ITC: A finger in every pie - Views on News from Equitymaster

Helping You Build Wealth With Honest Research
Since 1996. Try Now

  • MyStocks


Login Failure
(Please do not use this option on a public machine)
  Sign Up | Forgot Password?  

ITC: A finger in every pie

Aug 28, 2000

ITC Limited, India’s No. 1 cigarette and tobacco company commands 65-70% share of this Rs 80 bn market. The company has been a dominant force in this business and has consolidated even in adversity. However, punitive taxes and smuggled foreign cigarette brands have slowed volume growth for this company.Added to that, ITC became the big brother for every other group company like ITC Bhadrachalam, ITC Classic Finance and ITC Hotels. These group companies did not perform as per expectations and every single time ITC bailed them out from financial annihilation. Gradually, either these companies were divested (ITC Classic Finance) or ITC was forced to acquire a majority stake in them.

This however, turned out to be a blessing in disguise for this beleaguered tobacco giant. Punitive government laws made ITC realise that it cannot solely bank upon cigarettes. To secure its financial future it will have to look at other avenues, which when time comes will chug its future growth engine.

As a result an all-new business strategy was formulated. ITC identified hotels, paper/packaging, and IT as its future ‘dark horses’ in addition to its cash cow ‘cigarettes’. Therefore, it earmarked an aggressive growth and investment plan for all its businesses.

In 1999, ITC announced that ITC Hotels plans to add 1,500 new deluxe rooms at an investment of Rs 15 bn in the next five years. The strategy has already begun to take shape. The extension of Delhi Maurya Sheraton is likely to open shortly. Its new 5 Star Hotel near Sahar Airport in Mumbai is set to be commissioned in the last quarter of 2000. With the prospects for hospitality industry looking up, this is good news for the company.

To consolidate its papers and packaging business, ITC tried to acquire Faridabad-based packaging major Rollatainers India, but the deal fell through because of pricing differences. But going by the precedents, ITC will surely look at other avenues to consolidate its position in this business.

ITC Limited has also embarked on a major infotech (IT) thrust. It has identified IT as a future growth area and plans to fortify its presence in the segment through a 100% subsidiary ITC Infotech Limited. The company earned Rs 13 m as profits in the last financial year (Rs 17 m a year before that). Though these figures are not much, but IT is definitely growing at scorching pace in India and ITC’s presence in this segment (even on a smaller scale initially) will stand it in good stead.

Recently, ITC also announced a major Rs 2.5 bn investment plan for setting up around 100 sports wear retail stores across the country in the next 3 to 5 years. The next few years are likely to see a sea change in ITC's revenue contribution pattern. Exports, IT, hotels and packaging are likely to be the company's thrust areas, keeping the domination of cigarette segment in India intact.

Power packed performance despite diversifications
(Rs m)1QFY001QFY01Change
Sales 19,354 21,437 10.8%
Other Income 176 177 1.0%
Expenditure 15,915 17,048 7.1%
Operating Profit (EBDIT) 3,439 4,389 27.6%
Operating Profit Margin (%)17.8%20.5% 
Interest 315 231 -26.7%
Depreciation 300 378 26.1%
Profit before Tax3,0003,95731.9%
Tax 1,064 1,535 44.3%
Profit after Tax/(Loss) 1,936 2,422 25.1%
Net profit margin (%)10.0%11.3% 
No. of Shares (eoy) (m) 245 245  
Diluted number of shares 245 245  
Diluted Earnings per share*31.639.5 

Despite all these diversifications, ITC managed to record a 25% growth in profits to Rs 2.4 bn in first quarter ended june 30, 2000. Its operating profit margins also improved to 20.5% 1QFY01 from 17.8% in 1QFY00.

At Rs 760 per share, ITC stock trades at a P/e multiple of 24 times its FY2000 earnings. This is low compared to its historical high P/e multiples between 35-40 times. As investors’ concerns grow on high TMT stock valuations, ITC provides a good play on the FMCG segment.

Though there are concerns about ITC’s many diversifications, but in ITC’s case it is more of a necessity to cushion its future than anything else. Besides it knows the hospitality and packaging business well and holds a strong position in both. However, how the value of these investments will be unlocked for shareholders of ITC Limited is a key question, which the management should look at clarifying.

Equitymaster requests your view! Post a comment on "ITC: A finger in every pie ". Click here!


More Views on News

What Happens if ITC Hives off ITC Infotech? (Views On News)

Nov 20, 2021

The cigarette to hotel conglomerate is reportedly mulling the demerger of its software business at a valuation of around Rs 250 bn.

What Sparked an 8% Rally in ITC Shares Today? (Views On News)

Sep 16, 2021

ITC did not participate in the rally after the second wave and continued to underperform its peers. Is this about to change?

ITC 2020-21 Annual Report Analysis (Annual Result Update)

Sep 6, 2021 | Updated on Sep 6, 2021

Here's an analysis of the annual report of ITC for 2020-21. It includes a full income statement, balance sheet and cash flow analysis of ITC. Also includes updates on the valuation of ITC.

This Multibagger Stock Zooms 20% After Dolly Khanna Buys Stake (Views On News)

Nov 24, 2021

Shares of this edible oil company zoomed over 50% in three days after ace investor bought around 1% stake.

What Led to the Massive Surge in the Stock of Jubilant FoodWorks? (Views On News)

Aug 18, 2021

Jubilant FoodWorks hits new high, surges 35% in a month on growth prospects.

More Views on News

Most Popular

Infosys vs TCS: Which is Better? (Views On News)

Nov 26, 2021

In the post pandemic era, the top two IT companies in India are fighting to capture the growing demand for IT.

This Multibagger Stock Zooms 20% After Dolly Khanna Buys Stake (Views On News)

Nov 24, 2021

Shares of this edible oil company zoomed over 50% in three days after ace investor bought around 1% stake.

Don't Sell these Stocks if the Market Falls (Profit Hunter)

Nov 17, 2021

These are the 3 types of stocks that you should not sell in a market crash.

How to Find Your Next 10-Bagger in this Market (Profit Hunter)

Nov 19, 2021

The #1 make or break factor in your portfolio you shouldn't ignore.

6 Popular Stocks that Turned into Penny Stocks (Views On News)

Nov 27, 2021

A look at popular stocks that crashed big time and never recovered, i.e. which went from 'Multibaggers to Multibeggers'.


Become A Smarter Investor
In Just 5 Minutes

Multibagger Stock Guide 2022
Get our special report Multibagger Stocks Guide (2022 Edition) Now!
We will never sell or rent your email id.
Please read our Terms


Nov 30, 2021 (Close)