FMCG stocks have kept rising despite extremely high valuations and slowing growth, while ITC has languished despite attractive valuations and improving operating performance. ITC now trades at ~65% discount to HUL.
According to estimates, ITC’s PBT(Profit Before Tax) for FY20 is likely to be ~Rs.20,000 crore, and PAT(Profit After Tax) ~Rs.15,000 crore. Its market cap is about ~Rs.3 lakh crore. A P/E of 20x, puts it at a significant discount to consumer peers. Is this an obvious opportunity to make money?
A deeper dig into the segmental performance might have the answer: ITC’s cigarette PBT stands at Rs.16,000 crore. After taxes (@25%), the PAT works out to be ~Rs.12000 crore.
Global peers such as British Tobacco, Japan Tobacco, and Philip Morris trade at an average multiple of 13.5x trailing PE. If one were to value ITC at 15x, the market value for the cigarette business works out to be ~Rs.1.8 lakh crore. Company is also sitting on cash and investments of ~Rs.30,000 crore
This implies, that the consumer + hotel + paper business is currently valued at Rs.90,000 crores. We get this number by subtracting the value of the cigarette business and the cash from the market cap ( Market cap (3 lakh crore) – Cigarette (Rs.1.8 lakh crore) – Cash (Rs.30,000 crore)).
The PAT for consumer + hotel+ paper business is ~Rs.2,500 crore, implying a PE of ~36x.
As you can see, the consumer business of ITC (which includes paper) is available at a steep valuation of 36x. The stock is rather fully valued at this point; for the investor to make meaningful returns from here, the consumer business would have to start firing and adding meaningfully to the bottom line.
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