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ITC’s Profitability Ratios Rise First Time In Five Years On Non-Cigarette Business

The consumer goods maker’s non-cigarette business contributed more than half to gross revenue for the first time.

A layer of chocolate is applied to biscuits on the production line. (Photographer: Jason Alden/Bloomberg)  
A layer of chocolate is applied to biscuits on the production line. (Photographer: Jason Alden/Bloomberg)  

ITC Ltd.’s return ratios for financial year 2018-19 rose for the first time in at least five years as the company’s non-cigarette businesses contributed more to profits.

Return-on-equity—the firm’s profit to its shareholders’ equity—jumped 50 basis points year-on-year to 22.38 percent in FY19. Return-on-capital employed—earnings before interest and taxes to the company’s total assets after subtracting current liabilities—rose 40 basis points to 22 percent.

The consumer goods maker’s non-cigarette businesses contributed more than half to gross revenue for the first time.

ITC’s non-cigarette businesses—consumer goods excluding tobacco, hotels, agri-business and paperboards and packaging together saw a 13 percent growth in revenue with profit before tax margin improving to 8.6 percent in FY19 from 8.4 percent in the previous year, according to the company’s exchange filings. Gross revenue from the company’s cigarette business, however, dipped nearly 8 percent to Rs 22,913 crore, the filing showed. Broking firm CLSA in a research note said cigarette business’ EBIT margin fell to 70.3 percent in FY19 from 71.2 percent in the previous year.

Operational metrics indicated that the management’s focus was towards the non-cigarette business as indicated in ITC’s 2019 annual report. “In aggregate, the non-cigarette businesses accounts for over 80 percent of your company’s operating capital employed, about 90 percent of the employee base and over 80 percent of annual investments,” the company had said.

FMCG-Others Profitability Improves

The consumer goods business excluding cigarettes is poised to see better profitability as the business gains scale, Goldman Sachs said in a report. It includes brands like Aashirwaad atta, Sunfeast biscuits and Yippee noodles.

ITC’s annual report showed a 10 percent rise in the segment’s gross revenue with operational profit nearly doubling to Rs 316 crore in FY19 from Rs 164 crore a year ago. Capital expenditure allocated to the segment stood at Rs 1,321 crore in FY19, the most among all segments including the cigarette business.

Goldman said the company is among the top three players when it comes to flour, biscuits, instant noodles and stationary products. After cigarettes, the rest of FMCG segment is ITC’s largest segment, contributing nearly 25 percent to its revenue.

Steady Gains In Other Businesses

ITC’s hotel business’ revenue grew 17.5 percent, driven by increase in average room rates, improvement in occupancy and higher food and beverage revenue from existing hotels and addition of new properties, according to the annual report. The company said its paperboards and packaging business’ 11.6 percent gross revenue growth was driven by recovery across end-user segments in the consumption sector and higher realisations on paper products. The increase in crop output in 2018 helped the agri-business grow 16.5 percent despite slackness in exports, the report said.