In the past couple of years, cigarette major ITC, has made significant moves to de-risk its revenues. The company is now a strong No. 2 in terms of room capacity in India's hospitality sector (hotels). It also runs the largest packaged board business in Asia. It is one of the largest exporters of agri/marine products in Asia. Its new businesses include garment retailing, packaged foods, greeting cards, matchsticks and incense sticks. In a way, the company is modelling itself on the US tobacco giant, Altria (erstwhile Philip Morris). Let's compare the two.
With over US$ 81 bn of operating revenues, the Altria Group includes some of the world's most successful companies and brands. The group (through Philip Morris) is the largest tobacco company in the US and is also amongst the largest tobacco companies globally. The group owns 7 of the top 20 cigarette brands globally, led by its No. 1 brand 'Marlboro'. Apart from tobacco, Kraft Foods (a subsidiary) is the largest branded food and beverage company in the US and the second largest globally. The group also has a 36% stake in SABMiller Plc, one of the world's leading beer and alcoholic beverages company.
2003 Revenues (US$ m)
Contribution to sales
Contribution to operating profits
Marlboro, Virginia Slims, Merit, Philip Morris, Benson & Hedges, Parliament, Basic (leading discount brand), Lark, L&M, Chesterfield, Cambridge, Red & White
Has 36% stake in SABMiller Plc, one of the world's leading beer and alcoholic beverages company
Miller Lite, Foster's, Linenkugel's, Henry Weinhards's, Olde English, Mickey's, Hamm's, Milwaukee's Best, Icehouse
In comparison, ITC commands about 70% of Indiaís Rs 120 bn domestic cigarette market (value terms). Out of the top 10 brands in India, 6 belong to ITC. The growing awareness on harmful effects of tobacco as well as the governmentís punitive tax policy forced ITC to move towards de-risking its revenues. Consequently, it merged the paperboards subsidiary with itself and invested in growing the hospitality, retailing, packaged foods and IT businesses. The ITC group (including ITC Hotels) has emerged as the second biggest luxury hotel chain after Indian Hotels. In packaged foods, its product range includes ready to eat (Kitchens of India), staples (Aashirvaad Atta and Salt), confectionery (Mint-O and Candyman) and biscuits. ITC has also entered into garment retailing and has 48 Wills Lifestyle stores in 38 cities. Other initiatives include greeting cards (20% market share), safety matches and incense sticks.
Contribution to sales
Contribution to PBIT
Paperboards, paper & packaging
*Includes retailing, processed foods, biscuits, agarbatti, match sticks, greeting cards
As can be seen from the above tables, a bulk of both Altria's as well as ITC's revenues and profits is contributed by the tobacco business. The surplus cash generated from this business is funding their non-tobacco initiatives. The erstwhile Philip Morris seemed to have identified the risks and the stigma attached with the tobacco business very early on. It entered the spirits business in the 70ís and processed foods business in the mid-80ís. This helped the company de-risk its revenues in recent times. Contribution to revenues from its foods business consequently, has gone up from 33% in 2000 to nearly 38% in 2003 (December ending).
Similarly, in ITC's case, the contribution of cigarettes to total revenues has come down from over 77% in FY02 to about 74% in FY04. Contribution to PBIT too, has come down from around 95% to 92% during this period. We expect this contribution from cigarettes to keep declining in ITC's case to 67% of revenues by FY08.
In terms of sheer size, Altria sells 14 times more cigarettes than ITC and its revenues are almost 32 times that of the Indian company. Its dividend payout is also higher than ITC's. However, despite this, ITC commands a higher valuation as compared to its US peer. This may be because ITC is more profitable and the fact that it is in the growth stage. In the last 7 years (since FY98), ITC's revenues (net of excise) have clocked a CAGR of 12.8%. Profits have shown an even faster 18.1% CAGR during the period. In contrast, Altria has clocked a 2.1% topline and 6.5% profit CAGR during the same period.
With India ranked 6th among the top tourist destinations, ITC's hospitality business is likely to see encouraging times. Also, cigarettes account for only 14% of total tobacco consumed in India, as opposed to 90% in the US and 100% in China. Going forward, as the Indian per capita income increases and the demographic profile changes, cigarette consumption may start growing again. Moreover, the company's e-choupal initiative is likely to help it in stamping its footprint across rural India. This will be a key positive in the long run. However, punitive excise duties, as well as the threat of tobacco litigation will continue to be key worries.
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.
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: email@example.com. Website: www.equitymaster.com. CIN:U74999MH2007PTC175407