The way I see ITC is that you are only paying for the cigarette business. It is a monopoly business that grows volumes in single digits on average. Earnings grow at 10% cagr on average and a 2% yield. Yield keeps increasing as earnings grow and the cig business has shown huge pricing power as even in the worst taxation times ITC still managed to grow earnings. This shows the underlying strength of its cigarette business. This business needs pretty much no capital to grow and operate as well.
They then funnel these cash flows into a number of other businesses. Household brands have been built with huge capital. They keep re-investing to grow their other fmcg business. I think they are reaching a period where the fmcg business is now showing margins and margins will slowly improve towards industry standards & then support growth of new initiatives internally itself (through cash flows of other fmcg itself). This will give a fillip to bottom line & free up further cash for ITC to invest in newer lines of business.
The ITC of today can enter any business and pump it with capital to scale it and then break-even. Capital allocation of ITC is not poor. Majority of its initiatives do end up making money in the long run. Of course a few brands and businesses end up failing and they take steps to exit them or restructure them. They have a mammoth cash machine in cigarettes and they never talk/speak about the cash power of their sin business much, even in their Annual Reports its not boasted about like their other businesses.
I think in other fmcg they have successfully built profitable and big brands. Aashirvaad is now expanding its offerings, Master chef seems to be a solid product in frozen foods, that seems to be a futuristic market in India. Sunfeast has managed to garner market share in the hyper competitive biscuit market. Bingo has also made space for itself in a tough market.
They have a bunch of other brands such as:
- Mangaldeep , that has not seen a big hit due to patanjali and maintains its position in a household Indian product.
- Classmate & Paperkraft , ITC has managed to create a brand in the notebook space. And further having the largest Printing Press infrastructure in the country, it creates cost synergies for them across businesses as they have vertically integrated packaging for FMCG, cigarettes etc: etc: Therefore, being able to optimise one of the bigger costs in FMCG that is packaging.
- Other brands like savlon, fiama, engage, Yipee, candyman, Aim matches etc:. Newer brands in Sunbean coffee, bnatural juices etc:
- All these brands have a number of extensions like sunfeast has dark fantasy, farmlite, the new wonderz milk etc:
Further they are a fully integrated company. They have control over every aspect of the value chain from manufacturing to logistics to packaging to even contract farming.
Today it seems like you are only paying for the cigarette business in valuation and you get this massive vertically integrated “other business” for pretty much nothing.
(the hotel business uses sub 5% of cash flows, I could be wrong on the exact number please verify this. But this shows the cash power of the company)