The 23 per cent growth in operating profit at Rs 603 crore for the first six months has made it possible for the company to absorb the higher interest burden of Rs 83 crore in the first half.

In the second quarter, operating profit grew by 28 per cent to Rs 312 crore, providing adequate cover to the three-fold increase in interest cost to Rs 43 crore.

The interest burden, according to the management, has risen owing to the company's exit from the financial-services business, which required a cash out flow of more than Rs 800 crore.

Explaining the dip in net sales in second quarter to Rs 863 crore, from Rs 915.45 crore in the first quarter, company sources said that it was the result of seasonal variations. Sales,traditionally, for the company is lower during the monsoon months of July to September and, hence, it does not reveal any trend, they said.

The sources added that the company had made substantial gains in the premium end of the cigarette market, which accounted for nearly 5 per cent of volume sales of cigarettes. The chairman had said that the company would progressively move up the "value chain".

Net income and PAT in the second quarter of 1998-99 were Rs 903 crore and Rs 180 crore respectively. Expenses have been kept on a tight leash, and percentage of net income has been brought down to about 62 per cent, from 65 per cent in the corresponding quarter last year. Expenses to sales percentage was 70 per cent in the 1997-98 fiscal.

On the excise dispute, senior counsel has advised the management that the Cegat order dated September 4, 1998, is "unsustainable in law", and the company has "no legal liability to pay any differential duty". An eminent jurist has also supported the view taken by the company,a statement says.

INSIGHT

Results belie market expectations

ITC's net profit of Rs 350 crore for the first half ended September 1998 has belied market expectations. The market was expecting a profit after tax in the region of Rs 370 crore, an indication of which was the southward detour the stock took on Friday to the Rs 700 levels, dipping from around the previous levels of Rs 720.

ITC had increased prices of its major brands in June this year, following the hike in excise duties of cigarettes in the union budget. The move was expected to boost margins and volumes in the first half. However, while the move has paid dividends in the form of improved margins in the second quarter, a reciprocation in volume growth has not been forthcoming. Reflecting this is the 5.68 per cent dip in quarter-to-quarter sales from Rs 913 crore in the first to Rs 863 crore in the second. Another problem for ITC has been the huge drain on earnings created by the interest burden of Rs 83 crore (Rs 41crore).

Concerns about ITC's exposure to the loss-making ITC Bhadrachalam continue.