If you are someone who invests in the stock market then one name you would have heard is ITC. It is one of the biggest and oldest business conglomerates in our country. I am sure many of you would be interested to know if it is worth investing in ITC or not. So in this video, I have done an in-depth analysis of ITC and its business.
We will start with analyzing the business of ITC, then we will understand the key strength of ITC. Then we will discuss the future growth prospects and finally, we will analyze the financials of ITC on various parameters like growth ratio, profitability ratio, etc. And finally, we will do the valuation analysis of ITC to understand if it is worth investing in ITC at current levels. We will also try to understand why ITC share is currently trading at a much lower valuation as compared to the competitors.
But before we proceed, this video is only for long-term investors. Not for day traders.
Alright, let’s get started.
Company & its business
- ITC was established in 1910 with the name Imperial Tobacco Company of India Limited. Later, it was renamed I.T.C. Limited in 1974.
- So ITC started its business almost 111 years ago with Tobacco and it is one of the oldest public listed companies in India. Today, ITC is a big conglomerate with a presence across many business categories.
- Cigarette: ITC is the market leader with a 75% market share in the Indian cigarette sector. This is the biggest contributor to the revenue and profitability of the company. Some of the common brands in the cigarette category are Insignia, India Kings, Classic, Gold Flake, American Club, Navy Cut, Players, etc.
- FMCG: ITC has a strong presence in the FMCG segment with a huge product portfolio catering to packaged food, personal care, and education, and stationary. Top brands in the FMCG segment include Aashirwad which is ~6000 Cr brand and No. 1 brand in the Aata segment, Sunfeast is over 4000 Cr brand and No. 1 in cream biscuit segment, Bingo with ~ 2700 Cr brand and No. 1 in the snack food segment, Yippee is 1300 Cr brand and No. 2 in noodles segment, Classmate is ~ 1400 Cr brand and No. 1 in notebooks. Mangaldeep Agarbatti is over 800 Cr brand and No. 2 in the Agarbatti segment. Some of the other brands include Savlon, Engage, Fiama, Vivel, Nim Wash, B-Natural, Mint-O, Candyman, Papercraft, etc. FMCG is the fastest-growing segment of ITC and the most promising business category.
- Hotel: Launched in 1975, ITC Hotels is India's premier chain of luxury hotels. At present, there are 100+ hotels in 70 cities. Some of the hotels include ITC Grand Bharat in Gurugram. ITC Grand Chola in Chennai, ITC Maurya in Delhi, ITC Maratha in Mumbai, ITC Royal Bengal in Kolkata, and many more.
- Agribusiness: ITC is India’s one of the largest agribusiness enterprises with a presence across the entire agri value chain. ITC sources the finest of Indian Feed Ingredients, Food Grains, Marine Products, Processed Fruits & Coffee.
- Paperboard and packaging: ITC’s paperboards and specialty paper division is India’s largest and most technically advanced and eco-friendly paperboard business catering to a wide spectrum of packaging, graphic, communication, writing, printing, and specialty paper requirements. ITC packaging business converts over 70,000 tonnes of paper, paperboard, and laminates per annum into a variety of value-added packaging solutions for various industries including food & beverage, personal products, cigarette, liquor, and consumer goods.
- ITC also has many subsidiaries including ITC Infotech which is in the business of technology consulting.
Business BreakupNow let's try to understand the contribution of each business division of ITC to the revenue and profits of the company.
- If we look at the revenue break up for Q3 of FY21, ITC had total revenue of Rs 13,255 Cr. Out of this, cigarettes contributed Rs 5,498 Cr i.e. 41.48%. Please note that the Cigarette division revenue has increased 3.5% in Q3 of FY21 as compared to Q3 of FY20.
- The next contribution is from the FMCG business that contributed Rs 3,562 Cr i.e. 26.87% in total revenue. It has increased 7.5% as compared to Q3 of FY20.
- The hotel business has a significant impact due to COVID. It suffered a loss of 57.4% in revenue.
- Agribusiness is the 3rd largest contributor with 18.7% contribution. Its revenue has grown 18.5% as compared to Q3 of last year.
- Paperboard, paper, and packaging contributed 11.15% in total revenue.
Clearly, the Cigarette business is still the dominant contributor.
- If we look at the profit breakup for Q3 of FY21, ITC had a total profit of Rs 4,074 Cr. Out of this, cigarettes contributed Rs 3,453 Cr i.e. 84.76%. Clearly, the Cigarette business is the biggest contributor to the total profits of the company. However, there is a fall in profits by 8.1% as compared to last year.
- FMCG business contributed only Rs 207 Cr i.e. 5% in total profits. But the biggest takeaway is the huge growth of 92.7% in FMCG profits as compared to last year. Clearly, FMCG profits have grown significantly.
- The hotel business was a loss due to COVID.
- Agribusiness contributed 4.7% in total profits and the profits shrunk by 8.1% as compared to Q3 of last year.
- Paperboard, paper, and packaging contributed 7% in total profits. So clearly, cigarettes are the biggest contributor to the revenues and profits of the company but FMCG is growing at a good rate.
If we look at the leadership of ITC, Mr. Sajiv Puri is the Chairman and Managing Director. Mr. Puri is an alumnus of the Indian Institute of Technology, Kanpur, and Wharton School of Business. He joined ITC in January 1986. So he has been associated with ITC for 35 years now. Clearly, a rich experience. Puri has also served as Chief Operating Officer of ITC and prior to that as President of FMCG Businesses.
As of today, ITC has a market cap of more than Rs 2.5 lakh Cr.
