Teji Mandi: ITC running out of puff

Established in 1910, ITC is one of India's foremost private sector companies and a diversified conglomerate with businesses spanning cigarettes, Fast Moving Consumer Goods, Hotels, Paperboards, and Packaging, Agri-Business, and Information Technology. The Company is known as one of India's most valuable business corporations with a market capitalisation of nearly US$ 50 billion and a gross sales value of US$ 10.8 billion as of March 2019. ITC was ranked as India's most admired company, according to a survey conducted by Fortune India, in association with Hay Group. However, cigarette manufacturing and sales remain its largest economic activity in revenue terms.

A strong brand, a wide product portfolio, an established distribution network, and robust research and development capability have enabled the company to consolidate its position as the leader in the Indian cigarettes market. The strong brand loyalty of cigarette smokers is reflected in the sustained market share and profitability over the years, notwithstanding the increase in duties. Cigarettes are also exported to the US and the Middle East.

Over the last decade, ITC's new Consumer Goods Businesses have established a vibrant portfolio of 25 world-class Indian brands that create and retain value in India.

ITC's world-class FMCG brands including Aashirvaad, Sunfeast, Yippee!, Bingo!, B Natural, ITC Master Chef, Fabelle, Sunbean, Fiama, Engage, Vivel, Savlon, Classmate, Paperkraft, Mangaldeep, Aim, and others have garnered encouraging consumer franchise within a short span of time. While several of these brands are market leaders in their segments, others are making appreciable progress.

ITC’s commitment to creating value for India is also clear in its investments in the development of world-class manufacturing and hospitality assets that contribute to the Company’s competitiveness, whilst enhancing the country’s long-term intellectual property. An investment outlay of Rs 25,000 crore has been forecasted to support the creation of several Integrated Consumer Goods Manufacturing & Logistics facilities for its FMCG businesses, in building iconic luxury hotels and in strengthening distribution and agri-backend.

ITC’s Packaging & Printing business continued to aggressively pursue new product development across segments as a key driver for growth. Some of its innovations include antifungal coated cartons, micro-perforation for specific laminates, braille features for labels, and cold seal laminates for chocolates.

ITC Hotels is one of India’s largest and fastest-growing luxury hotel chains offering comprehensive hospitality solutions through more than 100 iconic hotels in over 70 destinations in the country.

The competitiveness of ITC's diverse businesses rests on the strong foundations of institutional strengths derived from its deep consumer insights, cutting-edge Research & Development, differentiated product development capacity, brand-building capability, world-class manufacturing infrastructure, extensive rural linkages, efficient trade marketing and distribution network and dedicated human resources.

ITC's ability to leverage internal synergies residing across its diverse businesses lends a unique source of competitive advantage to its products and services.

The unmatched distribution network, which facilitates the availability of its products in over 6 million retail outlets directly and indirectly across various trade channels, has been further strengthened with the addition of more markets and outlets to its servicing base. The Company sustained its leadership position in the convenience channel while consolidating its market standing in premium grocery outlets and in the Modern Trade channel.

Complementing the growing traditional distribution channels, ITC is making rapid strides in the emerging e-commerce space through collaborative planning, driving customisation and through higher discoverability of its offers across various platforms. The distribution value chain provides significant sustainable livelihoods.

With the profitability of ITC’s Cigarette business been subdued since FY15 ITC is focusing on de-risking its business model by reducing dependence on its core cigarette business that is affected by regulatory and tax hurdles for the past few years by scaling up the fast-growing consumer goods and hotel businesses. The government has increased the tax rate on cigarettes by ~9%, which will affect the cigarette business performance in the near term.

Amidst an unprecedented global health crisis and the need to accelerate the efforts in introducing innovative solutions to help fight the pandemic, precautionary measures of personal hygiene have today become a household need besides social distancing, to contain the spread of COVID-19. With this, the company has launched its Savlon brand of hand sanitisers in a sachet format priced at half a Rupee and meant for single use.

It has also repurposed its perfume producing facility to produce an additional 1,25,000 litres of hand sanitisers, and launched new products like Savlon Hexa an advanced hand sanitiser, and Zero Contact Surface Disinfectant Spray which kills a wide range of viruses, bacterial molds, and fungi on frequently touched areas with just a spray.

The outbreak of Covid-19 has resulted in the lock-down in key states in India, affecting major businesses such as travel & tourism and supplies of key Agri and consumer goods. The spread of the virus will affect the demand for hotel rooms in the near to medium term that would drag down occupancies and will have an impact on the revenue of the hotel business.

For the nine months ended on 31 December 2019, ITC's revenues increased 6% to Rs 38,833 crore. Net income before extraordinary items increased by 19% to Rs 10,769 crore. Revenues reflect the Agri-Business segment increase of 15% to Rs 8,555 crore, FMCG - Cigarettes segment increase of 6% to Rs 17,929 crore. Net income benefited from Other income increase of 30% to Rs 1930 crore (income), Equity Earnings -Before Taxes increase of 1% to Rs 7.96 crore (income).

If you look at the company's last 5-year financials, the company has managed to report consistent growth in its revenue and PAT growth. In terms of profitability, ITC has managed to sustain its return on equity (RoE) above 20% during the same period. The company in the last 5 years has also been able to keep its EBITDA and PAT margin consistent and well above the industry median. With 0.01% of long term debt to equity in 2019, ITC has a healthy free cash flow in its book.

Key Risks:

Exposure to regulatory risk in the cigarette business, and vulnerability of other business segments to economic cycles

Sustained consumption slowdown would affect the growth rate of categories such as consumer goods and hotels in the near term.

Final Thoughts:

ITC is one of India’s largest diversified players that operates in businesses such as cigarettes, FMCG, hotels, and paper. The company is the market leader in the domestic cigarette and PPP segments. The company is also the second-largest hotel chain by revenue and profitability, with a strong room inventory. The company has a strong distribution reach which it is utilising to scale-up its consumer goods business and de-risk its business model.

Thus with the robust financial risk profile and strong market position in the various segments in which it operates, ITC is a good bet over the medium term.

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