Contrary to perception, there has not been much capital misallocation. ITC has distributed almost 60% profits as dividend
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Had shared my work on another thread on the return sensitivity tables wrt to different growth rates and exit multiples. Excel sheet included in the link above.
How to Read the Table?
For ex., from an entry price of 148, if ITC manages even a 10-year CAGR growth of 7.5% in their PAT and we get an exit multiple of 20 on that 10th year PAT, we should be able to achieve a total CAGR of 15.57% inclusive of dividends. The model has been updated for the recent increase in DPR (Dividend Payout Ratio). One can use the matrix to ascertain worse and best case scenario.
| CAGR Return | |||||||
|---|---|---|---|---|---|---|---|
| Growth/PE | 10 | 15 | 20 | 25 | 30 | 35 | 40 |
| 2.5% | 5.42% | 8.32% | 10.65% | 12.62% | 14.31% | 15.81% | 17.14% |
| 5.0% | 7.59% | 10.65% | 13.10% | 15.14% | 16.91% | 18.46% | 19.85% |
| 7.5% | 9.80% | 13.01% | 15.57% | 17.70% | 19.53% | 21.13% | 22.57% |
| 10.0% | 12.04% | 15.40% | 18.05% | 20.26% | 22.16% | 23.82% | 25.30% |
Also sharing industry data for easy comparison with domestic peers on different parameters. Below excel also includes segmented data for the different business lines of ITC. The chart worksheet has 4 charts, so do remember to scroll down to view all the data. To the right of the chart are their respective slicers which can be used to visualize the various parameters one at a time.
Tobacco Industry.xlsx (274.9 KB)
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Unilever recently purchased GSK consumer business globally. They also purchased v-wash from Glenmark. A lot of growth for Unilever has been inorganic. Why has ITC not taken this route?
ITC has also missed the organic/ natural/ ayurvedic range completely where even Unilever had to enter with Ayush.
Doing a lot of things is not bad but not doing justice to any of them is. I see Unilever going up pretty fast compared to ITC if no urgent measures are put in place. THe revenue from Cigarettes can only help upto an extent.
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ITC’s entire top leadership and company culture is rooted in tobacco business which is much simpler that building FMCG brands. They can always hire people from HUL etc., however cannot change the entire culture and thought process that easily.
Disc. Invested.
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“Spitting pan masala can help in spreading Covid-19,” the order said.
Hi Dhiraj,
Could you explain the ROCE % calculation of ITC (consol.) on row 33 of worksheet segmentwise. You have taken some figure for capital employed from column H onwards which do not match the total capital employed figure in row 42. Also, column J onwards the Capital employed in your ROCE calculation remains same for all years.
If we use the capital employed in row 42 for the ROCE calculation the ROCE comes out to be in 30s against the 125+ the sheet is showing. Were you trying to calculate the ROCE for some other segment, left the calculations there?
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Your are correct. My apology for mistake. thanks for briging out. enclosing revised file.
ITC Segmentwise.xlsx (45.9 KB)
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Nice work @dd1474. ITC is obviously trading at a compelling valuation. Apart from the factors highlighted in the thread, I guess backward integration may provide it some advantages going forward especially in FMCG/FMCG Other segments. Only thing that concerns me at this point is high float (~42% available for retail investors). Shout out to experienced members to enlighten if high float can be a deal-breaker for retails investors.
Thanks for the detailed analysis. The most important worry that I have for this business is the declining share of legal cigarettes. Also, somewhere I think the diversification story has not played out really well because they’ve been telling for years about their plans for diversification. A large part (I read somewhere that it’s more than 90%) of their PBIT is from cigarettes, so I’m yet to convinced how they have this covered.
I believe Govt is very alert and moment they realize that they loosing significant share of Tax revenues due to smuggled cigarettes they surely will take steps to curb it. see how they took steps to ban sale of electronic cigarettes recently.
I am sure company too will be lobby hard along with other industry players to push it with Govt.
Another compelling reason being smuggled cigarettes are sold without any warnings on the pack which is also in violation of law of the land and hence
eventually things will get stabilized after a point.
as Govt. will also be concerned and worried about Jobs / employment etc. for the sector as it can have cascaded impact specially when that’s going to become a priority of govt for sure if this current crisis gets extended and cause significant dislocation of economic activity across the country causing job losses as large scale ( I wish and pray that it does not happen but beyond that we cant do much unfortunately ).
and when all these plays out ( hopefully ) , FMCG EBITA too will improve along with Agri / Agri export etc business and higher dividend payouts will further address capital allocation issues and all this can act as a multiple catalysts to rerate the business in coming years.
if one some of these don’t playout in that case it will remain laggard from price action perspective.
on ESG front , funds chasing returns may take convenient stand ( I remember few funds doing it by qualifying Telco business as FMCG business in 2007-8 ) and invest in ITC qualifying it by justifying that company is after all water , carbon positive etc etc.
lets us see how things plays out
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Just two inputs from my end wrt FMCG-others:
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The first table shows clear focus on FMCG-others in the recent past and the coming future. 3yr/10yr means capex in last 3 years/ capex in last 10 years.
It also shows a focus to reduce the FMCG-CIG growth going forward. -
The EBIT returns for FMCG-others have not been great. If we look at fellow FMCG players, the gross margins are as follows -
Nestle - 23%
HUL- 20%
Britannia - 16%
It may be argued that ITC is building brands and hence the EBIT might be lower for ITC.
One avenue where cash might be deployed more is advertising and sales promotion.
On a revenue of Rs 12525 cr, the promotion spends have been around 1000 Cr.
