ITC's First-Ever Analyst Meet Disappoints Investors: No Concrete Plan for Demerger

Back in November, we wrote to you about Indian tobacco company (ITC) and speculation related to its demerger.

In the article, we discussed what will happen to ITC's business if the rumor is actually true.

Guess what? In the recently concluded analyst meet of ITC which took place on 14 December 2021, all of the questions and speculations of demerger plan were discussed.

Since the announcement of the much talked about ITC's first-ever analyst and investor meet, the ITC share price has seen a lot of interest.

However, in the last two days its share price fell by 4%.

Here are the key things discussed in the meeting

In its first ever investor meeting on 14 December 2021, cigarette manufacturer ITC gave clarification on taxation on the cigarette business, demerger plans, and the strategy for the fast moving consumer goods (FMCG) business.

According to analysts present at the event, ITC did not provide any firm plans for demerger or listing of companies to unlock value but did not rule out those options for the company either.

However, the market was expecting some concrete announcements from the company management in this direction at the meet.

ITC chairman Sanjiv Puri said the company is open to the idea of demerger of the non-cigarette FMCG business and listing of the information technology (IT) businesses if it creates sustained value for shareholders.

ITC has not shelved the demerger plans for the hotel business, which will be done as soon as the industry recovers.

On the cigarette business, Mr. Puri said the recovery has been robust in the first half of the fiscal. There is a premiumisation of portfolio backed by innovation and better last mile execution. The economy is stabilising, which augurs well for the category.

He further added,

• 'Cigarette is just 8% of tobacco consumption. In periods of stability of tax, the legal cigarette industry claws back from illicit and volumes firm up.
  
  In the recent past, when taxation went up by 15% the revenue collection from cigarettes grew by 5%. In the period of tax stability, revenue grew by 10% led by volume.
  
  We hope the government takes into consideration all these since the industry and farmers were badly impacted also due to the pandemic'.

Higher tax on cigarettes could affect the business

ITC's top management discussed taxation on cigarette business.

The company's top management stressed the health ministry makes recommendations annually. They tried to allay concerns about higher taxation on its cigarettes business.

As per analysts attending the event, here's what Mr. Puri said,

• We expect a rational decision by the government after considering all aspects and expect any increase in taxation to be well spaced out in any case.

He also highlighted that the health ministry's recommendation this time is much wider and covers tobacco products other than cigarettes as well.

Since the government appointed an expert group to draft a tax policy on all tobacco products, investors have been concerned about ITC's performance.

Investors are also concerned about a global fall in cigarette usage. Puri, on the other hand, claims that cigarette sales have already returned to pre-pandemic levels.

Given that taxation stays consistent, ITC expects to gain market share as a result of the government's battle against illicit cigarettes.

ITC's FMCG space will be critical growth driver moving ahead

ITC is looking at merger and acquisition opportunities, especially for its FMCG business after a good performance in recent acquisitions - Savlon, Nimyle, Sunrise.

The company is open to acquiring regional brands or entering new areas or adjacencies in this category, but it will be selective, the acquisition must be value accretive, and it will not buy anything at an extraordinarily high price, says Sajiv Puri.

The company has set a Rs 1 tn revenue target by the financial year 2030 for its FMCG business.

ITC has also mentioned inflation and the strain on its margins as a result of rising input prices.

Despite experiencing extraordinary inflation in edible oil, palm oil, and packaging, the company's management stated that it was able to maintain 9% earnings before interest, taxes, depreciation, and amortisation (EBITDA) margins in the first half of the fiscal 2022.

A bit about the other core business areas

ITC focuses on processing and value-added goods in the agribusiness. Its value-added products will drive growth and margins.

It also claims to be the global leader in scale, profitability, and sustainability in its paper and paper board operations.

On the other hand, with improved consumer mood and mobility, ITC has seen a robust rebound in the hotel market.

According to a report, leisure travel is recovering well, but business travel is still sluggish, at 40-50% of pre-Covid levels.

On the other hand, hotel occupancy has already returned to pre-pandemic levels, and ITC expects its hotel business to perform better in the third quarter than it did in the second.

ITC also said it sees significant opportunities in the IT industry, particularly in the present situation.

Company's capex plans

ITC plans to invest Rs 100 bn over the upcoming three years and will move forward with more acquisitions, while awarding dividend payout around the 80% mark.

Supratim Dutta, ITC's chief financial officer, stated that of the Rs 100 bn investment planned for the next three years, 35-40% will be spent on the FMCG business, including cigarettes, to create new lines as sales and demand grow.

While 25-30% will be spend on the paperboard business because the nature of the business is capacity led growth.

10% will be contributed to the hotel business to complete existing projects and the balance on the agri-business to drive digital growth and sustain profitability.

Equitymaster on ITC

In August 2021, co-head of Research at Equitymaster, Rahul Shah, wrote an editorial on why this is the best time in years to buy ITC.

Here's an excerpt:

• I have a strong feeling that unless something goes drastically wrong with the fundamentals, the stock may have reached a nadir.
  
  Put differently, the stock may not fall much from the current levels. On the contrary, this could perhaps be the best time in a long time to buy the stock.
  
  Why?
  
  My optimism stems from the low interest rates on offer across a spectrum of asset classes.
  
  Take fixed deposits for example. I recently renewed my FD with a leading private sector bank at an interest rate of just 5% per annum.
  
  Well, this is exactly the dividend yield that ITC is currently trading at.

You can read the entire piece here: This Could be the Best Time in Years to Buy ITC

How the stock markets reacted to ITC

Shares of ITC opened the day at Rs 230.3 on the BSE and Rs 230 on the NSE.

Its share price closed at Rs 224 (down 1.9%) on the BSE and Rs 224 (down 2%) on the NSE.

At its current price, it is trading at a P/E of 19.1.

The share touched its 52-week high of Rs 265.3 and 52-week low of Rs 196.9 on 14 October 2021 and 4 May 2021, respectively.

Over the last 30 days, the ITC share price is down 5.6%. Over the last one year, the company's share price is up 4.1%.

About ITC

Established in 1910, ITC is India's biggest cigarettes & second largest fast-moving consumer goods (FMCG) company with 78% market share in cigarettes and presence in staples, biscuits, noodles, snacks, chocolate, dairy, and personal care products.

The company is also present in paperboard, printing & packaging business with revenue of Rs 45.5 bn and agri-business with Rs 80 bn as of fiscal 2021.

The company completed 100 years in 2010 and it employs over 36,500 people at more than 60 locations across India and is part of the Forbes 2000 list.

To know more, check out ITC company fact sheet and quarterly results.

For a sector overview, read our FMCG sector report.

You can also compare ITC with its peers:

ITC vs VST Industries

ITC vs Godfrey Philips

To know what's moving the Indian stock markets today, check out the most recent share market updates here.

Disclaimer: This article is for information purposes only. It is not a stock recommendation and should not be treated as such. Learn more about our recommendation services here...