DCF is based on future cash flow estimation not past
Also need to use a relevant discount rate (cannot use a constant rate for all companies/ sectors - CAPM model is one way to estimate)
Net debt needs to be incorporated
My estimate of intrinsic value for ITC is 160-165 which is around the same level as it is trading right now.
The real value of ITC lies in the fact that eventually it will be an FMCG company more than a tobacco company and re-rating will take place because FMCG industry has an average P/E between 50-60.
My guess is as FMCG revenue share (currently 25%) starts reaching the same level as cigarette share (currently 45%) the re-rating will start happening. also, the same will be accelerated by Covid impact as ITC’s cigarette sales would get impacted but FMCG sales would get a huge push (as essentials). Hence, this re-rating might start sooner rather than later.
This is the reason I see ITC as a great bargain at current price.
Thanks for your inputs. Past cash flows are used as a base to calculate future cash flows. Discount rate is always constant in DCF method. Buffet uses 10%. I have used same as well. Perpetuity growth rate depends on GDPR. I have assumed India will grow at 6% from 2030
Can you please share your intrinsic calculations? how did you get 160?
A random query on ITC. While there has been a lot of discussions wrt to business outlook, my query is specifically related to supply of shares in the market.
Is it possible for ITC to absorb the impending SUUTI sale through its investment subsidiary Russell Credit. (Recent instance of Bajaj Auto purchasing stake in Bajaj Holdings).
In future LIC too will have to bring down it’s stake from 16% current before it’s IPO, which will further increase the float. This unconventional approach is because the company may not want to do a buyback as BAT’s stake would indirectly increase in case of non-participation.
There is continuous increase in the float from FII selling because of ESG mandate limiting Institutional interest until cig business de-merger, unlikely in the near term. The company has cash of 27k i.e.13% of market cap. Such stake purchase can also ward off BAT takeover.
Future cash flows don’t just depend on past. Although past can be a decent enough indicator but doesn’t give the complete picture. You also need to take the impact of black swan event (covid) that will have a major impact for the next couple of years and taxation changes which will impact the cigarette business.
Buffett’s majority investments are in very very safe and stable businesses primarily within US and he has even used treasury bond rates for discounting cash flows but the same might not be true for every company and in Indian context (different risk free rates, inflation rates). However for ITC’s case 10% looks to be a fair number. I have also taken 9.7% (based on Prof. Damodaran’s CAPM methodology).
I won’t be able to provide my intrinsic value calculations here as it is an elaborate excel model but can say it is largely based on Prof. Aswath Damodaran’s methodology.
Very good, but now it will be interesting to see how they position the portfolios, as there is some overlap of Sunrise and Aashirbaad portfolios, as in Basic Ground Spices: Sunrise vs Aashirbaad.
ICICI Securities
“Though, ITC is likely to be adversely impacted by lockdown in FY21, there
are multiple factors that can impact cigarette business for the next two to
three years that are (1) unavailability of smuggled cigarette even post
lockdown period, (2) possibility of heavy tax on non-cigarette tobacco
products & (3) increase in sales due to increase in prices after excise hike.
Moreover, we believe margins in FMCG business can easily reach double
digit in next two to three years. We expect ITC to declare dividend of | 16/
share (company declared dividend policy of ~80% payout) along with
special dividend this year. The stock is currently trading at attractive
multiples of 13.6x FY22E earnings. We value on SOTP basis valuing
cigarettes business at 15x FY22 earnings, FMCG segment at 5X FY22E sales.
We continue to maintain BUY rating on ITC with a target price of | 230/share”
Is their assumption correct - "We expect ITC to declare dividend of | 16/
share (company declared dividend policy of ~80% payout) along with
special dividend this year. "
Company is expected to post net profit of 15500 cr. 80 % div will be approx 12400 cr’ With equity of Rs 1290 Cr , dividend per share may be about 12400/1290= Rs 9.6 per share.
What is the basis for these assumptions?
Why will smuggling stop or why will sales increase upon price hike??
It seems to be wishful thinking by the analyst.
due to lock down, there are heavy checking at district, state and national borders, so smuggling cigarettes would be difficult and it may continue for a while even after lockdown is over. I don’t have any opinion on other two points.
