ITC Fundamental Analysis: A dependable player

India is a developing economy, which means it has better job opportunities, offering better salaries, giving higher disposable income in the hands of working population, which they spend on improving their quality of life and standard of living. A large part of country’s population is under 35 years of age, which spend major part of its income on food and clothing. This is definitely a good opportunity for companies engaged in processed food segment, FMCG segment (such as soaps, cosmetics and personal care products) as well as fashion, clothing and lifestyle business.

ITC is a company which is engaged in diversified businesses, company started an a cigarettes manufacturer, but has successfully diversified in other businesses as well, such as FMCG, Hotels, Clothing and fashion, Agriculture, packaged and processed foods, stationery etc. We are going to analyze the company and each of its business segment in detail, so please make sure you go through all the segments to get a better understanding of the company.

Note: Since the company is engaged in so many sectors, analysing each business segment will make this post a very long one. So please sit back and relax, get a cup of coffee and let’s begin.

Cigarettes:

ITC started as a cigarettes manufacturing company and is now the market leader in this segment. Company enjoys almost 80% market share in the cigarettes segment and it has proved to be the cash cow for the company. Cigarettes business forms major source of revenue and profits for the company, it forms 40% of the company’s net sales and 60% of profits for the company.

Company has a strong distribution channel and rural penetration across the country. This strong supply chain is being tapped by the company in distribution of its products in the FMCG and personal care segment, providing ITC a better penetration in rural market. The cigarettes business of the company is burdened by high taxation which is the reason why company is now focussing on FMCG and processed food business in order to mitigate its business risk. In the future, company plans to expands the FMCG products portfolio and become the market leader in FMCG and food segment.

Non cigarette FMCG, Personal Care and Hygiene:

ITC is also engaged in FMCG, Personal care and Hygiene business. In the non-cigarette FMCG segment, company’s portfolio is dominated foods and confectionery items. Company has a wide variety of food brands such as Sunfeast, which is a confectionery and processed foods brand, under which company has launched many products such as Yippee! Which is an instant noodle brand, Mom’s magic, a biscuits brand, Dark Fantasy, which is a premium dark chocolate brand, Bounce, which is a cream biscuit brand. Company also owns many toffee brands such as Mint-O, which is a mint flavoured toffee, GumOn, which is a chewing gum brand and Candyman.

 

One of the most successful brands of ITC in food category is Aashirwad, under which, company sells wheat flour, spices, ready to eat meals and instant mix. Aashirwad has 26% market share in the wheat flour segment.

Company sells and distributes various personal care products under brand names such as Fiama Di Wills which is a personal care brand, Essenza Di Wills, Vivel, and Superia which is a soap brand.

ITC has recently acquired two well known brands Shower to Shower which is a leading brand of prickly heat powders and Savlon which is a niche brand in the antiseptic segment, these acquisitions will help company enter the healthcare product niche in India. ITC has recently crossed 10,000 crore revenue milestone in the FMCG business.

Apparel Business:

ITC is engaged in apparel business through two brands, Wills Lifestyle, which is a premium fashion brand,  and John Players. These brands target young and professional segment by providing large range of casual and formal wear for men. Company also has a brand for young women professionals named Miss Players. Currently, ITC’s apparel business has only 4% market share, but company is planning to grow the sales at 20% per year. Company is also using E-commerce route for sales and is selling its brands through online fashion E-commerce websites such as Myntra, Jabong etc.

Stationery and Paperboards:

ITC is also in the stationery business under two brand names, Paperkraft, which is a premium stationery brand and Classmate, which is a popular brand catering school and college stationery. Under Classmate, company makes a range of stationery products such as notebooks, pens, etc. Company is the market leader in the sationey segment and has 20% market share in organized stationery segment.

Agriculture:

ITC’s agri business is India’s second largest exporter of agri commodities. ITC currently focuses on export of agri products in various categories such as Wheat, wheat flour, barley, pulses, maize, soyabean. In marine products, company exports fish and prawns which has been very profitable for the company.

Agri business is not only a business for ITC, it also acts as a good source for procurement of raw material. ITC sources raw material for its processed food business via same supply chain. This not only integrates the process but also helps in keeping its procurement costs low. Company aims to generate 18,000 crore revenue by 2020 from Agri business.

Hotels:

ITC Hotels is the second largest hotel chain with over 100 hotels across the country. Company owns some of the most premium hotels in the country such as ITC Grand Bharat, Gurgaon, ITC Grand Chola Chennai, ITC Maurya Delhi, ITC Maratha Mumbai. ITC’s chain of hotels has served some of the most prestigious and important guests such as Bill gates. Company aims to be the market leader in the hospitality segment. The hotel business of ITC is growing at 9% per annum.

Revenue Segements:

Out of all the businesses ITC owns, some of the major contributors to the top line of the company are, Cigarettes (40%), FMCG-Non Cigarettes (21%), Agri business (19%), Stationery, paperboard and packaging (11.5%) Others (8.5%).

Concluding the business analysis of ITC, it can be said that company is well diversified in various sectors, and is performing well in all of them. What makes ITC a reliable investment is it’s clearly chalked out future plans, and well defined deadlines for their future. When businesses give such clear expansion plans with pinpointed revenue targets for the future, one must rest assured that company has a well thought out strategy to reach that goal.

Analyzing past performance is important because it gives you an idea of what company has achieved in the past and how will the company look like in the next few years. Having understood the business segments in detail, let’s move forward and analyze fundamentals of the company.

Basic EPS:

Basic EPS is a measure of how much profit a company is making on per share basis. In other words, it’s a measure of how much money each share of the company will receive if all the profits earned during the year is distributed to its shareholders.

