In my previous post, as was rightly pointed out to me I had missed out on 2 business divisions in ITC
9) ITC Infotech
9) ITC Infotech
The company registered a total income of about Rs 400 crores on a consolidated basis and a bottom line of about Rs 10 crores. Not exactly a great set of numbers considering the peer group
10) Education & Stationary Products
The company registered a growth of 72% last year in terms of topline albeit on a small base. Its two flagship brands are “Classmate” for the student community and “PaperKraft” for the discerning working executive.
Some observations on ITC
1) Branding - The company has always managed to create a slight premium positioning for its brands. So whether it is the hotels business or Wills Lifestyle or Fiama Lifestyle. This has enabled the company to address the mass maket effectively whenever it has moved the brand down. It is relatively easier to move a brand from the premium segment to the mass market as opposed to the other way around.
10) Education & Stationary Products
The company registered a growth of 72% last year in terms of topline albeit on a small base. Its two flagship brands are “Classmate” for the student community and “PaperKraft” for the discerning working executive.
Some observations on ITC
1) Branding - The company has always managed to create a slight premium positioning for its brands. So whether it is the hotels business or Wills Lifestyle or Fiama Lifestyle. This has enabled the company to address the mass maket effectively whenever it has moved the brand down. It is relatively easier to move a brand from the premium segment to the mass market as opposed to the other way around.
2) The company boasts of a phenomenonal distribution network like HUL and hence is able to leverage that as it keeps expanding its product portfolio.
3) The E-choupal initiative is a great asset to have both from a sourcing as well as sales perspective for most of the divisions. This could potentially become one of the most attractive pieces in the ITC portfolio.
4) Management is clearly working aggressively in expanding the non tobacco portfolio and it wouldn’t surprise me if ITC sells off the tobacco business on a 10-15 year horizon and becomes a huge FMCG player taking on the MNC players like HLL, P& G, Nestle etc
5) Financial ratios like RONW might lower in the near future as the company invests money aggressively in building the FMCG business.
Investment Call
ITC to me is clearly a long term call on a 5- 10 year ( Not 2-3 years) horizon in which the company will transform itself. It is a compounding story which might compound at 15-18% a year unless something drastic comes up on the tobacco regulation front.
The stock however is currently available at 23 times last years EPS of 8.35. I would wait for it to reach lower levels before I buy the stock.
Investment Call
ITC to me is clearly a long term call on a 5- 10 year ( Not 2-3 years) horizon in which the company will transform itself. It is a compounding story which might compound at 15-18% a year unless something drastic comes up on the tobacco regulation front.
The stock however is currently available at 23 times last years EPS of 8.35. I would wait for it to reach lower levels before I buy the stock.
12 comments:
Good and Nice writeup.It's gives nice
idea about the whole ITC.I am also interested in ITC in my long term portfolio.Do you think price close to 140 to 160 will be a good buy?
Thanks
Ravi
Hi Ravi
Yeah I think that would be a attractive price to get in the stock with reasonable margin of safety. Even around the 160-170 is a good band to get into the stock.
Though one needs to have a reasonably long outlook on the stock.
Cheers
Ninad
Hi Ravi
Yeah I think that would be a attractive price to get in the stock with reasonable margin of safety. Even around the 160-170 is a good band to get into the stock.
Though one needs to have a reasonably long outlook on the stock.
Cheers
Ninad
ninad
i would prefer to do a sum of parts analysis of ITC. It would make sense to value each business separately as they have very different economics.
also ITC's capital allocation has not been great in the past - case in point ITC finance and other similar business.
there ROE is high because they have a cash cow - cigarettes ..and they keep taking that cash from that business and investing it in cash sinks like hotels. somehow i am not impressed by the management
regards
rohit
Hi Rohit
Good points. I agree with you that historically the company got into unrelated diversification. It was driven I think with the right intention of derisking from the tobacco industry and allocating capital into other businesses. The company did get into areas like Hotels, IT, Financial Services. This was also driven by worldwide trend of tobacco companies diversifying like RJR Nabisco, BAT etc. However the good part about ITC has been that it hasn’t gone around doing expensive takeovers and focussed on organically building the new ventures.
I think the management over the last 5-7 years have focussed and stuck to the FMCG domain. ITC hotels continues to be part of the portfolio but it did about 430 crores of PBT on about 2300 crores of capital employed. Looks reasonable in terms of ROCE.
My personal take is that 5 years down there will be only 2 large Indian hotel chains, the Taj group and ITC. Oberoi will become a niche high end luxury player and most of the other guys would be small players. The worldwide chains like Four Seasons, Intercontinental etc will have significant marketshare.
