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ITC - Stock Analysis - by Prashanth Jana
ITC - Stock Analysis - by Prashanth Jana
Prashanth Jana
Oct 11, 2021
Business Overview
Diverse businesses
ITC is a diversified conglomerate with businesses spanning Fast Moving
Consumer Goods, Hotels, Paperboards and Packaging, Agri-Business, and
Information Technology. Cigarettes are the biggest segment contributing 46% of
revenues but almost 85% of profits, while FMCG and Agribusiness are the
growth engines, the company is focused on.
The different businesses are strongly interlinked with one another. In order to
grow their cigarettes business, ITC over the years built a strong supply chain
starting from the tobacco farmers to the distributors and retailers. This supply
chain helped them to tap into the farmers for their agri-business and retailers to
distribute their FMCG products. The FMCG business is the main end-user of
their packaging and paperboards business. This strong interlinkage helps them
in attaining synergies.
A decade of share price underperformance
ITC’s share price has largely remained range-bound for close to a decade now.
And hence, it’s currently available at quite an attractive valuation.
When compared historically, the value assigned for future growth is amongst the
lowest in the last 20 years and the gap with other consumer staples companies
have widened to a level not seen before.
Some of the reasons for the stock price not moving up are
Cigarettes contribute to around 85% of the tax collected from tobacco. Hence,
the significant increase in taxation and subsequent reduction in taxation
Taxes are the most important factor in determining cigarette pricing and
volumes
As taxes contribute to more than 50% of the selling price.
We think that this continual tax increase is not something that can be continued
forever and at some point, the government will have to resort to a stable tax
regime rather than an ever-increasing one. We are starting to see signs of that as
there have been no increases in this last Budget and also the quantum of tax
increases has been coming down over the last 3 years. Any future tax increases
or the lack of it is probably the most important factor to keep tracking over the
next few months and years ahead.
ITC’s FMCG business grew really well in its first 15 years, until 2015. The
growth slowdown seen in the last 5 years is what is worrying the markets. But,
the point to note is that it is not an ITC specific issue and more of an industry-
wide problem led by consumption and GDP slowdown, demonetization, GST
impacts, etc.
Strong brands
ITC over the last 2 decades has built really strong brands across categories.
With the strong distribution of the Cigarettes business, ITC can quickly scale up
new and coming products.
This inherent brand and distribution strength leaves them with multiple
opportunities to grow business profitably.
ITC has been entering too many categories too soon, which may keep
ITC’s advertising spend high and ineffective, which can weigh on
margins
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1 Comment
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Very distinct analysis. Pretty helpful. Keep up your good work. Thanks a ton!
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