In the past 5 years, ITC’s Basic EPS has seen a growth of 9.1% CAGR, while is 2012, the EPS was Rs. 7.93 per share, in the years 2016, company’s EPS was Rs. 12.16 per share.

Cash EPS:

Cash EPS is a measure that looks at how much cash flow the company has generated during the financial year. Cash EPS shows how much cash the business is generating in a year. Cash EPS not only includes Cash received by the business for the products sold or services provided, it also includes any upfront payments, such as cash advance received by the business.

ITC’s Cash EPS has seen a growth of 9.7% CAGR, while in 2012, company’s Cash EPS was Rs. 8.52 per share, in 2016 its Cash EPS was Rs. 13.52 per share.  

Revenue from operations/Share:

Revenue from operations is a measure of how much revenue a company is generating from its core business. Revenue from operations does not include income from non operating activities such as sales of assets, sale of subsidiaries, income from investments made etc. Revenue from operations/share measures how much revenue a company is generating from its core business on per share basis.

Company’s Revenue from operation/Share has seen a growth of 7.3% CAGR in the past 5 years. In 2012, company’s Revenue from operations/Share was Rs. 32.2 per share, in 2016, it was Rs. 45.78 per share.

Net Profit Margin:

Net Profit margin is the key ratio which is used to compare profitability of two or more companies working in the same sector. Net profit margin is a measure of how much percentage of total sales remains with the company as profit after all the expenses are paid.

ITC has pretty healthy and stable profit margin for the past 5 years. In 2012, company’s Net profit margin was 24.47% while in 2016 it was 26.72%

ROCE:

ROCE or Return on Capital Employed, is a measure of how efficiently the capital of a company is being used to generate profit. ROCE is expressed in percentage terms. A company with ROCE of 20% means out of every 100 rupees employed as capital, company is able to make a return of rupees 20.

ROCE of ITC has been pretty stable in the past 5 years. In 2012, company’s ROCE was 31.02% and in 2016 it was 28.18%. Company’s ROCE has seen a slight drop recently, as it has been acquiring brands like Shower to Shower and Savlon using internal resources in funding the acquisition.

Debt/Equity:

Debt to equity ratio tells us how much of the total financing of the company comes from creditors (those who lend money at an interest) and investors (those who invest in the shares of a company). Higher debt to equity ratios is an indication that majority of company is financed by loans and other debt (such as debentures and bonds).

ITC has been a zero debt company, which means company is either financed by its internal sources or by shareholders. A zero debt company is a good investment as it does not have to pay any interest and can keep all its profits, or can distribute to its shareholders as dividend.

Dividend percentage to Net profit:

The dividend payout ratio measures the percentage of net income that is distributed to shareholders in the form of dividends during the year. In other words, this ratio shows the portion of profits the company decides to keep to fund operations and the portion of profits that is given to its shareholders.

Company’s dividend percentage to net profit has increased in the past 5 years. In 2012, company’s Dividend percentage was 57.09% while in 2016 it was 69.48%. This means, company is sharing larger portion of its net profit as dividends with its shareholders.

Dividend/Share:

Dividend per share is the amount of dividends a shareholder receives on per share basis. Dividend per share includes all the interim dividends paid during the financial year as well as the final dividend paid at the end of the financial year. Dividend per share is calculated by dividing total dividends paid during the year from total number of shares outstanding.

ITC’s dividend per share has seen a steady increase in the past 5 years. In 2012 company’s dividend per share was Rs. 4.5 per share while in 2016 it was Rs. 8.5 per share. The dividend per share has doubled in the past 5 years.

Future Expansion plans:

ITC has very ambitious future expansion plans for its future. These expansion plans are not only limited to the existing businesses owned by ITC, company is also planning to diversify its business in new Industries. Some of the major expansion plans are discussed below:

Food and Beverage segment:

Company is planning to expand its processed foods business by setting up 8 new food processing plants by 2019, which requires capital expenditure of Rs. 4,000 crores. Company Chairman Y C Deveshwar has set the target of making ITC the biggest player in the FMCG segment by year 2030 targeting revenue of Rs. 100,000 crore from the FMCG business.

Company is also expanding its fruit juice business under brand name B Natural, which it acquired in 2014 from a bangalore based company. Currently, B Natural brand holds 7% market share in the juice segment, which the company plans to expand to 11%.

Healthcare (New business for the company):

One of the biggest expansion plans of the company is that ITC is planning to enter multi-specialty hospital segment, which will tap into opportunity offered by expanding medical tourism segment. Company will compete with major players of the healthcare segment such as Apollo Hospital, Fortis Healthcare, Max healthcare.

Company aims to provide a complete portfolio of healthcare solution through its business such as multi-speciality hospital, such as medical healthcare centers, mobile healthcare centers, nursing homes, diagnostic centers, dispensaries, pharmacies, clinics, laboratories and drug and medical accessory stores. It will also include nutrition and dietetic counselling centres, medical college, nursing college, medical research center and training facilities.

What makes ITC a good investment:

• Here are some fundamentals that make ITC a good investment for long term.
• Company is more than 100 year old, started business by making and selling cigarettes.
• Company has been consistently performing well for the past many years.
• Company has High ROCE and zero debt, and strong free cash flows.
• Company is market leader in cigarette industry with 80% market share. Major part of company’s revenue comes from cigarettes business.
• Company diversified in FMCG and foods segment, with a wide variety of products to offer company has recently crossed 10,000 crore revenue milestone and targets 100,000 crore revenue from FMCG segment by 2030.
• Company has also acquired two big brands from Johnson and Johnson that is Savlon and Shower To Shower, by which company wishes to expand in healthcare and hygiene niche.
• Company owns largest chain of Hotels in India, and aims to become market leader in the segment.
• Company is expanding its business to multi speciality hospitals, taking advantage of medical tourism and affordable health care provided by country.