ITC share gained about 2 per cent in a volatile session, while other FMCG major such as HUL dipped over 2.70 per cent on Thursday, March 3. In the last three months, ITC’s share price has fallen just 4.5 per cent compared to HUL’s 9 per cent. Analysts point out their preference for ITC in the current market given the near-term uncertainty on input prices and rural demand.
While other FMCG companies have also been badly affected by weak rural demand due to higher inflation and stiff raw material prices which is impacting margins, ITC seems to have remained relatively unscathed. The scrip’s presence in more than 300 mutual fund schemes across equity and hybrid categories is testimony to analyst preference for the company.
Ahead In The Race
The one thing that makes the company stand out in this market is its increased dividend pay-out. The management had clearly articulated in its capital allocation policy that dividend pay-outs will be stepped up to about 80-85 per cent of its post-tax profits.
To add to that, the company’s consistent dividend paying track record is a bonus. In the current financial year, ITC has recommended a total of Rs 10.25 dividend per share including a Rs 5 interim dividend. As a result, its dividend yield stands at about 5.07 per cent currently.
Another advantage during these times is its relative strength in urban positioning, and differentiated product mix. Analysts point out that ITC’s urban skew, low volume base and limited impact of input inflation are working in the company’s favour.
ITC’s financial performance has been robust in the third quarter. The FMCG behemoth delivered a strong performance across all operating segments in the third quarter (October-December 2021). Gross revenue stood at Rs 16,633.86 crore, representing a growth of 31.3 per cent year-on-year (y-o-y) while profit after tax (PAT) grew by 12.7 per cent y-o-y to Rs 4,156.20 crore. Earnings per share for the quarter stood at Rs 3.37 against the previous quarter’s Rs 3.
ITC’s hotels business is also gaining traction with an improved break-even as well as a structural uptick in its expanding FMCG business. Revenues and margins have been slowly but steadily inching upwards, which remains a key cushion for investors in these volatile times. Key triggers for the stock would be scaling up of its non-cigarette FMCG business, which should drive margin improvement in the coming years. Moreover, strong cash flows would also be a good bet in the current uncertain and disruptive business environment.
“ITC is possibly one of the most under-appreciated businesses in recent times… We suspect the market may not have taken a holistic look yet; even if one excludes a couple of nascent dairy products from the portfolio, the addressable opportunity for ITC is still $22 billion--larger than even the closest peers’ size of markets. The same would need to be captured into valuation soon,” stated the JM Financial Institutional Equities report.
A Deep FMCG Basket
ITC has marquee brands in its product basket, including Aashirvaad and Sunfeast among others, and the company is slowly but steadily creating a dominant position for itself in this Rs 5 lakh crore FMCG market.
Sanjiv Puri has also put in place an ‘ITC Next’ strategy, which is focussed on healthier margins, agile innovation, asset-right strategy, including developing new routes to market, and a future-ready product portfolio.
The company is diversified, which limits its risk. The firm has a dominant position in various categories--from snacks to spices, from biscuits to branded atta, from noodles to dairy, from chocolates to coffee, from deodorants to hand and body wash, from hygiene products to floor cleaners as well as notebooks and agarbattis (the last two being sectors where none of the Indian or multinational brands can claim to be present).
Hotels Regain Business
ITC’s hotels business is slowly coming around. The management has started on an asset-right strategy that provides enhanced focus and impetus on management contracts. In fact, this has been instrumental in substantially reducing the hotel business’s capital intensity.
ITC is also innovating on its offerings with unique packages to increase revenues, such as staycation packages and in-home dining experiences given its reputation in cuisines.
There is still lot to do and with the pandemic not over yet, any further restriction could change the revenue equation as this is a highly capital-intensive business.
Financial Prowess
During the three years from FY17 to FY20, ITC’s earnings per share has grown at 47 per cent, while return on capital employed (ROCE) moved up from 61 per cent to 72 per cent in the same period. Besides, ITC’s ESG (environmental, social and governance) overhang is reducing. “We are positive on the outlook for ITC despite ongoing structural headwinds (especially from ESG and slowing tobacco consumption). We expect a moderate cigarette tax environment over the medium term, which will support higher cigarette business profit growth versus the past five years. We believe the recent budget adds to our confidence in an environment of moderate taxation in the medium term, which allays one of the overhangs on the stock and should increase investor confidence. Valuation remains reasonably attractive, even adjusting for ESG,” says a recent Morgan Stanley India report.
