Update: Apr 2021 BASED ON THE DEMERGER DEVELOPMENTS ITC POSSESS MULTIBAGGER PROPERTIES
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ITC stock has been struggling from a long time now with its share price declining to more than 34% since last year. Such immense fall has wiped out more than Rs.206540 crore from its market capitalization.
We at Futurecaps has done an in-depth analysis so that you can understand if ITC stock is a multibagger or more of a value trap. Yes, even with the Sunrise Acquisition & Demerger possibilities.
Note: This is NOT A multibagger recommendation
About ITC
Established in 1910 as Imperial Tobacco Company of India Limited, was renamed to ITC in 1974.
Headquartered in Kolkata, ITC was primarily set up as a cigarette & leaf tobacco business but later strategically expanded to other businesses in FMCG, hotel, paperboard, paper & packaging as well as Agriculture to avoid any margin decline and achieve consistent growth.
In 2010 ITC completed 100 years & by 2019-20 touched an annual turnover of $10 billion.
Following are the Checklist parameters :
| Capitalization | Rs.200000 CR |  |
| History of Consistently Increasing Sales, Earnings & Cash Flow | No |  |
| Durable Competitive Advantage | Moderate | |
| Future Growth Drivers / Sector Growth | Moderate | |
| Conservative Debt (long term debt < 3 Net Profit) | No Debt | |
| Debt Equity Ratio, Current Ratio | No Debt, Current Ratio is 2.27 | |
| Return on Equity must be Above Average | 25% | |
| Low CAPEX required to maintain current operations | No |  |
| Inventory Turnover Ratio, Debtor Days, ROCE | 2.17%, Debtor days decreasing, ROCE : 32.6% | |
| Management is holding / buying the stock | Promoter holding is 0 | |
| Market Price < Intrinsic Value | No Intrinsic Value Discount Intrinsic Value Calculator |  |
| Stock Price is consolidating (now) | Yes |  |
| Stock Price is growing in past years along with EPS growth | No | |
| Consolidated PE, PB Ratio, PEG Ratio | High PB | |
| Cash Flow Positive, Net Profit % greater than 8% | Cash Flow: Positive Profit: 20% | |
| Paying Dividends, Tax | Dividends: Yes Tax: High | |
| EPS Growth Rate | Around 20% past 3 years | |
| Jump in Trailing Result EPS | Yes | |
| Jump in Quarterly Result EPS | Yes | |
| Expected Gain in 5 Years | 2X & Very Risky | |
| Price Movement Graph, 52 Week High & Low | Okay | |
| Volume Analysis | Very High |  |
| Power of Brand | High | |
| Corporate Governance, Reputation of Leaders | Good | |
| Fraud reported | No | |
ITC Stock – Superstar of the Past
Since inception ITC ltd. has been a top cigarette manufacturer & one of the fast growing FMCG companies in India.
As a fact, ITC stock was among the best performers & delivered close to 3000% return from 2000 to 2017.
These 17 years proved to be a golden period for ITC & shareholders alike and despite of being a Tobacco company it has been enjoying valuations of an FMCG company.
However, unfortunately since 2017 onwards, ITC stock has been tremendously declining with decreasing valuations.
Moreover in 2017, Sanjiv Puri took over reign of the company as the CEO & has proven to be an highly successful leader by growing company to new heights & increasing net profit to almost Rs.15000 crore annually.
ITC Stock – A Falling Star
Even though, total revenue of ITC’s FMCG businesses has grown from Rs.3000 crores in 2008-09 to Rs.12000 crores in 2018-19, its sales growth percent has been considerably declining from 13.09% in March 2009 to only 2.17% in March 2020.
Major Reasons for ITC Stock decline :
Government Policies on Cigarettes
In September 2020, Maharashtra Government decided to ban the sale of loose cigarettes & beedis & consumers now will have to buy the whole packet of each item.
The decision is based on the fact that these single stick loose cigarettes or beedis don’t have specific health warnings on it which is not in public interest.
Notification has been issued under subsection (2) of section 7 of the cigarette and other Tobacco Products (prohibition of Advertisement and Regulation of Trade and commerce Production, supply and Distribution) Act, 2OO3 (Act No. 34 of 2OO3) by the State government.
This move coming from Maharashtra Government in times when taxes on Tobacco products are expected to increase can have a major impact on its sales & profit as its 80%+ earnings comes from Tobacco business.
Financials
Our repeated analysis at Futurecaps has revealed that ITC’s sales growth percent has been on a major decline since 2014 from 11.66% to mere 2.17% in March 2020 but its expenses has been on the rise from Rs.22,232 crores in 2014 to Rs.30,044 crores in March 2020.
Moreover, even though its net profit has increased to Rs.15,306 crores in 2020 from Rs.8,891 crores in 2014, ITC ROCE (Return on Capital Employed) has decreased from 50% in 2014 to 33% in March 2020.
This raises a huge question on the company’s growth & its ability to provide a consistent return to its shareholders.
Valuation
ITC has been trading with FMCG company like valuations from years, however since 2017 while FMCG companies have been consistently growing, ITC has not even seen 30% of its growth.
Also dishearteningly now it has reached to Price to Earning ratio of 13.6 which is closer to the Tobacco companies instead of an FMCG.
The Industry PE of a FMCG company ranges around 60 level however of a Tobacco company ranges around 20 which means DIIs & FIIs considers its value similar to a Tobacco company instead of an FMCG.
Demand of products
Many experts believe a portfolio with good mix is composed of resilient pockets of the economy.
These are companies which are not effected much due to the COVID-19 pandemic like IT, pharma & FMCG.
However, where HUL and Britannia’s shares are now almost back to the pre-COVID levels with HUL gaining over 13% and Britannia gaining over 24% for the year ITC stock price has declined over 30%.
Also, as per current technical indicators suggest a bearish momentum.
Technical analysis reveals ITC stock price has broken 150 EMA of Rs.194.50 & 200 EMA of Rs.169.40 making a weak trade.
Hope for Multibagger
The chances of Viewing ITC as a Multibagger relies on the Success Acquisition of Sunrise companies & De-merger of the Non-FMCG Business which could take few years to reflect on. If our view changes during the time we will update back.
Conclusion
Although IT has businesses growing in various verticals like FMCG, hotel, Paperboard, paper & packaging and Agro Business but lately its stock price decline has proven that market doesn’t consider it a strong buy.
Even though it has made a huge returns for its shareholders in the past, its better for investors to stay away & observe it from the sidelines. Futurecaps analysis above shows that ITC stock is definitely a company to be cautious of among investors & traders alike due to the Sluggish EPS Growth Rate & Lack of Intrinsic Value Discount.
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Nice analysis but available at discounted price