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)
I am just thinking why did they not monetize the brand and tried to sell it. The brand is well known, has great recall and premium products also. Any pointers would make me understand why they chose to shut down rather…
May be they did not find right buyer and waited for long time. I think some one will ask in next Analys Call or Management will give more details soon.
It was a surrogate marketing startegy for Wills, not really an independent clothing brand. So, ITC will be sceptical of how new owner treats and positions that brand.
Also. other retailers may not find that association exciting. They wouldn’t like to loose money advertising for ITC
Bingo! It’s lame of me I missed that wills is their core cigarette brand and shares the name with this lifestyle stunt they did years ago , which you rightly called surrogate marketing… this really makes me think of more such brands which does similar stunts…create adjacencies not for the sake of focussing on them for long term but rather for marketing their core product. The true reason of creating wills lifestyle would be better known to management but it would be good for investors to know to understand the long term behaviour of this complex firm.
Actually this is sad. They had a good portfolio of products. I used to like their chinos and Luxuria Formal trousers. Anyway they are relieved of the pain of running a go-nowhere business. But feel fashion retailing is a bad business in India.
On the contrary, fashion retailing is picking up in a big way. Thats the reason I am surprised ITC couldnt pull it off. Look at Big bazaar’s focus on FBB. Reliance Trendz, Aditya birla fashion and private labels of Trent (Westside), Zara (Trent), H&M etc. all are having tremendous growth (except maybe not Zara at present) and all these retailers are having top focus on fashion. In such a turnaround moment of Indian consumerism, I am surprised to see Wills lifestyle shutting shop. It only makes me feel it was very poorly run with no vision and focus.
Disc: Started gradually nibbling into ITC as like its FMCG business
Will this tax reduction not have any favourable impact to ITC? Do they take any benefits from exemption etc? Suprised that ITC did not move significantly. All the large FMCG companies like HuL, Nestle, Godrej Consumer had a good move.
I think the general sentiment was an expected increase in tax rates for cigarettes to offset some of the revenue foregone by the govt. Might have kept the excitement in the stock subdued.
1.Tax cut on corporates ITC pays >32% avg
2. GST cut on Hotel room priced>7500
3. Plastic ban benefit on paper & packaging
4. FMCG segment on inflection point on Ebitda basis
5. management selling some of non performer segments (wills earlier John Player)
