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KEY HIGHLIGHTS
ITC, Indias largest cigarette manufacturer by revenue, has garnered leading market share
through its popular brands. It's not without its share of challenges, which include competitive
pressures from cheaper substitutes such as chewing tobacco and leaf-rolled tobacco, and the
potential for further government intervention (like the passage of higher taxes). Even so, ITC has
defended its turf for several years by investing in product innovation, and in marketing its core
brands. In addition, ITC has also recently expanded its product set to include lower-priced
products (which are subject to a lower tax rate) to expand its customer reach. This has allowed it
to post solid sales growth and expand operating margins in its cigarette business, despite rising
taxes. We believe ITC will continue to hold a dominant position in the Indian cigarette market
for over a decade, and we think Indian smokers will trade up to more premium brands as the
prevalence of smoking increases (unlike in developed economies, where smoking is declining).
Company description
ITC Ltd. is the largest tobacco company in India. It enjoys the leadership position in the Indian
cigarette market with a market share of 80% in terms of value. ITC has emerged as a
diversified conglomerate with leading presence in Paperboards, Hotels and Processed foods. EChoupal, the agri rural initiative of the company has been widely appreciated for its foresight in
harnessing the potential in the rural market.
Key investment arguments
Taxation related risks though Excise and VAT hikes for FY14 are announced.
Recent developments
ITC entered into Deodorants category with the launch of its brand Engage.
Sector view
high earnings
Lagged impact of GDP slowdown is reflecting in the sector with moderation in volume
growth.
ITC Ltd
ITC Ltd
BACKGROUND
ITC was incorporated on August 24, 1910 under the name Imperial Tobacco Company of India
Limited. From the year, 2001 onwards, its name was rechristened as 'ITC Limited'. ITC operates
in a diverse range of businesses and its multi-business portfolio includes - Cigarettes & Tobacco,
Hotels, Packaging, Paperboards & Specialty Papers, Agri-business, Foods, Lifestyle Retailing,
Education & Stationery and Personal Care.
ITC is Indias leading cigarette player with over 80% market share by value. It has a leadership
position in every segment of the market, led by significant investments in marketing,
distribution, product design, innovation, manufacturing technology and quality. ITCs
distribution reach is one of the largest in India. The FMCG business has a retail network of over
2 mn retailers in the country, ranging from premium outlets in metros to small shops in the
interiors of rural India.
BUSINESS DESCRIPTION
ITC multi- business portfolio includes:
FMCG
Hotels
Agri Business
Packaging
E-coupal
The Indian FMCG sector is the fourth largest in the Indian economy and has a market size of
USD13.1 bn. This industry primarily includes the production, distribution and marketing of
consumer packaged goods, that is those categories of products which are consumed at regular
intervals. The industry has tripled in size over the last 10 years and has grown at approximately
17% CAGR in the last 5 years driven by rising income levels, increasing urbanization, strong
rural demand and favorable demographic trends. These growth drivers, coupled with the lower
levels of penetration and per capita usage in India, are expected to result in robust industry
growth in excess of 15% per annum over the medium-term. The sector is growing at a rapid pace
with well-established distribution networks and intense competition between the organized and
unorganized segments.
Growth Rate
The FMCG sector is well poised to grow further and will prove to be a safe haven for investors
as it is expected that consumption in India is expected to rise from USD 900 bn to about USD
3,600 bn in the coming decade, presenting an unparalleled opportunity for FMCG and retail
companies. Further, early and good monsoon adds to the feel good factor in an economy and
creates a favourable emotional base for consumption of FMGC products. On account of stable or
decrease in raw material cost & ad-spend coupled with price hikes taken up by the companies,
we expect margins to improve slightly in the coming quarter. Decrease in the inflation rate will
help the sector perform better going forward, which we believe will happen once the overall
economy improves at higher rates.
Comparative Analysis
ITC has overtaken Hindustan Unilever in branded foods and beverages sales for the first
time in the year ended March, marking a significant breakthrough in the cigarettes-tohospitality conglomerates ambition to become the countrys largest non-cigarette
FMCG company. ITC, which entered the packaged foods business over a decade ago,
will report a 24% sales growth in branded foods at over Rs 4,600 crore for 2012-13, a
person with direct knowledge of the development said.
Financial Summary
Financial Analysis
Net Revenue at `32882.56 crores grew by11.1% primarily driven by a 16.0% growth in
the non-cigarette FMCG segment, 14.7% growth in Paperboards, Paper and Packaging
segment and 10.6%growth in the Cigarettes segment.
Profit Before Tax registered a growth of 18.5% to ` 12659.11 crores while Net Profit at
`8785.21 crores increased by 18.4%
.Earnings Per Share for the year stood at `11.0 (previous year `9.45).
Cash flows from Operations aggregated ` 10759.50 crores compared to`9596.24 crores in
the previous year.
ITC is one of Indias most admired and valuable corporations with a current market
capitalization of over `270000 crores and has consistently featured amongst the top 10
private sector companies in terms of market capitalisation and profits.
Over the last 18years, your Companys Net Revenue and Profit AfterTax recorded an
impressive compound annual growth rate of 15.3% and 21.6% respectively.
Major Catalysts
ITCs non-cigarette FMCG business grew by 26% YoY in FY13, surpassing the industry
growth, a sign that ITC is fast gaining market share in the Indian FMCG industry, which is still
dominated by HUL, with a 15% market share. In a short span of time, ITC has penetrated
successfully in segments like food & confectionery and personal care products. The company has
leveraged its strong distribution network developed over the years for its cigarette business to
penetrate the FMCG market. The company plans to enter into dairy products soon. Its foods
division already has positive cash flows; the personal care division would take at least another
six months to turn positive. Consequently we expect non-cigarette businesses to add to the
earnings in FY15 in a better way.
Ratios
Current Ratio
ITCs average current ratio over the last 5 financial years has been 1.65 times which
indicates that the company is comfortably placed to pay for its short term obligations.
Interest coverage ratio indicates the comfort with which the company may be able to service
the interest expense (i.e. finance charges) on its outstanding debt. Higher interest coverage
ratio indicates that the company can easily meet the interest expense pertaining to its debt
obligations. ITCs average interest coverage ratio over the last 5 financial years has been
157.20 times which indicates that the company can meet its debt obligations without any
difficulty.
Investment Risk
Risk
The major risks facing ITC stem from potential changes in government regulations related to
taxation, manufacturing licenses, and advertising or distribution bans. More specifically, if the
government drastically increases the excise tax rate on cigarettes (similar to past actions), the
company's production volumes and profitability could suffer. Apart from regulatory risks, we
also believe there is a risk that ITC management may expand further into less profitable
businesses--and away from its core competencies in cigarettes--which would not be in the best
interest of its shareholders. Overall, we rate ITC as having medium uncertainty, reflecting that
the firm derives more than half of its sales from the cigarette business, which in itself is a noncyclical business that operates with minimal financial leverage.
BETA Analysis
Here the Beta of ITC is 0.46. i.e. less than
1, hence, it signifies that the stock is less.
volatile as compared to the overall market
But it also implies that the stock is
expected to increase at a rate lesser than the overall market. Conversely, during
down markets, the stock would be expected to decline at a lesser amount.