The FMCG major stock ITC (Indian Tobacco Company) is under pressure for quite some time. The stock has reached its 52 weeks now and is struggling to gain back momentum while other stocks are performing well in the present bull movement in the markets.
In this article we will look at the stock details and analyze why the stock is underperforming from quite some time.
To give an overview of the company and the type of business, ITC stands for Indian Tobacco Company. Started as a Tobacco and cigarettes company in India, ITC has developed many folds and its revenue increased from the tobacco business. All the major and minor brands of tobacco products in the markets are manufactured and produced by ITC. Tobacco and cigarettes manufacturing is the major revenue source for the company over the past decades.
But it wanted to diversify the product portfolio and reduce its dependencies on the tobacco business. Because the tobacco business is supposed to face lot of scrutiny and also huge tax implications from the government. Tobacco comes unders the highest slab of tax in the India and during any new budget annoucement the stock of ITC will be under pressure fearing the announcement of new taxes on the tobacco products.
It entered into FMCG sectors many years back and have been developing its product portfolio since then. There are many major brands in the FMCG sector produced by ITC. You might be eating many of these on your daily life without even noticing that those are produced by ITC. Look at the product page of ITC to get an idea about the different products.
Now only FMCG, but ITC is also expanded into hospitality. You might have heard about some of the TOP ITC hotels across the major cities in India.
Now the main motive of ITC is to increase its revenues and profits from the FMCG sector and Hotels business while continuing its tobacco business and eventually recognized in the market as a major FMCG player with a side unit as a tobacco business. So in future even if tobacco comes under huge pressure from the government because of its health and environment problem, the business can sustain because of its market in the FMCG sectors.
Now you have understood the Business of ITC. Lets see some of the details regarding the Stock as of 15th March 2021
Over the past few months, when the entire market in on the Bull move, Investors are of the hope that the stock of ITC will also give good returns. But the stock is struggling to come out of its resistance levels. The stock stayed in the price range of 200-220 for most of the time and it has once moved till 239 but fell back very soon to the level of ₹210 within just a span of 3-4 days. This made the investors disappointed.
Stock Price as of 15th March 2021: ₹202.5 P/E ratio of the stock: 19.38 52 Week low: 134.60 53 Week High: 239.20
Don’t get confused from the 52 week low and high ranges. Before the covid19 times in the year 2019, the stock is trading at the price of ₹300. Now during covid19, the stock has fallen and since then it is struggling to come back.
The stock traded at ₹305 rupees in May 2019 and since April 2019, the stock in on the down move with no comeback to these levels. But investors never left hope on the stock as the stock is considered as one of the top Value stock and that it might come back with very good returns for value investors.
There is no doubt that the stock has a huge value. The brand name of ITC is very huge and the stock has given good returns to an investor in the past in the manner of providing consistent dividends. It is only now that the stock is under pressure.
The main reasons is that
The issue of ESG and the cigarettes’ business is contracting.
FMCG business turnover is not generating sufficient profitability
But recently the company has announced a wide different range of FMCG products and is trying to increase its market share. with these new products hopefully comes a new customer base and might see increased revenue for the company in the coming financial year. If some of the products from the new product portfolio are appealing to the users, then those will be a new revenue in the coming quarters and hence can affect increasing profitability from the FMCG sector.
ANd also the long-term underperformance has increased the attractiveness from the valuation point of view and we have seen this kind of a cycle play out in many leading companies
It has happened in the past when the competitors such as Hindustan Unilever, Nestle, each of these underperformed in the past and gave very good returns to the investors.
Another big concern for the investors has been the capital allocation policy of ITC. A lot of cash flow was going into low ROCE businesses like hotels and it has clearly been stated by the management that they will complete the existing projects but they are not going to start new hotel projects or deploy more capital into low ROCE businesses. The company’s capital allocation policy has improved in recent times.
We are at a stage where product acceptance is coming in and that is becoming a bigger piece of the pie and someday there will be a situation where you could see ITC as more of an FMCG play rather than a pure cigarette play. Cigarettes of course will be there for many years to come but the current lens that investors view ITC with, which is only as a cigarette business, could change down the road.
Coming to the ESG issue, If you look at the ESG ratings of an independent agency like Morningstar, it is valued on various parameters. ITC is doing very well with regards to purchasing renewable energy for their energy needs or being carbon neutral or not consuming water and things like that.
The company is well-governed and corporate governance has very good ratings. The company has a very good image among the users, even though a part of its portfolio included the anti-society cigarettes’ business. Even though we might expect some resistance from the consumers when we look at the perspective of cigarettes’ business, the company is growing its FMCG portfolio and is doing everything it can to reduce the impact on the environment and other social activities which will help it to develop a positive brand image.
So looking at all these different angles, the stock of ITC is a very good bet considering the historical data of similar underperformance of FMCG stocks in the past. Basically for Longterm investors and value investors, the stock has the potential and value to provide good returns.
From our side at Orb52 we are very positive on the stock and only the coming days will tell us what will happen.