Investment Thesis Report
Real MOATS especially in cigarettes and FMCG business which ensures revenue visibility
Diversified into other verticals to fuel growth and utilize the cash thrown by the cigarettes business
Transforming from a bad capital allocator to a good capital allocator; stopped incremental money into
businesses which are not performing well
3% dividend yield at current price and a P/E of 28 makes it attractive considering you are getting an
FMCG company + hotel brand into it too
Scaled up FMCG brands brilliantly a lot of investment has been done upfront now its time to make
2. money
Hotel business demerger could be one of the triggers
We have a few concerns on growth ; over long term we don’t see earnings growth above 10-12%
Company: ITC Limited
P/E: 28
ROE: 28.5%
3.
Analyst
Take:Hold
CMP: INR466
Revenue Segmentation
Strong revenue growth driven by non tobacco business although tobacco constitutes 85% of EBIT
FMCG, Agriculture and Paperboards business driving revenue growth.
Profits from FMCG business currently low because ITC is still consolidating brand presence
and also investing in newer brands.
Paper and Agriculture business are showing strong profit growth and have become dominant
players in their respective industries.
HOSPITALITY INDUSTRY UPCYCLE
2.
Demand and Supply Imbalance impacts pricing power
2.
ITC Hotels- Defining Luxury
Q3 Operational Update-
115+ Hotels
80+ Destinations
ITC Hotels- Defining Luxury
Company Sales (in cr.) PBT margin
The hotel business is set to be
demerged in this financial year.
EIH (29 hotels,
2,511 36.5% They have gotten all the required
4269 rooms)
approvals for the demerger.
ITC (132 hotels,
3,103 25%
Currently the hotel business
12000+ rooms) contributes approximately 4-5% of
revenues and 2.5% of EBIT for ITC.
Indian Hotels(322
hotels, 37000 6,769 24.5%
rooms
Lemontree and Chalet’s margins
Lemontree dragged down by heavy interest
Hotels(104 hotels, 1,071 20%
10,000 rooms payments
Chalet hotels 1,417 19%
110+ Years of Manufacturing Cigarettes
ITC is the largest buyer, processor and exporter of leaf tobaccos in India
Competition Operations
Other
8%
ITC helps the Indian farmer grow quality leaf tobaccos and linked him to global markets.
VST
9%
It has created a global benchmark as the single largest integrated source of quality
tobaccos and is the biggest buyer of all cigarette tobacco types grown in India
Godfrey Philips
10%
Production Chain
Sourcing The Tobacco
Leaf Utilization
Processing - Threshing
ITC Distribution
73%
Brands Recent Performance
Cigarettes Segment witnesses consolidation on a high base after a period of
sustained growth momentum
ITC’s Cigarette Division provides 43% of its Gross Revenue.
Net Revenue up 2.3% from FY23 TO FY24 and Net Segment PBIT up 2.3% YoY
2-yr CAGR: Net Segment Revenue +9.3%, Segment PBIT +9.4%
Differentiated variants and premium segments continue to perform well - Classic
Icon, Classic Alphatec, Players Rush, Capstan Victory - New introductions
Macroeconomic Overview
ITC has a monopoly in the Indian Cigarette Industry - 73%
TAXATION ILLICIT MARKET MOATS
Cumulative effect of taxes on High Barriers to Entry - ban on
cigarettes in India is around Legal cigarettes constitute
only 8% of overall tobacco advertising tobacco and
50% depending on the state.
consumption in India tobacco products
Taxes increased during the
transition to the GST regime. making it the 4th largest illicit No foreign threat - ban on FDI
Relative stability in tax rate cigarette market globally investments into tobacco
since then has led to claw back While the share of legal industry
of revenue from illicit markets cigarettes in total tobacco Inelastic Demand
consumption has declined from
Largest Market Share - loyalty
21% to 8% since 1981, the
of consumers
aggregate tobacco consumption
in the country has increased
Company is Top 3 Indian
over the same period corporates in the private sector
Illicit trade causes an in terms of Contribution to
annual revenue loss of appx. ` Exchequer
15500 crores to the Exchequer
ITC FMCG
ITC began its FMCG segment in 2011 and today it has achieved
revenues of over 20000 crores.
Double digit revenue growth
EBITDA margins are subdued in comparison with peers because
they have been investing into newer brands continuously
Gross Margins are similar to those of consumers
Company Sales (in cr.) EBITDA margin
HUL 61896 24%
Godrej
14096 21%
Consumer
Dabur 12404 19%
TCPL 15206 15%
ITC 21000 9.50%
ITC FMCG
Leaders in multiple categories: created organized segment Moving to value added products like going into soap,
of Atta with Aashirvad and now using the goodwill of the handwash with Savlon which started off as an
antiseptic another example was engage perfumes after
brand in other ancialliary product categories
starting off with deo’s.
