RESEARCH REPORT AS ON 30-04-2022

ITC Ltd: A True Indian Conglomerate

ITC has a diversified presence in cigarettes, FMCG, hotels,
packaging, paperboards & specialty papers and agri-business. Apart
from having a near borderline monopoly in its traditional business
of cigarettes, ITC is the country's leading FMCG marketer, a clear
market leader in the Indian paperboard and packaging industry, a
globally acknowledged pioneer in farmer empowerment through its
wide-reaching agribusiness, and a pre-eminent hotelier in India - a
trailblazer in 'Responsible Luxury' chain of hotels.
1910 Incorporated on August 24, 1910 under the name of 'Imperial Tobacco
Company of India Limited
1925 Packaging & Printing Business was set up as a strategic backward
integration for ITC's Cigerettes Business
1975 Launched its hotel business by the name 'ITC-Welcomgroup Hotel Chola'.
1979 Entered into manufacturing paperboards, packaging & printing business
1985 Set up Surya Tobacco Co. in Nepal, now a subsidiary of ITC.
1990 Set up the Agri Business Division for export of agri-commodities based on
partnership with farmers
2000 Launched a line of greeting cards under the brand name ‘Expressions,
further extension in stationery
Entered in lifestyle retailing business with the Wills Sport
ITC InfoTech India was set up in 2000 to provide outsourcing solutions
Introduced e-Choupal initiative in 2000 with soya farmers in Madhya Pradesh
2001 Entered food business in 2001 with the introduction of ‘Kitchens of
India’
2002 Entered the confectionery and staples segments with the launch of the
brands mint-o and Candyman confectionery and Aashirvaad Atta
2003 Entered the biscuits segment with Sunfeast
Forayed into the marketing of Agarbattis (incense sticks)
2005 Entered personal care with Essenza Di Wills, an exclusive range of
fine fragrances and bath & body care products
2007 Entered the fast growing branded snacks category with Bingo!
Launched the 'Superia' range of Soaps and Shampoos in the mass-market
segment followed by Vivel range
2010 Entered the Indian instant noodles market with Sunfeast Yippee!
Expanded its product portfolio in personal care with the launch of
Engage deodorants
Expanded the tobacco portfolio with launch of its handrolled cigar,
Armenteros, in the Indian market
2014 Entered e-cigarette business
2015 Acquired Savlon and ‘Shower to Shower’ from Johnson & Johnson
Ltd., India
Entered the Fruit-based juices and beverages market with the launch of
B Natural Fruit beverages
Forayed into the dairy segment with the launch of Aashirvaad Svasti
Ghee in November 2015.
Acquired the brand Nimyle to enter the floor cleaner space
2020 Acquired entire stake in Sunrise Foods
The percentage of revenue from cigarette business has
reduced from 87.3% in 1999-2000 to 41.4% in 2019-2020
ITC earns more than 80% EBIT margin from its Cigarette
business.
There are many entry barriers in this business because of
government regulations. Government don’t issue a license to
new companies to manufacture cigarettes. So it a very
concentrated industry where ITC is the market leader with
more than 75% market share.
ITC has brands like Gold flake and Classic which are very
famous brands.
But there have been few problems in this business.
High taxation by the government: If we compare with rest of
the world then in India, consumption of cigarette has fallen. As
tax increases the affordability reduces which in turn reduce the
demand of the cigarettes.
But cigarette is a habit product, so ITC has the pricing power.
Though the volume growth of consumption of cigarette is less
yet the EBIT margins have grown due to price hikes.
Over the years, discriminatory and punitive taxation on cigarettes has led
to a progressive migration from consumption of duty-paid cigarettes to
other lightly taxed/tax-evaded forms of tobacco products, comprising
illegal cigarettes and bidi, chewing tobacco, gutkha, zarda, snuff, etc.
Consequently, while the share of legal cigarettes in total tobacco
consumption has declined from 21% in 1981-82 to a mere 9%, aggregate
tobacco consumption in the country has increased over the same period.
As a result, despite accounting for less than 1/10th of the tobacco
consumed in the country, duty-paid cigarettes contribute more than
4/5th of the tax revenue generated from the tobacco sector.
While India is the world’s second largest consumer of tobacco, legal
cigarettes constitute only 9% of overall tobacco consumption in India, as
against a global average of 90%. Legal Cigarettes contribute more than
4/5th of Tax Revenue, despite constituting less than 1/10th of Tobacco
Consumption. This causes ITC to continuously increase prices of
cigarettes and hence there is reduction in the sales of legal cigarettes.
Since 2000, ITC used the cash flow generated from cigarette
business to grow the FMCG business. Since 2000 till today the sales
of this FMCG business has risen from 100 crores to somewhere more
than 12000 crores. FMCG business is the fastest growing amongst all
the company’s business segments.
Top brands in the FMCG segment include Aashirwad which is ~6000 Cr
brand and No. 1 brand in the Aata segment, Sunfeast is over 4000 Cr
