A fellow member sought my view on ITC on personal message. The query was as under
“I wanted to ask you about ITC. I feel most of the concerns that were raised when it was getting lower valuation are still there (too much diversification, non availability of products, investment in hotels). Just that price has hidden all problems. Still 80% profit is cigarettes and that doesn’t seem likely to change in near future. Also, Reliance’s planned foray into FMCG is likely to affect most ITC FMCG products which already sell at a discount to market leaders (except Aashirwaad atta).
Wanted to know your thoughts.”
In my view, neither decline nor increase in price is reflecting fundametal change in business. There was some ECG concerns and also immediate negative due to COVID which resulted in decline in price. Now, from Agri to Paper to Hotel business, outlook is favourable and price were relatively low which again driving interest in ITC. Having said that, if tomorrow, say for instnace, SUUTI decide to sale ITC stake, price may again see volatility.
I would consider following points in my decision to be invested in ITC
- Dividend distribution and growth. The management promosed 70-80% dividend payout 3 years back and they are walking to talk. In addition, while they have done some small expansion and required capex, broadly capital allocation is reasonable in my view. Hence, I am not concerned on that front.
- Business prospect: While we may have different opinion, One thing ITC management has ensured is maintianing quality of whatever business they are present at probably highest level. It is very difficult to differentiate quality in Chips and other eatable products, but they are consistent. Also, quality of Wills Lifestyle shirts and Fiama soap, of which I am personal consumer, was excellent in my subjective assessment. This is my personal view and may not be factually correct. However, while business is competitive, the management has ensured till now one important point, providing good quality stuff to consumer (at least in FMCG business), even if it may not result in superior profitability. It might not be great in short to medium term, but in long term, in my view, that shall help. It is not simple in Indian market, to scale business from nil to Rs 16,000 Cr business in 20 years (adding Rs 3,800 Cr FMCG sales only in FY22).
On competition from Reliance and other Players, I feel the Indian market is like sea and growth is also expected to be in line in GDP. Further, there is scope from premiumisation with increase in per capita income. One can refer to Mr Mehta, CEO of HUL again and again talking same point in HUL con call. Hence, I do not see that market becoming saturated. However, whether ITC gain from it or no, only time will tell. Till now, ITC has gained market share (as moved from nil to positive value). Hence, do not see any specific reasons why it cam continue to do so.
3 Profit being generated mainly from Cigarette
The concerned raised is valid. However, I would not see revolutionary change in FMCG profit share going up. It would be slow and steady improvement. We under estimate benefit of operating leverage in a business of FMCG. With more than 6 mn unit outlet reach, ITC has achieved major milestone in my view. Also, as compared with other peers, ITC share in backward integration is relatively higher. That can result in lower financial ratios,but at core, would improve sustainability of business. Classic example being using production facility of Engage perfume to manfuacture Salvon spray during Covid period.
So, I would continue to hold ITC in my investment at current valuation. Will look at today results but would not be resulting in major change in my thought process.
Disclosure: ITC is my highest equity holding. My view may be biased. Not a SEBI registered advisor. Not suggesting any investment action to the reader, No trade in last 3 months.
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