Rohit I have a opposite view of the management in terms of liking the management. If u do a comparison will Hindustan Unilever, HUL has a cash cow in the HPC business that they run. HUL has been trying to grow sales by entering newer growth areas like water, ice creams, food etc but haven’t manage to make a mark. I cant think of a single successful HUL business/ product launch in the last 5 years ( though they are turning the corner now ). ITC however has managed to build itself a decent portfolio of FMCG business in the same time period and have created successful brands/ businesses like Aashirwaad, Sunfeast. Bingo.
They have finally made their move which everybody was waiting for, into the HPC segment to take on HUL. This is going to be a tough battle bcos this is HUL’s cash cow and they aren’t gonna let ITC take marketshare here so easily. ITC might lose a few battles but I think the broad direction is right for the company and you could eventually have ITC selling of the tobacco business ( 10 year horizon) to a BAT kind of global major.
The FMCG business will lose money for the next few years but I would put a bet on ITC emerging a significant player in this space. Hence my post talked about ITC being a 5-10 year bet as opposed to 3-5 year bet.
Cheers
Ninad
Hi Ninad,
Great write up on ITC. I fully agree with you on the management quality as well as the long range of their vision in terms of derisking the company from the tobacco business. Also I view their presence in diverse areas
as a strength and not a weakness.
In fact, there was an article in Eco times about 1 year back which compared the marketing abilities of ITC vis a vis HUL and the view of the columnist was that ITC was winning hands down in HUL's traditional areas. I am hoding the stock with a 10 year perspective (I am with you on the holding period as well)and I feel that one cannot lose on this one.
Hi Mahendra
I would however always suggest that one needs to monitor the company's performance on a regular basis.
The risk in ITC is if there is some kind of regulation either in India or worldwide which could impact the cash cow - the cigarette business.
Cheers
Ninad
Hi ninad
The only other tobacco company which has diversified well is phillip morris into kraft ..foods etc
FMCG is a logical extension for a tobacco company. the skills needed to be successful in the tobacco business are similar to FMCG - branding, distribution etc.
so i can understand the diversification into FMCG, agri business - e choupal etc. but what is the logic of diversifying into hotels, papers , IT ??!! etc. how do these business build on the competency of a tobacco company ?
one option is always to return cash to shareholders instead of blowing it up in unrelated businesses (accquisition or organic)
regarding hotels ..it is a very cyclical business ..we are seeing a cyclical high. 1998-2002 was terrible for hotels ..so ROE for paper, hotels over a business cycle are at best average ...no where near tobacco or even FMCG
i am not suggesting ITC is not good value ..i think it would be a better value if the management was more prudent with the cash flows
regards
rohit
Hi Rohit
I agree with you some of the diversifications that the company got into are unrelated and avoidable. Most of it is however historical baggage of the license raj and other variables.
ITC got into to Hotels and Paperboards in 1975. Hotels I agree, there is no logic for this diversification. Paperboards was more of a backward integration for its packaging needs and even today 40% of the paper businesses revenue comes in catering to the in house needs for packaging.
Financial services which the company subsequently sold off was bcos of BAT's influence. BAT if u see worldwide has diversified into retailing and financial services.
IT is really speaking converting the in house IT team into a independent company - CITI model, Siemens - SISL, Philips Software kinda of thing.
I agree it makes sense to exit some of these businesses. But its tough for managements to take difficult decisions when things are going smoothly. RIL for ex is in a similar boat. The core business generated cash to fund diversifications into Telecom, retail, Sez etc
But on a broader level the ITC management is making the right moves in the last 5 years.
Cheers
Ninad
Hi Ninad,
A bit late on this one, since I was caught up in work.
ITC is conciously looking to reduce its dependence on tobacco business which it claims publicly. So it could well be 25 % of total sales in about 5 years. Then it would not be so worrisome.
Secondly although it has diversified into unrelated areas what needs to be noted is that it is in the top 3 in most of these sectors like hotels and paper. So though unrelated the businesses are big enough to stand on their own feet and we have the GE model to prove that large diversified businesses can make sense in driving a conglomerate's profits.
Regards
Mahendra
Hi Mahendra
I agree with you that ITC will increasingly reduce the amount of tobacco revenues as a % of its total revenues.
I think most of the unrelated diversification have happenned historically and the company has been broadly focusing on the FMCG space in the last 5 years.
Cheers
Ninad
Hi ninad,
nice write up on ITC. and great arguments for & against.
venkat
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