Sign up for Equitymaster's free daily newsletter, The 5 Minute WrapUp and get access to our latest Multibagger guide (2017 Edition) on picking money-making stocks.

This is an entirely free service. No payments are to be made.

Download Now Subscribe to our free daily e-letter, The 5 Minute WrapUp and get this complimentary report.
We hate spam as much as you do. Check out our Privacy Policy and Terms Of Use.
Where there is smoke, there will be profits - Views on News from Equitymaster
  • E-MAIL
  • A  A  A
  • Jan 29, 2000

    Where there is smoke, there will be profits

    Somehow, the investor community is not very enthused with ITC anymore. Part of this has to do with falling cigarette volumes which has deprived the stock of its sheen, and part of it has to do with the allure of software. There was a time when ITC posted the highest volumes on the stock exchanges and moved the market either way - single-handedly. Not anymore. The once upon a time market leader is now relegated to the back-benches.

    ITC is India's largest manufacturer of cigarettes with a market share in excess of 65 percent. The company has brands across the five cigarette segments - king-size (India Kings, Wills, Classic, Gold Flake, Benson & Hedges, 555), longs (Wills), filters (Gold Flake, Bristol, Wills, Capstan, Berkley, Scissors), plains (Gold Flake, Berkley, Scissors) and micros (Berkley, Scissors, Bristol, Capstan). Given ITC's brand appeal and distribution strength, it comes as no surprise to anyone that it has market leadership in all the cigarette segments. The variety in ITC's product profile can be gauged from the fact that it has 4-5 brands in each segment. Equally impressive is the company's enormous distribution reach, covering the length and breadth of the country with over 2 million outlets rivaling Hindustan Lever and Colgate.

    In addition to cigarettes, which contribute to over 85 percent of total revenues, ITC's has its fingers in tobacco exports, paper, printing, agri-products exports and hotels. Over the past few years, it has restructured by exiting from finance and oilseeds. It is now concentrating on hotels (ITC Hotels), packaging (ITC Bhadrachalam) and of course - cigarettes.

    ITC is run by a professional management, although British American Tobacco (BAT plc) does have its way around the company with its equity stake of more than 40 percent. ITC's alliance with BAT affords it access to the latter's overseas range - 555 and Benson & Hedges. After BAT's takeover of Rothmans, ITC can also expect to leverage the Rothmans and Pall Mall brands in future.

    But despite its obvious strengths, things aren't exactly hunky-dory for India's premier cigarette manufacturer. Legislation on cigarette sales in some states has hit volumes. Kerala, which imposed a ban on smoking in public places and Tamil Nadu, which levied a luxury tax on cigarettes have witnessed a decline in cigarette sales. Several states have imposed restrictions on cigarette sales at railway platforms. Add to this the rigid advertising constraints within which cigarette companies have to function, and one begins to realise why the going is far from good for these companies. And the problem of smuggled cigarettes has been the bane of the local industry for some time now.

    Cigarettes apart, even the hotels and paper businesses are mired in problems. A downturn in the Indian paper industry over the last 4-5 years has seen ITC-Bhadrachalam post heavy losses, leading to an erosion of networth. ITC was forced to pump in more money in the business to ensure that ITC-Bhadrachalam did not sink. The hotels business is also far from being a winner. Like the paper business, ITC Hotels is facing the brunt of a decline in the fortunes of the hotels business.

    This only serves to underscore the importance of ITC's cigarette business. So long as hotels and paper businesses suffer setbacks, it will be cigarettes that will propel growth. Given the 4-5 percent projected growth in cigarette volumes over the next few years, ITC will continue to pursue a price-led growth. The company has launched two international brands - Benson & Hedges and 555, under an agreement with its international parent, BAT. It is likely that in the future more such brands would be introduced. This will enable ITC to capitalise on demand for foreign brands, which is currently met by the black market or through direct imports.

    However, there are concerns voiced from several quarters about ITC's wayward ways. The company's retailing foray is disturbing. Moreover, it continues to pump in funds in hotels in Delhi and Bombay, with another couple (in Calcutta and Bombay) on the anvil. The investments amount to over Rs 2.5 billion annually and there is a view among analysts that this would be better utilised in reinforcing the company's core strength - tobacco.

    And of course, there is always infotech (IT) - the darling of every other Indian corporate. But to be fair to ITC, it entered the IT arena long before the Indian investor community fell in love with Infosys, Wipro, Satyam and Mastek. There is some talk of ITC drawing out elaborate plans to tap its IT potential.

    All said and done, the future clearly belongs to cigarettes. But with stiff competition from 'bidis' - the poor man's cigarette and impending excise-related litigations, the company will have to tread cautiously for it will be cigarettes that will rescue the company from going up in smoke.



