ITC’s Businesses

  • The FMCG Business includes the Cigarettes segment and the branded FMCG products segment (Staples, Biscuits, Snacks, Noodles, Confectionary, Ready to Eat, Juices, Dairy, Chocolate)

ITC’s Product Portfolio

Shareholding Pattern (As of March 2020)

Source: Company Filings

  1. High Free Float will continue to lead to high trade volumes and significant price movement in the company
  2. Some FPIs have sold share over last two years due to their philosophy to not invest in ‘Sin Companies’; further many global funds will continue to refrain from investing in the company due to exposure to Cigarettes segment and thereby not meetings its ESG (Environmental, Social and Governance) requirement
  3. Tobacco Manufacturers (India) Limited and LIC are the two major shareholders for the company

Why is Street not happy with ITC?


  1. Drop in Revenue for Cigarettes business
  2. High Dividend Payout by the company questions the company’s ability to effectively allocate capital for new products and businesses
  3. Despite capital employed in the non-cigarettes business, the cash flow generation has been weak for other segments
  4. Ability of the company to establish popular FMCG brands

Financial Analysis

Company has maintained its strong operating margins

Source: Company Filings

Increasing Profits and Strong Return Ratio

Source: Company Filings

Robust Free Cash Flow generation due to contained Capex

Source: Company Filings

Dividend Payout Ratios has dropped substantially

Source: Company Filings

Subdued Investment in Capex; Assets not sweating enough

Capex has been subdued for the company

Source: Company Filings

No improvement in Asset Turnover ratio

Source: Company Filings

  • The company’s capex plans have been largely conservative despite the robust cashflows it enjoys from Cigarette segment
  • Most of the capex investment have taken place in the company’s Branded FMCG products (apart from cigarettes) and Hotel Business
  • Also, the company’s existing assets have not been sweating enough as suggested by deteriorating Sales to Gross Block ratio
  • Further, as per the company’s new dividend policy, 80-85% of company’s PAT will be returned to shareholders

Segment-Wise Analysis

A Slow Transition away from Cigarettes

Source: Company Filings

  • Despite the company’s sustained efforts over the last few years to reduce its dependency on Cigarettes, the segment continued to generate about 42% to the company’s revenue as of fiscal 2019
  • The revenue from Cigarettes segment dropped by 30% in fiscal 2018 on account of higher tax incidence under GST regime; the tax incidence increased by 20% on-year basis for the company during fiscal 2018 on cigarettes segment
  • During the ten-year period, the FMCG – Others segment grew at a staggering pace of 33% CAGR thereby leading to high share in portfolio mix

Cigarettes continues to be the major revenue contributor for the company

Source: Company Filings

  • The revenue for the company grew at 6.5% CAGR during fiscal 2014 to 2019, as compared to 13% CAGR growth during the previous five years
  • The FMCG – Others (Staples, Biscuits, Snacks, Noodles, Confectionary, Ready to Eat, Juices, Dairy, Chocolate) was the fastest growing segment for the company at 8.9% CAGR during fiscal 2016 to fiscal 2019, as compared to 12% CAGR growth during the previous three years
  • The slow growth in the Agri-business (constituting 50% share in non-FMCG segment) of 4.3% CAGR impacted the growth for non-FMCG segment

The decline in revenue of its cash cow – Cigarettes segment – is a major cause of worry for investors. Though the company has been able to maintain profitability in the segment, the increase number of consumer switching to unorganised market due to rising cost is a headwind. Also, post the increase in excise duty in Union Budget, effective tax incidence on Cigarettes around 55%, while the same is merely 22% for Bidis; the company is also losing market share to VST Industies and Godfrey Phillips due to rise in demand for small filter cigarettes

Market size of Major ITC Brands

Source: Company Presentation

Profit-wise, ITC still a Cigarettes Company

Cigarettes has consistently contributed about 83-85% of the company’s bottom-line

Source: Company Filings

Low Operating Margins for Branded FMCG (FMCG – Others) remains a worry

Source: Company Filings

Major Capex Done; Time to Sweat Assets

Trend in Capital Employed across different segments

Source: Company Filings

Trend in Return Ratios for different segment

Source: Company Filings

  • FMCG products have very long product lifecycle with high gestation period; though ITC has created brands and made substantial investments in FMCG products segment, it has little to show in terms in of returns
  • However, its brands are still young and like other brands the company has to work its way up from 2% operating margin currently to ~10% over the long-run
  • The company’s hotel business also has generated low returns during fiscal 2014 to fiscal 2019, however the gestation period for hotel business is even higher than the FMCG business
  • The ROCE for the hotel business in India has been around 10% over the last two decades, and therefore even over the long-run the segment may not add substantial shareholder value
  • During 9M Fiscal 2020, the revenue for ITC increased by 6.5% on-year supported by modest growth across segments • •The EBIT for the company increased by ~10% on-year with operating profit from FMCG – Others segment recording a staggering 46% on-year increase during the period

Peer Comparison

Source: Screener

To Conclude………

  • ITC is among the best conglomerates in the country and is a good portfolio stock; the combination of dividend yields + capital gains even on conservative basis may provide mid single digit inflation adjusted returns 
  • However, the current market price does not discount risks associated with inability of the company to ramp up margins in the Branded FMCG segment
  • The ability of the company to gain further market share in the wheat flour market through Aashirwaad brand, and further strengthening of Sunfeast, Bingo and Yippee will determine the value creation
  • The company has the benefit of strong cash flows from Cigarette segment which will enable it to engage in price wars and gain market share in new geographies
  • The demerger of Cigarettes segment and other FMCG products over the long-run (though management has always stated that same is not in horizon) may lead to further value creation
  • Presence in Nifty Fifty and Sensex will ensure robust fund flows for the company due to index fund allocation by Fund houses
  • The company will witness revaluation in its premium only when its Branded FMCG products segment increases its contribution to company’s bottom-line. Till then, the company will be assigned a premium of a ‘Cigarettes company’


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