Paper industry macro scenario
Low pulp prices, import surge and subdued demand caused weaker numbers in FY 23
September 2022
Dramatic fall in craft pulp prices and
increase in other key raw material prices
key reason for weak numbers in FY 23.
Global and domestic paper demand
slowdown a consequence of both
June 2023 struggling global consumption as well as
dumping by China in global markets.
FTAs with ASEAN countries like
South Korea and economic
slowdown in China rapidly
accelerating imports of cheap
paper products into the country
Paper industry macro scenario
Based on dominant industry trends, we expect a consolidation in the largely fragmented paper industry
Top listed paper makers in India Key market trends -
Shift to premium quality paper and
paper products which only the large
players can provide.
Oversupply scenario in India making
smaller mills commercially unviable.
Total production capacity in India - 40 High raw material prices benefitting
million MTPA larger integrated mills with in-house
pulp production capacity while
ITC is the largest player with about 0.98 adversely affecting those without.
million MTPA production capacity ~ (4%
market share ) and hence well Increasing government
positioned to capitalise on dominant environmental compliances making it
market trends. difficult for smaller players to
operate in the segment.
ITC paper - Margin comparison and future prospects
High timber and low pulp prices caused temporary margin decline in FY24.
ITC paper’s PBT margins have been largely
stable since FY13 ~ 18% - 22%.
Recent underperformance has been largely
due to increasing timber prices due to
alternative uses in the booming construction
industry.
30% decline in packaging board prices
another key reason for underperformance.
Competitors with captive plantations less
affected as compared to ITC paper which
sources timber externally.
However, reducing demand for timber
(construction market slowdown) and rising
pulp prices to lead to better margins in FY25.
Product portfolio - Paper and paper based products
ITC’s differentiated paper portfolio key to its continued growth in the difficult macro environment
Paperboards and Plastic substitution
Speciality paper
speciality boards products
Clear market leader in the ITC manufactures specialty Sustainable paper based
paperboards space both in paper for a variety of packaging and speciality
terms of volume and product applications including decor paper solutions to replace
quality (laminates), packaging and single use plastic.
printing. Main applications in food
ITC makes both coated virgin
and beauty packaging
paperboards and recycled ITC is a leading player in the
ones which cater to a wide premium printed paper
Key tailwinds:
range of applications from segment.
Government push towards
luxury packaging to packaging
Other speciality offerings sustainable packaging
of cigarettes
cater to niche applications like
Rising adoption by ITC’s
Specialty paperboards include insulation, flameproofing, anti-
FMCG and Hotels business
anti fungal boards and milk rust papers, etc.
cartons
ITC Agriculture
Sourcing over 4.5 million tonnes of agri commodities from 22 states - largest procurer of wheat in the private sector
MACROECONOMIC OVERVIEW:
ITC currently focuses on Growth of demand for organic products supposed to rise with CAGR of 25.25%
exports and domestic trading between 2022-27
of: Favourable government policies
Feed Ingredients - Soyameal Competitive advantage of india
Food Grains - Wheat &
Wheat Flour, Rice, Pulses,
Barley & Maize ITC - Looking Ahead using NextGen
2
Marine Products - Shrimps Agriculture
ITCMAARS (Metamarket for Advanced Agriculture and
and Prawns
Rural Services), a programme that delivers hyperlocal
Processed Fruits - Fruit
1
and personalised solutions by synergistically
Purees/Concentrates, integrating NextGen agri-technologies to empower
farmers
IQF/Frozen Fruits, Organic 0
0 2 4 6
Addressing the challenges of climate change, ITC has
Fruit Products introduced a range of sustainable agricultural
90% INCREASE IN NET
Coffee practices under its climate-smart agriculture (CSA) RETURNS OF FARMERS
programme.
ITC Infotech
ITC’s IT business likely to be a strong revenue driver in the coming years.
Recorded a resilient growth of 12.5% even in the
backdrop of muted growth in the IT Services Industry.
This was driven by an expanded global footprint and
capability-led partnerships across key clients.
Expanded to France, Mexico, Brazil and Malaysia, with
plans to expand into Gulf countries in FY 23.
