INSUBCONTINENT EXCLUSIVE:
Despite an encouraging show on the topline front, it’s the bottom-line performance of ITC that the Street has frowned upon
Notwithstanding a double-digit revenue growth aided by around 8 per cent volume surge in cigarettes, the Street was not pleased with the
December quarter performance of tobacco-to-FMCG major ITC
As a result, the stock slumped more than 4 per cent, declining for the fifth consecutive session on Wednesday.
ITC posted a 4 per cent
increase in net profit – the slowest growth in the past 11 quarters – against an expectation of double-digit growth
The operating margin too decreased by 140 bps over the year-ago level
Higher raw material cost (including higher leaf tobacco prices) dented the bottom-line growth
Input cost grew nearly 20 per cent, higher than the 15 per cent growth in revenues
Likewise, other expenses (including ad spend) grew faster than the top-line growth.
The cigarette business contributes over 80 per cent to
the company’s bottom-line
So, any headwind in the business has a direct impact on the bottom-line and valuations
Little wonder then that the Street ignored the smart gains in cigarette volumes against a corresponding drop a year ago
The same was also the case with the non-cigarette businesses that posted a double-digit growth in revenues
The margins of the FMCG and hotels business also improved over the earlier quarters.
The ITC stock is trading at the same level as two years
It has predominantly been a value stock rather than a growth one
With increased taxation and curbs on smoking, the cigarette volumes are unlikely to have a secular increase
The company has been zealous in steadily improving its profitability
Hence impact on the bottom-line in any quarter is likely to evoke a negative response from the Street.
Trading at 28.5 times its trailing
four quarters earnings, the stock is one of the cheapest in the FMCG sector
The price-to-earnings multiple of the ET FMCG Index stands at 47
However, the subdued bottom-line performance of the December quarter doesn’t make the stock any more attractive.
With the Q3 results
behind it, the Street is going to closely track next month’s Union Budget for the triggers on ITC
The stock typically trades flat, or weak, ahead of the Budget in the fear of higher taxes on cigarettes.
