ITC: Lack of positive triggers
Despite posting slightly better-than-expected results for the quarter ended March 31, in which ITC Ltd saw a substantial reduction in loss of the non-cigarette fast-moving consumer goods (FMCG) business, its stock ended lower by 0.75 per cent at Rs 231.75 on Friday against a flat market. While the stock's outperformance in recent months could be one reason, the Street also seems to get a feeling that volume growth in the cigarette business was lower (at four-five per cent) than expectations of 6.5-7 per cent and that, too, despite a low base (volumes were down two per cent in the March 2011 quarter) and inventory accumulation ahead of the Budget.
On the whole, the company reported total income from operations and net profit of Rs 6,955 crore, up 17 per cent year-on-year (y-o-y) and Rs 1,614 crore (up 26 per cent), compared with average expectations of Rs 6,769 crore and Rs 1,543 crore, respectively.
The company also disappointed investors with a 19 per cent y-o-y rise in operating profit against expectations of a 23 per cent rise. This was despite price hikes in cigarettes, which helped cigarettes segment margins expand 200 basis points, and a more-than-expected decline in losses by 'other FMCG' businesses to Rs 17 crore (from Rs 67.8 crore), backed by robust revenue growth of 23 per cent. The gains in cigarette and other FMCG businesses were partly negated by the margin decline in ITC's agri, hotels and paper businesses.
Last, the growth in net profit was also aided by an 81 per cent jump in other income to Rs 208 crore.
Analysts advise investors to brace for a muted (low single-digit) growth or even a decline (of up to five per cent) in cigarette volumes in FY13 as they build in expectations of further price hikes, ranging 8-17 per cent (in order to maintain segment margins). Even if the trend of improving performance of other FMCG businesses is sustained and businesses like agri, hotels and paper see a bounceback (in terms of margins), analysts believe it could get offset by the negative impact of price rises in the cigarettes business, which accounts for 80 per cent of total segment profits.
In this backdrop, analysts don't see significant positive triggers for the stock. Besides, it also looks fairly priced at 25 times FY13 estimated earningsm given average target one-year forward multiple of 24 times. Hence, they expect the stock to track broader markets in the near term.