Q3 meets estimate; small cigarettes boost ITC volume: ICICI

Sales growth is very much in line with our estimates.

Sanjay Manyal

ICICI Direct

Beating estimates, cigarette major ITC  reported a 21 percent year-on-year rise in its third quarter net profit at Rs 2.052 crore. Boosted by a strong growth in its FMCG business the company's net sales grew 23 percent at Rs 7,627 crore.

Sanjay Manyal of ICICI Direct said ITC's sales growth as well as profit after tax (PAT) is well in line with their estimates. Going forward, he expects the FMCG business of ITC to make a profit on a full year basis in FY14. According to him, the company has gained market share in the smaller cigarette segment and that has boosted volumes to a large extent. However, he is not calling a buy on the stock at the moment and recommends investors to hold it.

Here is the edited transcript of the interview on CNBC-TV18.

Q: The stock is up, up and away. Right now, it is 1.2 percent higher from its already elevated Rs 287 levels that it was trading before the results. What have you made of the net sales growth of 20 percent?

A: Sales growth is very much in line with our estimates. Simultaneously, profit after tax (PAT) is also in line with our estimates and it is positive. However, we need to understand what kind of FMCG profit margins are there, whether the losses have gone down or is it probably one of the quarters where we have made a profit. I haven't really seen that number yet because one thing we need to understand is that if FMCG probably couldn't make a profit, this is probably in the current year.

Q: The losses for the other FMCG business is coming in at around Rs 24 crore vis-à-vis Rs 46 crore of loss on a year on year basis. Does that help you?

A: The losses have come down but, I think if probably they would have made profit in any one of the quarters, then the third quarter would have been the one. But, they are still making losses in the FMCG business. We were expecting them to probably make a profit on a full year basis in the FMCG business in FY14 and that probably could be one of the positive triggers.

However, I think one thing is sure that they have gained market share in the volume front, probably in the smaller cigarette segment because they have introduced below 65mm cigarette last quarter and that probably would have triggered a good volume growth in that particular segment.

Q: So for their cigarette business in particular, the cigarette revenue which is net sales of cigarette have gone up 13 percent on a year-on-year basis where the PBIT has grown around 21 percent for the cigarette business in particular. Does that give you any sort of solace in terms of your estimates on the cigarette business and how would you extrapolate it into possibly the entire fiscal as well as FY14, if you could take a cue?

A: We were basically expecting around 17 percent kind of growth in the cigarette business which is just below our estimate. But, one thing we need to understand is that the company probably have taken 10 percent kind of a price hike earlier this year versus a 20 percent excise duty hike. So one thing is sure, they have to take a few more price hikes to maintain that kind of a profitability and sales growth because the excise duty hike was very steep this year, around 20 percent.

They haven't passed on the entire excise duty hike to the consumers for sure. Probably, the next big thing would be the next budget which is next month. Obviously, one does not expect a similar kind of excise duty hike that they had last year because two consecutive years of that kind of hike would be really detrimental to the volume. Probably, the government will hike it to a minimum of 5 to 10 percent kind of excise in the next budget. I think overall, the results are pretty good.

Q: The non-cigarette FMCG business has clearly not turned around but, otherwise it is a good performance. You have a buy on the stock at this juncture?

A: We have a hold on the stock but, I think once we introduce FY15 numbers, the target price will go up. Again, as I mentioned, we are expecting FY14 to be the year where they could really make a turnaround in the FMCG business and make profit in that particular business. It would certainly be a positive.

Q: The agri business did very well in the previous quarter. This time around, if I am not mistaken and if I can read the numbers correctly on the press release, it has come in at around Rs 1,600 crore, just ballpark figure. That would translate into at least overall 35 percent growth on a year-on-year basis. What would your estimate be with regards to the agri business and do you expect the contribution to start upping itself for ITC, hence contributing effectively to the top line as well?

A: This is one of the segments where they have started doing well in the last two quarters. Mostly, I think the export of tobacco must have risen from what I can understand. But, I think this is one particular segment where they did very well last year. I think they have shown a good performance this quarter too, which is certainly a positive surprise for the stock.

Q: Sequentially, there has been improvement in hotels. Should we really take that very seriously? The third quarter is bound to be better than the monsoon quarter. The year on year performance in hotels has not been very heartening at all. The losses have reduced in the FMCG and other businesses but they have not been wiped out. Do you expect the non-cigarette business to really turn around any time soon?

A: Specifically if you mention the hotels business, they have seen a decent growth because of the seasonal factor. The third quarter has always been a really good quarter for them. However, I think the profitability has gone down mainly because of one of their properties which came up in Chennai,  Hotel Chola. That probably has led to the higher operating expenses initially and lower revenue from that particular hotel. I think we should not take that very seriously because hotels contribute to merely two-three percent of the bottomline.

As I mentioned, that's mainly because of the capex which they have done for the Chennai property. As far as the FMCG business and their overall business is concerned, we are expecting FY14 to be breaking even into the FMCG business and that probably would be the positive factor for the company.

Q: If you had to just wrap it up quickly, would your top buy be ITC?

A: It will remain ITC along with some of the midcaps like Marico and Dabur. But in largecaps, only ITC will be the top pick.