brand and No. 1 in cream biscuit segment, Bingo with ~ 2700 Cr
brand and No. 1 in the snack food segment, Yippee is 1300 Cr brand
and No. 2 in noodles segment, Classmate is ~ 1400 Cr brand and No.
1 in notebooks. Mangaldeep Agarbatti is over 800 Cr brand and No. 2
in the Agarbatti segment.
Investment phase in FMCG business is reducing. It has already more
than 25 brands so it may prefer to do more acquisitions.
Moreover, they have acquired brands like Savlon and Nimyle which
have been very successful acquisitions.
ITC Hotel Group is the hospitality business of ITC Limited. ITC
Hotels, launched in 1975, is one of India’s premier chain of
luxury hotels which has become synonymous with Indian
Hospitality. At present there are more than 100 hotels of ITC
in over 70 cities. Some of the hotels include ITC Royal Bengal,
a Luxury Collection Hotel, Kolkata; ITC Grand Chola, a Luxury
Collection Hotel, Chennai; ITC Maurya, a Luxury Collection
Hotel, New Delhi.
Now rather than owning the properties, ITC is going through
managing contracts in Hotel business.
The hotel business has a significant impact due to COVID. It
suffered a loss of 57.4% in revenue.
ITC Agri Business is one of the leading domestic players and
exporters of numerous agricultural commodities. It works with
farmers to improve the productivity and quality of various crops and
sources the finest of Grains, Oil Seeds, Pulses and a range of value-
added agri products such as Processed Fruits, Coffee and Shrimps
across multiple geographies in India. It is No. 1 in producing Leaf
Tobacco.
ITC's globally acknowledged E-choupal initiative empowers 4 million
farmers. While the farmers benefit through enhanced farm
productivity and higher farm gate prices, ITC benefits from the lower
net cost of procurement (despite offering better prices to the farmer)
having eliminated costs in the supply chain that do not add value.
ITC Paperboard and Specialty paper division is India’s largest,
technically advanced and eco-friendly paperboard business. It caters
to a wide spectrum of Packaging, Graphics, Communication, Writing,
Printing and Specialty paper requirements. It converts over 70,000
tonnes of paper, paperboard and lamination per annum into variety
of value-added packaging solutions of various industries including
food & beverage, personal products, cigarette, liquor, and consumer
goods.
Strong Brand Name: Today, the majority of people in India are aware of
many brands of ITC including Aashirwaad, Sunfeast, Bingo, Yipee,
Savlon, Classmate, etc. It takes a lot of effort to build a brand value and
ITC has a strong competitive advantage due to this brand value as people
recognize and prefer these brands over the competitors.
Innovative and agile business: To stay relevant and sustainable for the
long term, it is very important for a business to innovate. ITC has been
very innovative and agile in terms of business. For example, during
COVID lockdown, they partnered with Dominos, Zomato, and Swiggy to
deliver products to the consumer at their doorstep. They also launched
ITC stores on wheels.
Sustainable growth: The future is not just about growth but sustainable
growth without harming the environment. ITCs one of the biggest
strength is sustainable growth. It is a carbon positive company for 15
years with afforestation, water positive for 18 years with watershed
development, and solid waste recycling positive for 13 years with
livestock development and solid waste management.
Strong distribution network: Distribution is the backbone of an FMCG
company. Over the past 110 years, ITC has built a very strong distribution
network. Today, its products are sold at over 60 lakh retail outlets all over
the country. ITC can use this distribution network to sell all the products
including the new launches.
 Profitability and cash generation are heavily skewed towards the
cigarettes business, which is not expected to see any significant
recovery in the short term.
Punitive taxation by the government on the cigarettes business could
increase the illegal sales of the product.
Investors that emphasize on strong ESG values tend to exclude ITC
because of the nature of its business even though the company is
one of the highest rated ESG companies in the world. ESG acceptance
becomes more widespread resulting in further shrinkage in
valuations.
Hospitality sector is one of the worst affected by the ongoing
pandemic and now with the coming of the second wave, recovery in this
business may be further prolonged, which would impact ITC.
Poor capital allocation in the future can lead to lower returns for the
company.
Potential sale of the 7.93% government stake in ITC held by SUUTI.
Potential change in smoker behaviour (especially fringe smokers) post
the lockdown period.
Dividend History (Last 10 years)
As one of India’s foremost private sector companies, the Company
has performed consistently for over a century and has rewarded
Shareholders since inception with uninterrupted dividends.
Balance Sheet as at 31st March, 2021
Consolidated Statement of Profit and Loss for the year ended
31st March, 2021
The company’s
sales has grown
by 5% over the
last 5 years.