Started a new Service Line – ‘DxP Services’ – pursuant
to the Strategic Partner Agreement with PTC Inc
(Rebadging deal), which significantly boosted revenues
but had a one-time impact on profitability. Acquisition
Revenue doubled in the last 5 years and is
of Blazeclan, a specialised cloud services company.
expected to continue on the same trajectory
and reach $1 billion in the next 3-4 years Current capabilities - Data & Analytics, Direct to
EBITDA margin more than doubled from 8% Consumer (D2C), Open Hospitality (Hotels-in-a-Box),
(FY19) to 18% (FY 24). This margin is at par or PLM-led Digital Thread Solutions, Digital Manufacturing,
a little lower than peers due to expansion to SAP S/4 HANA, and Cloud based activities
newer geographies and recent acquisitions
Capital Allocation
In Fy22 the management came out and mentioned a change in the capital
allocation policy of the company
This change meant that 80-85% of profits would be distributed as
dividends
Also there would be no incremental investments in the hotels segment
which had ROE’s of sub 5% at that point in time
They were following an asset light model for the hotels segment
These actions and the demerger of Hotel business from the core
businesses give us confidence of better capital allocation of management
There could be potential sale or demergers of other non core businesses
in the future
Intelligence, Experience and Integrity
Professional management has driven the company’s growth and profits.
Management
Sanjiv Puri Sumant Bhargavan Supratim Dutta Hemant Malik Sandeep Kaul Anil Rajput
Chairman & Managing Director Executive Director Executive Director & Executive Director ITD, MAB & Start-up Cell President, ITC
CFO Corporate Affairs
Over the year the Company had six Board TOTAL REMUNERATION IN LAKHS
Mr. Puri is an alumnus of the Indian
Meetings of which 4 had full attendance
Institute of Technology, Kanpur, and the
ITC’s Remuneration strategy is performance
Wharton School of Business, USA.
based, competitive and values led
Puri has served as the Chairman of the
Non-Executive Directors, including
Expert Group constituted by the Govt. of
Independent Directors, are entitled to
India to promote agri-exports and a
remuneration by way of commission for
Member of the technology discussion
each financial year, ranging between `
group constituted by the NITI Aayog
70,00,000/- and ` 1,00,00,000/-
Puri was recognised with the 'Best CEO
individually, as approved by the
Award' by Business Today in 2024.
Shareholders.
Shareholding Pattern
Notable DIIs: Life Insurance BAT SALE OF ITC SHARES
Corporation Of India, General
British American Tobacco PLC (BAT)
Insurance Corporation Of India
sold 3.5% of their stake in ITC which
Notable FIIs: Government of
was said to be an overhang for the
Singapore, Goldman Sachs
stock
Trust Ii, Tobacco Manufacturers
This stake was picked up by mutual
(India) Limited
fund schemes, majorly by ICICI
One of the shortcomings is
Prudential Life Insurance Company
senior management do not
have meaningful stake in
company.
Income Statement analysis
Clean balance sheet with healthy year on year asset growth
Rev from operations has been
steadily increasing apart from FY24
where it remained stagnant due to
high base in cigarette industry
Consumption in the country is
struggling especially in rural which
is why there have been muted
growth in FMCG companies
Company earns an EBIT margin of
28.89% which is among the highest
as compared to peers
Balance sheet analysis
Clean balance sheet with healthy year on year asset growth
ITC is debt free with no long term
borrowings.
Trade receivables jumped up in FY
24. However, more than 98% of
these are either not yet due or due
within 6 months.
A decrease in bank deposits, bonds
and equity MF holdings held under
current assets has resulted in a
sharp increase in CCE in FY 24
Sharp increase in inventory in FY 24
due to increasing key raw material
prices, especially in ITC paper
Current ratio ~ 3, Quick ratio ~ 2
Dupont ROE analysis
Growing ROE led by both NPM and asset turnover improvement
Growth in ROE coming from both better NPM as well as increased asset turnover.
NPM growth shows that company is on account of both increase in revenue as well
as decrease in costs relative to revenue.
Overall increasing asset turnover signals efficient management.
Slight ROE decrease in FY 24 due to lower asset turnover, caused mainly by high
outstanding inventory.
Ratio Analysis
Improving ROIC largely consequence for
improving NOPAT. Margin growth on account of both
revenue increases as well as increasing
Invested capital broadly unchanged operational efficiency
since FY22.
Ratio Analysis
Cash cycle increased in FY24 mainly due
to increased outstanding inventory.
High DPO and low DSO signal positive
bargaining power
References
https://economictimes.indiatimes.com/industry/indl-goods/svs/paper-/-wood-/-glass/-plastic/-marbles/paper-
imports-surge-43-in-apr-sept-this-year-on-higher-shipments-from-asean/articleshow/105449539.cms?from=mdr
Appendix
Maggi example