- Strong Brand Name: Today, the majority of people in India are aware of many brands of ITC including Aashirwaad, Sunfeast, Bingo, Yipee, Savlon, Classmate, and many more. It takes a lot of effort to build a brand value and ITC has a strong competitive advantage due to this brand value as people recognize and prefer these brands over the competitors.
- Innovative and agile business: To stay relevant and sustainable for the long term, it is very important for a business to innovate. ITC has been very innovative and agile in terms of business. For example, during COVID lockdown, they partnered with Dominos, Zomato, and Swiggy to deliver products to the consumer at their doorstep. They also launched ITC stores on wheels.
- Sustainable growth: The future is not just about growth but sustainable growth without harming the environment. ITCs one of the biggest strength is sustainable growth. It is a carbon positive company for 15 years with afforestation, water positive for 18 years with watershed development, and solid waste recycling positive for 13 years with livestock development and solid waste management.
- Strong distribution network: Distribution is the backbone of an FMCG company. Over the past 110 years, ITC has built a very strong distribution network. Today, its products are sold at over 60 lakh retail outlets all over the country. ITC can use this distribution network to sell all the products including the new launches.
ITC has strong competition from other FMCG companies. For example, the personal care category has strong competition from HUL which is the leader in the category. In the food business, it has strong competition from Nestle, Britannia, Dabur, and Marico. Patanjali is also a strong competitor but it is not a listed company.
Future growth prospects
ITC has a strong focus on the FMCG business. It is in a transformational phase from being a cigarette company to an FMCG company. Although, it is a long way to go. Over the last 9 months, ITC has launched 100+ innovative products in the hygiene, health & wellness, naturals, and convenience category.
People are getting more conscious about their health and looking for organic and healthy foods. This category would grow more in the future. In the health and wellness category ITC has launched:
- Aashirwad organic atta and dals
- B Natural - Immunity Soup
- Aashirwad salt
- Aashirwad dairy products
Convenience food is again growing at a fast rate as people are getting busier in their life and require ready-to-cook instant food. This category would grow even further in the future. ITC has launched various products:
- Aashirwad on the go range of instant food
- ITC Master Chef all-purpose gravies.
- ITC Master Chef - Bakery Range
After COVID, there is more awareness about health and hygiene. ITC has launched many new products in this category including:
- Nimeasy and Nimwash dish wash liquid
- Savlon Hexa soaps, body wash, disinfectant sprays
- Savlon masks and germ protection wipes
- Vivel glycerin neem oil soap
- Dermafique bio-cellulose face masks
Not only this, there would be growing demand for Hotels in the hospitality segment, Agri products as well as paper and packaging business.
- Revenue growth: In the last 10 years, ITC revenues have grown from Rs 22,566 Cr on Mar 11 to currently at Rs 48,196 Cr at a CAGR of 8%.The profits have grown from Rs 5000 Cr on Mar 11 to Rs 13,262 Cr at a CAGR of 10.2%
- Operating profits have been consistently above 30% which is great! The latest operating profit margin is 35%.
- The ROE and ROCE, both are well above 20% which is great! The latest ROE is 22.4% and ROCE is 29.8%.
- Debt to equity: ITC debt to equity has been negligible.
- Reserves: ITC is a cash-rich company and has huge reserves. It has increased from Rs 15,716 Cr to the levels of Rs 57,853 Cr. How many companies do you know which such amount of reserves? Very few.
If we look at the latest shareholding pattern, 24% stake in ITC is with British Company “Tobacco Manufacturer (India) Limited”. 21.65% is with various insurance companies where LIC holds 16.25% shares, financial institutions own 8% stake, Indian mutual funds own 9.94% stake and foreign portfolio investors hold 12.96% stake.
If we look at the dividend yield, ITC provides great dividends and it has a dividend yield of ~5% at the current share price which is fantastic. So if you invest in ITC at the current level, you would get ~5% return on investment in the form of dividend yield which is over and above the share price hike.
Over the years, ITC share has fallen from the high of Rs 340 in 2017 to currently at Rs 220. Currently, it is valued at a PE of 20.
Now the question is: Why ITC shares have fallen when other FMCG companies like HUL are commanding a PE of 70, Nestle is at PE of 78 and Britannia has a PE of 44 and all stocks have given great returns.The reason is their Cigarette business which is also known as the SIN business. Over the last few years, FII has consistently reduced its stake in ITC from 18% on Mar 18 to currently at 13%. The reason is the due to ESG theme i.e. Environmental Social and Governance. Of late, there is a new trend of ESG theme where investors want to invest in companies that are compliant with environmental, social, and governance theme. Although ITC scores higher on ESG score, it is still a tobacco major with 45% business from tobacco. There is a lot of pressure on the tobacco business due to an increase in tax as well as people looking at it as a SIN business.
Hence, the share price has fallen. However, ITC is consistently increasing its FMCG business and in the next 3-5 years, food and personal care would contribute more to the revenues. Currently, it is investing a lot of money in its FMCG business and it will slowly start giving results in terms of better profitability and then slowly ITC would start commanding a higher valuation.
It is a matter of time, ITC would have a strong comeback. It is one of the best value stocks available at the current price. It might not give quick returns in the short term but certainly a great buy for the long term. And please note that you can’t expect multi-bagger returns from ITC. But you can expect a decent return year on year and the downward risk is very low. Hence, those who are looking to invest for the next 5-10 years should have ITC in their portfolio.
PS: If you want to learn every aspect of fundamental analysis of stock and other important concepts of personal finance, you can explore my video course on "Everything about money management".
: This article is only for educational purposes. Consult your financial advisor before investing your money.
Note: This article is authored by Sahil. Sahil is the founder of this personal finance academy.