Q4 smoke turns holy for ITC

ITC, originally a tobacco company which is now an Indian conglomerate having dozens of varied products in its basket of offering posted its Q4 results in the last week. The popularly tagged as a 'tobacco major' surprisingly given robust numbers in Q4 where it usually faces some budgetary turmoil every year. In the union budget 2016-17 the excise duty hike on tobacco and cigarettes was too marginal for the company to react accordingly.

ITC’s cigarette business which accounts for nearly 50 per cent of its total revenue increased at the rate of 10.2 per cent to RS Rs 4639.17 crore. Similarly its PBT from cigarette has grown 11.5 per cent to Rs 3018.56 crore. However, going forward the company may face some hurdles amid the recent government rule to print large pictorial warnings covering 85 per cent of the front and back side of the cigarette packaging meant to discourage smoking. The entire tobacco has protested against the move stating that it would drastically affect the businesses of more than 45 million farmers.

Subsequently the agri business that accounts for 16 per cent of its total revenue grew at a rate of 26.5 per cent to Rs 1806.79 crore in Q4FY16 from Rs 1427.89 crore. To enhance its agri business activities, the company is shifting its plant to Guntur from Hyderabad. The plant is likely to introduce more products including food safe spices and millets by investing nearly 8000 crore for the same.

Apart from the two mentioned above, ITC has also penetrated into the packaged foods business which has seen a very gradual upside in the wake of huge competition from the sole packagers. Its packaging business accounts for only 11 per cent of the revenues. Packaging business remained flat for the quarter. However, its packaging faces restrictions o the use of logos, colours and brand images which could be a hurdle in the near term.

ITC is very small in terms of its hotel business but has witnessed a gradual growth. Andhra Pradesh government has been boosting the company to set up its agri plants and five star hotels in Guntur.

ITC’s stock price has not grown much from the last year but still has maintained to outperform against the benchmark and its major peer Hindustan Unilever. The company is virtually debt free through which it has been attracting investors so far. The company has a good Return on Equity track record from last three years. The company also maintains healthy dividend payout of more than 50 per cent and book value of 50.

The stock has seen recent rise in its share prices after it announced bonus in the ratio 1:2 and dividend of 8.5/share of Re.1.00. ITC is nearly in its 52 week high and has a strong resistance near 355-360 levels. The stock is a buy from 322 levels which is the strong 100 EMA support level. The stock can test 400 once it gives a breakout at 360 in the first place.

Where the compulsory warning on the packages has not helped reduce the number of smokers in India, the pictorial warnings would hardly do. However, faster diversification would help it offset the fear of losing the share in its prime business.