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Despite 2.8% drop in cigarette volumes in FY11, due to higher realisations, cigarette EBIT
grew 17%. Both its paper and hotel businesses continued their trend of generating free cash.
Its agri business has been biggest growth driver in the last 4 years with EBIT CAGR of 64%
with EBIT of Rs5.66bn ( 8.3% of total).
Cigarette business continues to deliver growth, despite challenges
Last 4 years has seen a lot of structural changes in the taxation levy in cigarette
business. Starting from the fresh levy of value added tax ( VAT) on maximum retail price
at 12.5%, and the sharp increase in taxation on the non-filter segment, and lastly the
sharp hike in excise duty in the filter segments (18.3%) in the 2010 budget. Post the VAT
levy, individual states have frequently raised the taxation at the state level from agreed
rate of 12.5% to higher rates, like the recent move by Rajasthan to a rate of 40% on
cigarettes.
As a consequence of the above, ITC's cigarette volumes have been flat at 81.72bn sticks
in FY11 compared to 81.68bn sticks in FY08. However, ITC has recorded a net revenue
growth of 12.8% in this period, and a EBIT growth of 16.6%, mainly achieved by a
12.74% improvement in per stick realisation. While a large portion of the realisation
improvement would be price hikes, we believe product mix improvement driven by
management focus on new product offerings at the premium end (like brand launches of
'Lucky Strike' (premium range), 'Classic Menthol Rush', 'Gold Flake Sleek Line Kings',
'Gold Flake Arctic Menthol' 'Players Gold Leaf') have also helped.
Agri, paper businesses outperformed 17% EBIT CAGR of ITC in last four years
ITC's agri business has seen its EBIT grow from Rs1.29bn in FY08 to Rs5.66bn in FY11,
recording a EBIT CAGR of 64%. While, the revenue CAGR has been just 7% in this period.
ITC has reduced exposure to non-value added commodity exports, and focused on leaf
tobacco exports where it has significant competitive advantage. Besides, the external
environment for Indian tobacco exports have been excellent due to global shortages of
cigarette tobacco. While, sustaining the high growth may not be possible, we expect ITC to
sustain a more moderate growth going forward. Agri business now contributes 8.3% of ITC's
overall EBIT.
ITC's cigarette business has seen a EBIT growth of 22% in last four years, and now accounts
for 12% of ITC's EBIT. Improvement in integration and product mix have driven this growth.
Free cash flow generation per share has grown 68% in last four years
While ITC's cash generation (net of tax and working capital) from business has grown from
Rs27.2bn in FY08 to Rs52.6bn in FY11, its annual capex has actually reduced from
Rs22.42bn in FY08 to Rs12.73bn in FY11. This has consequently improved ITC's free cash
generation Rs9.3bn in FY08 to Rs44.6bn in FY11.
The paper and hotel businesses have started generating free cash post their own capex
needs. It may be recalled that these two business were areas of concern for investors a while
back as they were dipping into the cigarette business cash generation. In FY11, the paper
business generated Rs10.5bn of gross cash, it had a capex of just Rs2.5bn, while its hotel
business generated a gross cash of Rs3.51bn compared to its capex of Rs3.22bn. Even on a
longer time frame of 5-7 years, these two business are generating free cash.
We believe, as a consequence of the above trends, ITC management has rightly stepped up
the dividend distribution to the share holders in the last four years to 55-58% of its annual
profits.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Despite 2.8% drop in cigarette volumes in FY11, due to higher realisations, cigarette EBIT
grew 17%. Both its paper and hotel businesses continued their trend of generating free cash.
Its agri business has been biggest growth driver in the last 4 years with EBIT CAGR of 64%
with EBIT of Rs5.66bn ( 8.3% of total).
Cigarette business continues to deliver growth, despite challenges
Last 4 years has seen a lot of structural changes in the taxation levy in cigarette
business. Starting from the fresh levy of value added tax ( VAT) on maximum retail price
at 12.5%, and the sharp increase in taxation on the non-filter segment, and lastly the
sharp hike in excise duty in the filter segments (18.3%) in the 2010 budget. Post the VAT
levy, individual states have frequently raised the taxation at the state level from agreed
rate of 12.5% to higher rates, like the recent move by Rajasthan to a rate of 40% on
cigarettes.
As a consequence of the above, ITC's cigarette volumes have been flat at 81.72bn sticks
in FY11 compared to 81.68bn sticks in FY08. However, ITC has recorded a net revenue
growth of 12.8% in this period, and a EBIT growth of 16.6%, mainly achieved by a
12.74% improvement in per stick realisation. While a large portion of the realisation
improvement would be price hikes, we believe product mix improvement driven by
management focus on new product offerings at the premium end (like brand launches of
'Lucky Strike' (premium range), 'Classic Menthol Rush', 'Gold Flake Sleek Line Kings',
'Gold Flake Arctic Menthol' 'Players Gold Leaf') have also helped.
Agri, paper businesses outperformed 17% EBIT CAGR of ITC in last four years
ITC's agri business has seen its EBIT grow from Rs1.29bn in FY08 to Rs5.66bn in FY11,
recording a EBIT CAGR of 64%. While, the revenue CAGR has been just 7% in this period.
ITC has reduced exposure to non-value added commodity exports, and focused on leaf
tobacco exports where it has significant competitive advantage. Besides, the external
environment for Indian tobacco exports have been excellent due to global shortages of
cigarette tobacco. While, sustaining the high growth may not be possible, we expect ITC to
sustain a more moderate growth going forward. Agri business now contributes 8.3% of ITC's
overall EBIT.
ITC's cigarette business has seen a EBIT growth of 22% in last four years, and now accounts
for 12% of ITC's EBIT. Improvement in integration and product mix have driven this growth.
Free cash flow generation per share has grown 68% in last four years
While ITC's cash generation (net of tax and working capital) from business has grown from
Rs27.2bn in FY08 to Rs52.6bn in FY11, its annual capex has actually reduced from
Rs22.42bn in FY08 to Rs12.73bn in FY11. This has consequently improved ITC's free cash
generation Rs9.3bn in FY08 to Rs44.6bn in FY11.
The paper and hotel businesses have started generating free cash post their own capex
needs. It may be recalled that these two business were areas of concern for investors a while
back as they were dipping into the cigarette business cash generation. In FY11, the paper
business generated Rs10.5bn of gross cash, it had a capex of just Rs2.5bn, while its hotel
business generated a gross cash of Rs3.51bn compared to its capex of Rs3.22bn. Even on a
longer time frame of 5-7 years, these two business are generating free cash.
We believe, as a consequence of the above trends, ITC management has rightly stepped up
the dividend distribution to the share holders in the last four years to 55-58% of its annual
profits.
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