    Equitymaster requests your view! Post a comment on "Where there is smoke, there will be profits". Click here!


    More Views on News

    ITC: Demonetisation woes pull down business growth (Quarterly Results Update - Detailed)

    Feb 8, 2017

    ITC Ltd has announced third quarter results of the financial year 2016-2017 (3QFY17). The company has reported 4.7% YoY and 5.7% YoY growth in revenues and net profits respectively. Here is our analysis of the results.

    ITC: A Decent Quarter Amidst Challenging Environment (Quarterly Results Update - Detailed)

    Dec 7, 2016

    ITC has announced second quarter results of the financial year 2016-2017 (2QFY17). The company has reported 8% YoY and 10.5% YoY growth in revenues and net profits respectively.

    GSK Consumer: On the Recovery Path (Quarterly Results Update - Detailed)

    Jun 20, 2017

    While GSK consumer reported muted revenue growth, volumes are seen to be recovering.

    Apex frozen food Ltd. (IPO)

    Aug 21, 2017

    Should you subscribe to the IPO of Apex Frozen Foods Ltd?

    ITC: Numbers Go Nowhere in FY16... (Quarterly Results Update - Detailed)

    Jun 8, 2016

    ITC declared results for the quarter and year ended March 2016. During the year, the company's net revenues and profits rise by 1% YoY and 3% YoY respectively.

    More Views on News

    Most Popular

    A 'Backdoor' to Multibaggers: It's Like Investing in Asian Paints Ten Years Ago(The 5 Minute Wrapup)

    Aug 10, 2017

    Don't miss these proxy bets on growing companies or in a few years you will be looking back with regret.

    The Most Profitable Investment in the History of the World(Vivek Kaul's Diary)

    Aug 8, 2017

    'Yes, it looks like a bubble. And, yes, it's like buying a lottery ticket. But there's something happening that has never happened before. It's an evolutionary leap in money itself.'

    Should You Invest In Bharat-22 ETF? Know Here...(Outside View)

    Aug 8, 2017

    Bharat-22 is one of the most diverse ETFs offered so far by the Government. Know here if you should invest...

    Signs of Life in the India VIX(Daily Profit Hunter)

    Aug 12, 2017

    The India VIX is up 36% in the last week. Fear has gone up but is still low by historical standards.

    Bitcoin Continues Stellar Rise(Chart Of The Day)

    Aug 10, 2017

    Bitcoin hits an all-time high, is there more upside left?

    Copyright © Equitymaster Agora Research Private Limited. All rights reserved.
    Any act of copying, reproducing or distributing this newsletter whether wholly or in part, for any purpose without the permission of Equitymaster is strictly prohibited and shall be deemed to be copyright infringement.

    LEGAL DISCLAIMER: Equitymaster Agora Research Private Limited (hereinafter referred as 'Equitymaster') is an independent equity research Company. Equitymaster is not an Investment Adviser. Information herein should be regarded as a resource only and should be used at one's own risk. This is not an offer to sell or solicitation to buy any securities and Equitymaster will not be liable for any losses incurred or investment(s) made or decisions taken/or not taken based on the information provided herein. Information contained herein does not constitute investment advice or a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual subscribers. Before acting on any recommendation, subscribers should consider whether it is suitable for their particular circumstances and, if necessary, seek an independent professional advice. This is not directed for access or use by anyone in a country, especially, USA or Canada, where such use or access is unlawful or which may subject Equitymaster or its affiliates to any registration or licensing requirement. All content and information is provided on an 'As Is' basis by Equitymaster. Information herein is believed to be reliable but Equitymaster does not warrant its completeness or accuracy and expressly disclaims all warranties and conditions of any kind, whether express or implied. Equitymaster may hold shares in the company/ies discussed herein. As a condition to accessing Equitymaster content and website, you agree to our Terms and Conditions of Use, available here. The performance data quoted represents past performance and does not guarantee future results.

    SEBI (Research Analysts) Regulations 2014, Registration No. INH000000537.

    Equitymaster Agora Research Private Limited. 103, Regent Chambers, Above Status Restaurant, Nariman Point, Mumbai - 400 021. India.
    Telephone: +91-22-61434055. Fax: +91-22-22028550. Email: info@equitymaster.com. Website: www.equitymaster.com. CIN:U74999MH2007PTC175407

    Become A Smarter Investor In
    Just 5 Minutes

    Multibagger Stocks Guide 2017
    Get our special report, Multibagger Stocks Guide (2017 Edition) Now!
    We will never sell or rent your email id.
    Please read our Terms


    Aug 21, 2017 (Close)


    • Track your investment in ITC LTD with Equitymaster's Portfolio Tracker. Set live price alerts, get research alerts and more. Get access now...
    • Add To MyStocks


    Compare Company With Charts