.50 per stick, in a bid to tap consumers at the bottom of the pyramid, who are looking to graduate from bidis but find cigarettes expensive at Rs 3-5 per stick and thus end up smoking illegal cigarettes. The move will help the company gain market share from illegal cigarettes, which typically sell at Rs 10 for a 10-stick pack.

ITC’s hotels business also did reasonably well, with profit before interest and tax rising 10% to Rs 78.2 crore. Analysts believe the business is set for revenue growth and margin expansion as occupancy rates improve and properties ramp up.

At a trailing 12-month price-to-earnings ratio of 25.3, the ITC stock is definitely not cheap compared with the broader market. But its PE is similar to that of pure-play FMCG peer Hindustan Unilever (HUL), which hasn’t given investors much to cheer about in a long while. So those holding the HUL stock could well consider selling it and buying ITC.