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ITC: Where do you go? - Views on News from Equitymaster
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  • Dec 20, 2001

    ITC: Where do you go?

    ‘From today, fashion changes direction in Mumbai’, reads an advertisement in bold. The punch line refers to the opening of first Wills Sports retail showroom in Mumbai. Finally, signs of activity in ITC’s retail plans.

    If one remembers, the ITC management has been consistently hogging the headlines in the past year for reasons other than tobacco, its principal business. The tobacco major has been consistently trying to diversify its business portfolio in a bid to reduce its tobacco associated risk profile. It is not as if the company is not faring well. Sales were up 7% and profits a healthy 28% in 1HFY02. But public and government activism against tobacco consumption as well as the threat of imported brands meant that ITC had to identify new revenue streams.

    Currently, ITC is investing heavily in hotels, paperboards/packaging, retailing, infotech and greeting cards. On the retailing front, ITC has earmarked Rs 2.5 bn investment to open over 100 sports wear retail stores in the next 3 to 5 years. With the 26th store opening in Mumbai, ITC has some 74 to go to meet targets.

    ITC’s other investment plans include 15 bn over the next three years in hotels, another Rs 15 bn investment in paperboards business spread over five to seven years. Infact, earlier this year ITC decided to merge ITC Bhadrachalam (its paperboards subsidiary) with itself.

    This is where investors are concerned. Despite the management’s commendable hold over the tobacco business and improving operating efficiencies, ITC new investments continue to be viewed with cynicism and caution.

    The retail target of opening 100 stores looks ambitious. Already, the existing retail chains are facing pressure not only on their toplines, but are also coming to terms with the challenges of supply chain management, which incidentally is one of the major reasons for several big retail chains messing up. ITC is a first timer in this segment, and is just one among many brands who vie for consumer mind share. The hotel sector is also not doing too well. Moreover, ITC’s previous attempts to diversify have not been too successful (remember ITC Classic Finance).

    With ITC deciding to merge with ITC Bhadrachalam, the company’s EPS is likely to be affected when merged figures come out. This is likely to change the valuation matrix for ITC. In all likelihood, ITC will merge ITC Hotels (another 70% subsidiary) with itself in the future. This will again be a dampener to valuations.

    At the current price of Rs 676 ITC is trading at 13.6x FY02 anticipated earnings. The valuations are very low mirroring the aforesaid concerns. Any sign of performance exceeding expectations in its new businesses will give the stock fundamental strength.



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    Aug 18, 2017 (Close)


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