ITI Ltd: What Next After 300% Gains?

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I don't understand the excitement around ITI Ltd. The stock is up more than 4x or a huge 300% from its 52-week lows.

However, the fundamentals are far from inspiring. The stock has reported losses in the latest financial year FY23 as well as the last 12 months.

Although the stock was profitable between FY16 and FY22, the net profits have fallen from a high of Rs 2.7 bn in FY17 to 1.2 bn in FY22.

Yes, that's right. A company that earned Rs 2.7 bn in profits in FY17, earned only Rs 1.2 bn in FY22. In fact, in FY23 it even incurred a loss of Rs 3.6 bn as highlighted.

So, profitability wise, it definitely is struggling.

The balance sheet too is a bit stretched, with latest borrowing at Rs 19 bn that's only slightly lower than the equity of Rs 20 bn.

I know what's going through your mind. The stock may have gone up more than 4x in less than 1 year because it could be a turnaround stock. Hence, looking at the past performance may not make sense.

However, didn't Warren Buffett say that turnarounds seldom turn?

In other words, it is very hard to figure out in advance which stocks will turn around and which ones won't. So, it is better to stay away from these categories of stocks as a whole.

Another concerning factor is ITI's valuations. The stock has a book value of Rs 22 per share while its share price stands at Rs 370 per share.

This gives it a price to book value multiple of an extremely high 16.8x. Maybe, price to book value could be the wrong way to value ITI.

However, the stock isn't cheap on a price to earnings basis either. The highest fully diluted EPS the stock earned was in FY17 when it stood at Rs 2.8 per share. Using this EPS to calculate the PE ratio gives us a PE of a huge 133.8x.

A PE ratio of 133.8x and that too on the best ever earnings recorded by the company, is certainly on the very high side.

For perspective, if we assume that the company deserves a normal PE ratio of 20x, then the company will have to grow its profits by 10x over the next 2-3 years, to earn a 50% return on the stock at the current price.

This shows that the stock is indeed being very richly valued by Mr Market.

Another sore point is the ratings downgrade the company earned by the company just last month. This is what Brickwork, the ratings agency had to say.

• The poor liquidity of the company is reflected by the losses at the EBITDA level in FY23 and H1FY24 due to a significant decline in the scale of operations. The company reported a Total Operating Income (TOI) of ~Rs.1395 Crs in FY23 (PY ~Rs.1860 Crs) and ~Rs.403 Crs in H1FY24 (PY ~Rs.364 Crs).
  
  The company reported a net loss of Rs.360 Crs in FY23 (PY Rs.120.08 Crs) and a net loss of Rs. 228.40 Crs in H1FY24. Resultantly, the debt protection metrics have deteriorated as on FY23 and continue to remain subdued as on H1FY24. The company's stretched receivables and increased reliance on bank borrowings have further impaired the company's liquidity position.

Thus, the company's fundamentals, valuations and also liquidity, don't paint a pretty picture at all. However, there does seem to be a silver lining to all these dark clouds, and it comes in the form of the company's latest annual report.

The annual report highlights how the company has won a huge order worth Rs 24.2 bn from BSNL. The company has called it the most awaited order and also important, as it opens new avenues in 5G technology arena.

Other initiatives like in-house developed EVMs (Electronic Voting Machines), data centre services, manufacturing and marketing of laptops, water pipe and solar panel manufacturing, are all showing strong traction.

Thus, it looks like the company does have a better future a compared to its past and this is the main reason the stock may gone up more than 4x in less than a year.

However, if a value investor were to assess the company, he won't be too happy with the risk-reward equation at the current valuations.

In fact, he won't be too happy with the business quality either. None of the initiatives that the company has highlighted, have started reflecting in the company's financials so far.

I think it was Ben Graham who often used to talk about being able to distinguish investment from speculation and from the evidence at hand, ITI ltd would feel more at home in the latter category than the former.

Happy Investing.

Warm regards,


Rahul Shah
Editor and Research Analyst, Profit Hunter
Equitymaster Agora Research Private Limited (Research Analyst)