Story about ITC

December 15, 2021 by Vandana S · 6 min read

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ITC Limited is one of the premier private organizations of India. It was established on 24th August 1910 under the name Imperial Tobacco Company of India Limited. Over the years the name was changed to India Tobacco Company Limited in the year 1970. In 1974 it was renamed I.T.C Limited. As the brand grew and took over multiple businesses, the full stops in I.T.C were removed as on September 2001. The ITC today as we all know has no abbreviation.

History of ITC

ITC has its presence in Cigarettes, Hotels, Paperboards and Packaging, Agri-Business packing and food, Confectionary food, IT sector, Personal care, and other FMCG products. ITC, like any other company, began with a lot of passion, modesty, and hard work. It began its journey in a leased office complex and for 16 years they stayed put there. In the 16th year, the purchased of a new plot in Kolkata, marked the headquarters of ITC – Virginia House, and this plot became an important landmark in Kolkata and the growth of ITC was seen.

For almost 60 years the company solely focused in the tobacco industry. In the year 1925, the packaging industry was set up and today is one of the most sophisticated packaging houses in India. In the year 1975, ITC entered the hospitality sector by acquiring a hotel in Chennai. The principal reason for ITC to enter this sector was to create value for the nation. The potential to earn high profits in the foreign exchange, generating tourism and creation of employment opportunities attracted ITC. Today over 100 plus hotels exist under the name ITC hotels- WelcomHotels, Luxury Hotels, fortune hotels, and WelcomHeritage. Its base has expanded internationally as well through a strategic partnership in Dubai and Sri Lanka.

FMCG Products

In 2000, ITC launched the Lifestyle retail brand Wills Sport and by 2006 Will Lifestyle was a premium partner to all fashion shows in that year. In the same year, ITC entered the IT sector under the name ITC Infotech India. Globally it was one of the fastest growing IT industry for outsourced IT solutions.

ITC entered the agriculture business to aid the farmers in improving the productivity of the crops. It is one of the largest exporters in the country. In 2002 ITC launched Notebooks under the name Paperkraft. In 2003, Classmate was launched and is one of the most used notebooks by students in the country. Around the same year, a series of products were launched like Candyman, Ashirvaad Atta, Bingo Chips, and Sunfest biscuits. In the year 2010, Sunfest Yippe was launched. Soon products like Gum On, Fruit drink- B natural, Ashirvaad Svasti Ghee, Fabella Premium Chocolates, Sunbeam Gourmont Coffee, ITC MasterChef frozen snacks, and other FMCG products were launched. It is one of the most undervalued FMCG companies with a PE valued at 19.7%.

Financials

ITC industry has a market share of 77% in the cigarette industry alone and earned 212 billion INR in the year 2020. Overall ITC has a market capitalization of 2.62 lakh crores. It earned 128.44 billion INR in FMCG products, 102.41 billion INR in Agri based industry, 61.07 billion in the paperboard and packaging industry, 8.37 billion in the hotel industry.

Despite Covid, in March 2021 the reported profits earned after-tax were 12,934 crores. In the past week, ITC saw a rise of 5% in the stock market. A stock that usually took 2 months to move 2 percent, has suddenly shown growth in less than 10 days. Many leading experts believe that the reopening of the economy has favored the cigarette and hotel industry. Although in Sensex in the year 2021 has underperformed by 31%.

Tax and Sin tax

A sin tax is a tax charged on goods that are harmful and costly to society. Goods like cigarettes, alcohol, sugar-added drinks, and gambling comes under this. A sin tax is added to reduce the consumption of these harmful products.

In India, around 275 million people consume tobacco and have the world’s leading mouth cancer cases. In India the cigarette industry is highly regulated. Over the last 5 years, the taxes are currently 56%. The price has been increasing higher every year. The profits are not that consistent and the drop in sales and profit is seen. This does not mean that the number of people who consume cigarette have reduced. They have turned to cheaper brands and Bidis. As the tax grows, the number of illegal and cheap industries rise.

ITC is severely dependent on the Cigarette industry and the EBDITA is 75% which is very good for investors to analyze the company. Although one flaw with ITC regarding this is that its sole dependence on the cigarette industry determine the profits of the company. If the industry performs badly, entire ITC would be harmed as its diversification is still 70% in cigarettes and 30% in other industries. This is a bad move for a company so huge like ITC to keep all its investments in one basket.

Issues with ITC

One of the issues with ITC is that they are overly diversified and the industries they have invested in are not dominating in the industry ,except for Cigarettes. And most of the companies where ITC has diversified are not good money management investments. Companies like the hotel industry, Cigarette, B2B Argo industry and IT are risky investments.

Another issue with ITC is that in FMCG business their operating margins are just 7% as compared to leading FMCG companies like Colgate, Nestle whose operating margins are 27% and 24% respectively. Without merging the Cigarette industry with the other FMCG products, the margin received by ITC is low. Also, products like Atta cannot have more margins as they are consumed immediately and the demand is high and they have only a 7% margin. To make it high, they need to change the mix.

The returns in the hotel industry are low. The money invested is high and the returns are less comparatively. The EBIT has grown from 60.89 to 154 which is a good thing for a company, but the capital employed is increased drastically- 5193.03 crores to 6732 crores in a span of 5 years. The pretax ROCE has grown to 2.79%. Low ROCE business does not help ITC in its growth.

ESG Companies

ESG companies are those companies that are environmentally, socially, and governance conscious. The companies which harm the environment, those companies will be shadowed and they won’t be getting funds as they are not in the ESG portfolio.

Despite the issues, ITC pays a 5-6% dividend yield which makes many investors happy with the return. If you are looking for medium returns and less risk, ITC is your company to invest in. But for long-term growth prospects, ITC is not your company to invest in. What is your view?

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