Most of issue about misallocation of capital are already convered on thread. While author is correct about past misallocation, what market would be concerned is not about past mis allocation but future misallocation of capital. When Dividend payout ratio since FY2020 is more than 90%, the management is now left with 10% of net profit at their disposal. Please note that during FY11-FY19 period, dividend payout ratio was 59-60%, so almost 40% of annual profit available to management to be utilised.
In Para, there is comparsion of ITC with Indiabulls/ GE/Enron. Seriously, the company which has consistently paid dividend with growth for last 50 years, increasing from Rs 140 during FY1971 as dividend to Rs 2.38 Lakh (for same invested amout) in FY2019 considered with companies which hardly had any free cashflow !!! Also, there is conflict in the discussion, on one side their complaint that management is not utlising free cashflow properply and misallocating capital and other side, same business is considerd with non-cashflow generating businesses. In language of JagatGuru Shankracharya, “Brahm Satya, Jagat Mytha”, if need to be adapted in stock market, I would adventure to say, “Dividend Satya, Price Mytha” Comparison with GE need to seen in context of free cashflow generation by GE group. With GE Capital being a growth engine, there was virtually no free cashflow in GE book during Jack Welch. Further, the accounting polciies of GE was also world class in manipulation with assumption. Luckily in case of ITC, it also had a finance subsidiary by name ITC Class finance, which got closed in late 1990s/early 2000 lossing small amount in today’s context.
On point of ITC Giving 10 hours of investor presentation, author does missed to mention that ITC AGM also last 2-3 hours where at least 60-70 members do ask management question. While I completely agree with view that there is scope for improvement in corporate governance, but we also need to consider the price.
Further, one more point to consider is profitability of Other FMCG business over the years. It is true, that Pivot brands of ITC like Ashirward is lower margin as compared with other established players, The operating leverage is also appearing playing out in ITC Other FMCG business, with current EBITDA margin touching 10% in Q3FY23 as against loss making in FY2013. So it is not only hope in my view.
I belive most of investors know that profitability of Cigarette is much higher and same being utilised to develop businesses like Other FMCG which would be superior due to health related issue of Cigarette.
Also, I find it simpler to look at capital employed change and get change in allocation of capital then to look only at assets without liablities. Find enclosed segmentwise capital employed details:
Further, above change in capital employed also after 60% Dividend payout. I could not understand not look at only Capital employed and only assets (without considering liabilties which also fund assets) and calculating the figure. The better prespective woule to calculate Capital employed change. Further, one also need to look into Capital employed since FY2019 to FY2022, maximum growth in Other FMCG business with Rs 3,000 Cr being additional capital employed while no major change in other business.
While concerns are valid and known, one also need to take in account price, dividend and management efforts in last 3 years to increase dividend payout. this is my view and it may be completely wrong.
Disclosure: Among top 2 Holding, MY view may be positively biased. Not a SEBI registered advisor, Not suggesting any investment action. I may change my investment position without informing VP forum. I have great track record of being wrong in past
