This Could be the Best Time in Years to Buy ITC

Aug 9, 2021

Rahul Shah, Editor, Profit Hunter

It's an open season for trolls targeting ITC's poor performance in recent times.

They were at it again when the market scaled a new life time high last week. Tongue firmly in cheek, one of them called ITC the most consistent performer of the last few months.

Of course, the reference here was to the 'consistent underperformance' of the hotels to tobacco conglomerate.

The stock price of the company has remained stubbornly around the Rs 208 even as the Nifty has moved from 9,800 levels to more than 16,000.

The going really has been tough for a company that once used to be among India's favourite blue chips. The stock has lost about 40% from its highs four years back even as peers like HUL and Nestle have looked in top form.

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However, are the woes of the company coming to an end? Has the bottom been finally reached?

I will go out on a limb and say yes.

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.

I know what you are thinking. Comparing ITC with FDs is like comparing chalk with cheese.

But think of it this way...

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At current valuations, I am getting a solid blue chip stock that only gives me FD like returns but has the potential to provide both capital appreciation as well as increase in dividend payouts in the future.

Thus, unless the dividends reduce dramatically in the future, the investor is assured of an FD like returns even as he waits for the stock price to regain its upward journey.

Another way of looking at this situation is pitting ITC against a market darling like Pidilite Industries and assuming they're going to shut the stock market for five years starting tomorrow.

Pidilite currently trades at a dividend yield of a paltry 0.4%. Thus, all that the investor will receive by investing in Pidilite at today's valuations will be a return well below 1%.

This is very low in my view and is the result of paying too high a multiple for a stock.

If you pay in excess of 100x multiple for a stock - the current valuation of Pidilite - you are essentially banking on someone else to buy it back from you at a similar multiple or higher.

Of course, Pidilite will grow its EPS at a much faster rate than ITC.

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But do you think investors would be willing to continue to value it at 100x when its 5-year average has been 60x and a 10-year average even lower at 40x?

I for one am not willing to take that risk.

ITC investors on the other hand will keep earning their 5% dividend yield even with the stock market closed.

And who knows, if things take a turn for the better, the dividend earnings may keep rising.

This is why I believe ITC may have not only bottomed out now but also has a better risk reward ratio than a lot of these market darlings trading at high PE ratios.

What do you think, der reader? Let me know your thoughts.

Do you think a laggard like ITC has a better risk-reward ratio over the next 3-5 years compared to a market favourite like Pidilite?

I think its advantage ITC.

Warm regards,

Rahul Shah
Rahul Shah
Editor and Research Analyst, Profit Hunter

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13 Responses to "This Could be the Best Time in Years to Buy ITC"

Dilip Purwar

Sep 17, 2021

I am in full agreement that such a diversified,high dividend with a consistent good record and management adhering to corporate governance.
A fairly priced script at this expensive market and valuations. If one go by past few year performance,it is disappointing but this is common phenomenon in share market to ignore some good script ,then suddenly it draws attention of fund manager and then it moved up.it is testing patience of investor,it is sooner then later ITC will reward its share holder.

Like (1)

Anupal Bharali

Sep 17, 2021

Seems to be an excellent analysis on ITC Ltd. It should reward long term investors if one takes the plunge right now.

Like (1)

Mitesh Shah

Sep 17, 2021

09821915616

Dear RAHUL,

ITC certainly deserves best attention of investors but at the sametime ur r trying to contradict Tanushree for buying Forever Stocks ? This kind of confusion is the key to sell big winners early.

Like (1)

Srini

Aug 10, 2021

Investment may be protected in ITC. How about returns? Are there better blue chips in the market that can give better returns?

Like (1)

Amit Nagpal

Aug 10, 2021

Very good analysis of ITC in regard to it's Div. yield vis-a-vis other stock. ITC has been a laggard of late but the risk return ratio is favorably skewed toward it. I still remember, when ITC used to be at Rs 250-300 at F.V of 10rs many years ago and remained there for few years. Suddenly in a span of 2 years it rocketed to 1200 rs. After that it split to 1:10 and it re scaled to 120 rs. Now after that period, in last 10 years it scaled to just 200rs. So no one knows when next propel would come. This is perfect analysis by Mr Rahul and I am a great fan of him, no doubt about it.

Like (1)

Dr Rajeev

Aug 9, 2021

ITC is the biggest scam that Stock Market analysts have perpetuated over the last few years. A product that is a health risk and may have fewer consumers in future with greater regulatory restrictions is the main source of profit. Does not augury well. The hotel business that is not anywhere near the top in brand name, profitability and sustainability - a drain on funds. As IDFC was promoted strongly by analysts several years ago, ITC has also been promoted - possibly paid by ITC. Coal India gives better dividend yield but is an equally bad investment. Most of the investors have waited too long for ITC to turn around - isn't it time to junk it?

Like (1)

Chacko

Aug 9, 2021

Good Article, No doubt. Same observation came many a times from EM in the last 3 years about ITC I am also an investor, how ever disappointed with it, Huge opportunity cost is not indicated here by Rahul. So far last 3 years 5% is my gain, which is not good in many ways. However if the demerger happens, then it may manage to write a new story, an investor for 3 years now would have crossed 6 years. Demerger can only give a max of 100% , even then i dont think any meaningful return is achieved.

So this is not an investment, but a parking space for funds.. Unlimited waiting is really a problem too

Like (1)

Premkumar R

Aug 9, 2021

It appears an interesting idea. I am tempted. But I already have 250 shares of ITC bought at an average price of 185. Is it a good idea to buy more? I don't have too much spare money.

Like (1)

NADSAL S PRASHANTH

Aug 9, 2021

Agree with the subject.keep accumulating ITC is good option. same time pidilite i have bought in 2018 and almost more than double now. and it will go up only because of the sectorial demand at present until new competitors enter into the market.

Like (1)

Balajee

Aug 9, 2021

Excellent analysis and not Rocket science for a investor to decision !

Like (1)
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