Even if we add half of that to their EBIT, the margin comes to around 6.5%.
Ad spend % of sales for reference -
Britannia ~ 4%
Nestle ~ 6.4%
ITC ~ 9%
HUL- 10%
Not sure how and when ITC is going to get comparable EBIT margins for FMCG others.
Disc - Invested
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Here is a nice analysis on ITC :
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There has been lots of questions about ITC and its Capex on FMCG. I wrote a bit about this on the HUL&ITC forums… some are replicated here along with updated numbers.
Snapshot of ITC fundamentals, Capex and valuation numbers last 10 years. Its not dissected( as Dhiraj did above) into parts but ITC as a whole.
ITC started speaking about 25,000 Cr Capex around 2012 or so…
They wanted to do the investments across all verticals… Since they they did a Capex of around 22815 Cr ( 2012 to till March 2019). Please note that this will also include maintenance capex… Though I made a split based on know methods ( refer the plot above)… Lowest estimate could be simple sum of all depreciation which is about 10,000 Cr. I do expect that they might have done similar Capex in FY 20 as well.
What I find interesting is that they were building 20 ICMLs ( Integrated Consumer Goods Manufacturing and Logistics facilities ). ITC is investing in 20 state-of-the-art Integrated Consumer Goods Manufacturing and Logistics facilities (ICML) across the length and breadth of the country to enable the FMCG Businesses to rapidly scale up. These ICMLs would enable ITC to constantly craft and deliver best-in-class products, enhance cost efficiency whilst enabling greater value realisation to the farmer, help reduce India’s Agri wastage and provide ITC’s brands a competitive edge in terms of scale, freshness and close-to-market distribution.
Out of these 20, 13 are already built and they started operations ( from Sanjiv Puri Interview to Shereen Bhan (CNBC TV 18). I do believe once these facilities came to light it would certainly improve the FMCG margins as it provides the scalability and better margins. ITC was also tweaking its distribution channels for a while now.
Idea is to cover crop to product, meaning fresh procurements to complete packaging and distribution.These ICMLs were located in such strategic locations. Its a long process and I believe it will be completed in next 2-3 years.
I do believe they switched the hotel model to leasing than owning them outright. So Capex might get toned down in the coming days and its time for past Capex to produces some good results.
Im also a big dividend lover like @dd1474 which makes ITC very attractive.
Discl: I hold a large chunk of ITC in my PF at higher level. Also planing to add more. So my views could be completely biased.
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How are people with cigarette addiction managing during the lockdown? I heard from friends that some amount is available in black but that would limit supply…
Also, there is a theory that if one stays away from something for 21 days, addiction can be done away with. Will many people who wanted to leave cigarette come out if this lockdown and not continue? Views?
I have loaded up packs at home and it’s available in next door grocery shop.
At personalrsonal level I have managed to quit half a dozen time in last 4-5 years and back to normal .
It’s more about phycological issue for me .
A nicotin patch has helped me reduce the no of sticks I used to consume every day but when I don’t use patch it goes back to original count.
I wish I could get rid of it during this lockdown but until now it’s jist a wish …my intent seems to be little corrupted at its core.
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Roughly 10% of the world’s tobacco smokers live in India, representing the second largest group of smokers in the world after China.
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India is also the third largest producer of tobacco leaf in the world.
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In contrast to most other countries, India’s tobacco consumption pattern reflects heavy use of non cigarette tobacco, primarily in the form of bidis, chewing tobacco and paan reparations
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Globally, 5.4 million deaths annually are caused by tobacco use, and it is expected that by the year 2030 about 80% of these deaths will be in developing countries
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Tobacco-related deaths are on the rise in India and account for approximately a sixth of the world’s tobacco-related deaths.
In 2004, India ratified the Framework Convention on Tobacco Control (FCTC), the global treaty adopted by theWorldHealth Assembly in 2003. This treaty aims to curb tobacco use and reduce tobacco-attributable morbidity and mortality. In 2001, The Ministry of Health and WHO jointly established the National Tobacco Control Cell (NTCC) as a nodal agency to coordinate activities to curb tobacco consumption.
Tobacco is a labour-intensive crop in India. Growing, harvesting and processing tobacco represent the means of livelihood of a large number of agricultural labourers.12 National employment surveys by the National Sample Survey Organization (NSSO) place the direct and indirect tobacco workforce in India at approximately 7 million
The vast majority of these jobs, perhaps more than 4million, are in bidimanufacture,13 with women making up half of the tobacco-related workforce.
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The Goods and Services Tax (GST) was implemented in the country with effect from 1st July, 2017 replacing more than a dozen Central and State levies like excise duty, service tax and local sales tax or VAT etc.
In the case of Cigarettes, on which excise duty, VAT and other State level taxes were being levied previously, the highest GST rate of 28% is now being levied in addition to GST Compensation Cess and National Calamity Contingency Duty (NCCD) and Basic Excise Duty (BED).
The legal cigarette industry is under intense pressure with volumes shrinking by around 24% between 2011-12 and 2017-18 in the wake of the high tax cost of duty-paid cigarettes and consequential spurt in the growth of illicit, duty-evaded cigarettes with the resulting adverse impact on Indian Tobacco Farmers and Revenue Collections.
States’ willingness and ability to tax tobacco has increased in recent years
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I believe Govt is very alert and moment they realize that they loosing significant share of Tax revenues due to smuggled cigarettes they surely will take steps to curb it. see how they took steps to ban sale of electronic cigarettes recently.
That should solve the biggest problem the company is facing now. But again, no one can determine when the government will take note of this. Finally, I don’t know how the diversification thing plays out; so as you rightly say, let’s see.