Profit has grown

by 7% over the
last 5 years.
Around 80-85% of the profits are given as dividend.
Overall for FY 2020-21, Gross Revenue stood at 48151.24
crores increased by 3.9%.
Profit Before Tax (before exceptional items) at 17164.15
crores degrew by 11.1% over FY 2019-20 and Profit After
Tax stood at 13031.64 crores (previous year 15136.05
crores).
Total Comprehensive Income for the year stood at
13277.89 crores (previous year 13754.24 crores).
Earnings Per Share for the year stood at 10.59 (previous
year 12.33).

Compounded Profit Compounded Sales

Growth Growth
10 Years: 10% 10 Years: 8%
5 Years: 7% 5 Years: 5%
3 Years: 6% 3 Years: 4%
TTM: 12% TTM: 23%
Company is almost debt free.
The company has delivered a poor sales growth of 4.68% over past
five years but volume of sales is good.
ITC is a cash-rich company and has huge reserves. It has increased
from Rs 15,716 Cr to the levels of Rs 57,853 Cr.
Return on Capital Employed : The ROCE measures the ability of a
firm to generate profits from its total capital (shareholder capital
plus debt capital) employed in the company. ITC has 29% ROCE for
the latest year. Higher ROCE is better.
Return on Equity (ROE): ROE
Return on Equity measures the ability of a firm to
10 Years: 26% generate profits from its shareholders
investments in the company. In other
5 Years: 23%
words, the return on equity ratio shows
3 Years: 23% how much profit each rupee of common
Last Year: 21% stockholders’ equity generates. ITC has
a healthy ROE track record of 20 %
Over the years, ITC share has fallen from the high of Rs
340 in 2017 to currently at Rs 250. The reason is their
Cigarette business which is also known as the SIN
business. Over the last few years, FII has consistently
reduced its stake in ITC from 18% on Mar 18 to currently
at 13%. There is a lot of pressure on the tobacco business
due to an increase in tax. However, ITC is consistently
increasing its FMCG business and in the next 3-5 years,
food and personal care would contribute more to the
revenues. Currently, it is investing a lot of money in its
FMCG business.
Those who are looking to invest for the next 5-10 years
should have ITC in their portfolio.