ValuePickr Forum

ITC and Hindustan Unilever (HUL)

Which FMCG will perform ?
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Interesting comparison

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As on September 30, 2018, Specified Undertaking of Unit Trust of India (SUUTI) held around 9.63 per cent stake in Axis Bank, 7.97 per cent in ITC and 1.80 per cent in L&T.

While the government is waiting for L&T to launch a buyback offer to tender its shares; for holding in Axis Bank and ITC, it would consider off-market deals, an official said.

“We are open to selling stake in Axis Bank and ITC through bulk or block deals. It all depends on the valuation,” the official told PTI.

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Any one acccumulating ITC at these levels ?
Does it appear to be good long term (5-7-10 year ) bet ?
Or it looks cheaper only optically

PE is 31, PEG is 3.6, so definitely not cheap. I think of this as a buy and hold company and I have been purchasing at 250-285. But it fell below 200, 3 years ago, so you may want to wait.

I meant it’s cheaper on relative basis compared to other companies in pack .
May be because market is giving valuation of cigerrarates business and not FMCG yet

Yes, which means it does not belong to the FMCG pack. But if it is yet to be included in the pack, why do you want to buy it? What do you think of its valuation if you consider it to be a cigarette company?

It’s already part of my PF and I am adding free every month ( weekly ) and currently forms around 10 percent of my PF.
Was just trying to have others views too as I am prone to biases hence checking.

Mine too, although not 10%, I also add regularly.

I don’t think biases has a place in purchasing FMCG companies in the sense that there will be demand and growth for the products although it is a competitive space, so you are not making any big mistake unless you have paid a big price and investing for long term. And as you know it hovers around 270-280 many times, so If this is part of your long-term portfolio, you could wait for Nifty to fall, which many expect to happen.

Thanks for all the inputs

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I have been reading more into ITC lately. (whatever little bit my amateur skills allow me to do).

My view is that the stock is cheap at 30x. It is a free cash flow machine yielding 2% in div. The FMCG business is a big trigger for profitability going forward. I think they can pull industry standard opm if not slightly lesser, but even then it will be a big boost to all metrics. That coupled with the increase in free cash due to nature of the business would increase dividends further. With a long term view of 5 years or maybe more, at 30x today with a 2% yield downside seems limited. Cigarette business is a stable cash cow and govt will not jeopardise tax income from cigarettes, so there will always be a sort of quid pro quo. As far as disruption goes, yes they can be disrupted by vapurisers etc: But we must remember that ITC started its own vape that was stopped. Vapourizers are banned in many countries including India due to various legal and health concerns, so even ITC had to stop selling their vape in 2014 if im not wrong.

Their FMCG brands need no introduction. And they have big ambitions if mgmt commentary is anything to by, they want to achieve 1L crores in the next decade in revenue from fmcg business. They definately have the cash to back this. I think FMCG business will turn around and some brands extremely strong and will do well.

I think they could be a great compounder. At this price it is like paying only for cigarrette business…almost atleast.

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A consumer product I did not know was made by ITC – Decor laminates …

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I have few points about ITC:

  • Still Cigarette contributes more than 80% of the profit
  • Tax impact on Cigarette and the increased in warning on the packet to 80% in around 2016 has slowed the growth rate of profit significantly
  • Even the FMCG-others business growth rate has come down in the last few years.

I was trying to correlate how much tax was increased on its Cigarette business and its corresponding impact on revenue.
Regarding VAT and Excise duty ITC management mentioned in page number 40 of 2016 annual report that the incidence of Excise duty and VAT on cigarette at per unit level has gone up cumulatively by 118% and 142% over the last 4 years. Which means that from 2012 to 2016 the Excise duty has gone up by 118% per cigarette.

Now lets look at the trend of Excise duty (company don’t declare any numbers on VAT)


Figure 1 (Source- Page 296 2017 annual report for Excise duty and March end financial results of each year for Cigarette Gross Revenue Breakup )

If we look at figure 2 then we would notice that the Excise duty as % of Cigarette revenue has remained around 47% from 2009 to 2017. It was little surprising for me. I was expecting the % to go up from 2012 to 2016 based on the increase in Excise duty of 118% in that period. I would be happy if any one of the reader can throw up more light on this.

Here is the detailed analysis if anyone of you are interested - https://arthavriksh.blogspot.com/2019/06/itc-analysis-2019-06-09.html

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The foods division, comprising cookies, staples and snacks, now accounts for 21.3% of revenue, while agri-business generated 13.4% of ITC’s gross turnover last fiscal.

The foods division is expected to be at the vanguard of ITC’s expansion plans, helping achieve the company’s earlier stated goal of generating Rs 1 lakh crore in sales from non-cigarette FMCG businesses by 2030. This division is expected to generate Rs 60,000-65,000 crore in sales, up from about Rs 9,700 crore now.

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