ITC - Complete Stock Analysis

Should........we Invest in ITC for the Long term or not ??

It gave great returns in past, however poor returns in the last 5 years.

A great quality company may not be a good stock always. Can it be a good investment from hereon, here are my thoughts & please research further

Few top ITC Brands

                                         

knowingly and unknowingly one of the products from ITC is being used in every household on a daily basis.

• Aashirwad aata is India's top-selling aata brand

• Yeepi ranks 2nd in noodles 

• Engage ranks 3rd in top-selling perfume brands

• Sunfeast and Moms Magic is the 3rd top biscuit brand after Britannia and parle

• Savlon is 2nd most selling antiseptic liquid after Dettol.

• Classmate is the top-selling stationery brand in India and many more...

Multiple businesses under ITC umbrella & respective approximate % revenue

Contribution to profit :

1. Cigarette 41%
2. FMCG (non-tobacco) 22%
3. Hotels 3%
4. Agri 19%
5. Paper, Paperboards, Packaging 11%
6. Others 4%

ITC is trying to diversify from the sin (tobacco) sector to the proper FMCG company. 

Reason - In the cigarette and tobacco business there is so much interference from the government side, Company can't advertise their product, they can't even select the packaging for their tobacco products. The government imposes so much tax on these products, which results in an increase in the price of the cigarettes, and due to the High price consumers started moving towards local brands that are available at a lower price. In India, only 8% of the total consumption of cigarettes is branded and 92% are local brands that are available at a lower price. If taxes are increased by the government it directly affects the consumption & profits of the ITC because the bigger part of the ITC profit comes from cigarettes. To reduce the risk of this uncertainty company diversified itself in the FMCG sector and trying to focus more on this sector, to reduce the dependency on tobacco products.

FMCG sector is a competitive sector, It will take a lot of time to earn more profit in this sector due to intense competition.

Every other business it is into, commands a comparative low valuations multiple & is capital intensive.

With FMCG growth, ITC stock will rerate.

One negative point is there is no real promoter or ownership at the moment.

Shareholding structure

1. Institutions (funds) ~58%

2. Corporate Bodies ~ 30%

In addition, equity is extremely huge.

This is a worthy point to keep in mind from a valuation perspective.

The company has a good dividend policy which it has recently updated. It is intending to have a dividend payout ratio of  80% to 85% of the PAT

This will result in a good dividend yield & better than many fixed deposits

Key challenges with ITC

• Losing growth potential in the tobacco business to other brands

• FMCG business yet to perform to the level from where growth can be better predicted

• Intense competition

Potential triggers in the future for ITC

• May demerge businesses to focus better

• Non-tobacco businesses show good growth with the bigger brand value

• The hotel business has good potential in the very long term because of the luxury aspect

At current levels, ITC is bound to attract investor attention.

Looking at the valuations, it has the potential to give great returns in sync with business performance & triggers.

The stock is in an upward trend, It can be a good large-cap portfolio stock from the must consumption sector.

Advantage:

• The company has reduced debt.
• The company is virtually debt free.
• Company has a good return on equity (ROE) track record: 3 Years ROE 26.68%
• The company has been maintaining a healthy dividend payout of 60.47%

Disadvantage:

• Stock is trading at 7.13 times its book value
• The company has delivered poor growth of 2.15% over past five years.( This is not necessary to consider)

Why ITC is good for long term investment:

Reasons are as follows:

• Compounded Sales Growth of 10 Years: 11.32%
• Compounded Profit Growth of 10 Years: 14.33%
• Debt-free: ITC has no debt.
• Interest Coverage: 415.20 which means the company is 415 times capable of giving their short-term liabilities. (ICR = EBIT/Interest exp)
• ROCE: 34.62 % | ROE: 22.69 % | Current ratio: 3.25 | Quick ratio: 2.34 | NPM last year: 26.04 %
• In response to hiking in tax, ITC neutralized the burden and the company has hiked cigarette prices by 10–12%.

Fundamentals of ITC:

• Current Price (Rs.) - 189.70
• Face Value (Rs.) - 1
• Book Value (Rs.) - 46.77
• 52 Week High (Rs.) - 310.00 (15-Apr-19)
• 52 Week Low (Rs.) - 233.25 (08-Jan-20)
• Life Time high (Rs.) - 367.70 (10-Jul-17)
• Life Time low (Rs.)- 4.14 (25-Jan-96)
• Average Volume [20 days](No. of shares) - 27598629
• Market Cap (Rs. in Cr) - 297936.89 (Cr)
• P/E Ratio - 21.15
• % of Promoter holding pledged - 0.00

The dividend of ITC of the last few years:

• May 22, 2019 - 5.75 per share
• May 25, 2018 - 5.15 per share
• June 5, 2017 - 4.75 per share
• May 30, 2016 - 8.50 per share
• June 3, 2015 - 6.25 per share
• June 3, 2014 - 6.00 per share

Bonus History of ITC:

• July 1, 2016 - 1:2
• Aug. 3, 2010 - 1:1
• Sept. 21, 2005 - 1:2

I'm very optimistic about the stock as it has the potential to give an extraordinary return of 2X - 3X from a long-term perspective.

NOTE:- This data is based on my personal research, please take it for an informational purpose. Do your own research before investing in this stock.

Thank you :-) 

Author - Himanshu Rane (PGDM - Finance)