We are clearly looking for sustained profitable growth – ITC

Update on the Indian Equity Market:

Nifty 50 closed with gains of 63 points to 15,746 on Monday. Dalal Street investors defied the global trend to rescue benchmark indices from the negative territory on Monday.

Among the sectoral indices, PSU BANK (+4.11%), REALTY (+2.33%), and BANK (+0.91%) were top gainers while AUTO (-0.41%) and IT (-0.28%) were top losers.

Among the stocks, ADANIPORTS (+5.13%), NTPC (+3.96%), and TITAN (+1.79%) were the top gainers. UPL (-4.38%), WIPRO (-1.16%), and TATAMOTORS (-1.01%) were the top losers.

We are clearly looking for sustained profitable growth: ITC

Edited excerpts of an interview with Mr. Sanjay Puri, Chairman and Managing Director at ITC with Business Standard dated 21^st June, 2021:

The second wave of the Covid-19 pandemic has hit business sentiment, but ITC chairman and managing director, Sanjiv Puri, says that with vaccination picking up pace, consumers will gain confidence and the economy will recover progressively.

• He says that certain business segments of the company were impacted by the pandemic last year, but recovered in the second half and revenues from the non-cigarettes FMCG business – created organically and inorganically– grew 16 per cent on a comparable basis in FY21, which is nearly twice that of the industry peer group average.
• The second wave have impacted sentiments severely, both in rural and urban centers. There has been a surge in cases in rural India this time and therefore rural sentiment has been under some pressure resulting in tendency to conserve.
• Monsoon is expected to be good and given the fact that manufacturing was not shut during the lockdowns this time, the loss of non-agricultural income could be lower than that of last year. With pace of vaccination increasing, cases reducing, increasing mobility and consumer confidence economy is expected to recover.
• ITC’s FMCG revenues and margins were higher on YoY basis but lower sequentially in 4QFY21. Mr. Puri commented that ITC is clearly investing for sustained profitable growth. Following a strategic review of the portfolio, the lifestyle retailing business has been shrunk. The food business has been reorganized into clusters to enable sharper focus. In addition, purposeful innovation, multi-channel growth engines, scaling up market reach, and digitalization are enhancing competitiveness. The interventions are evident in FMCG margins, which have gone up by 640 bps in the last four years.
• He suggested to look at the growth of the business on YoY basis. In 4QFY21 the FMCG margins were up 115 bps YoY except the education and stationery products business, lifestyle retailing business and Sunrise which has been acquired in FY21.
• ITC will continue to look for value accretive inorganic opportunities. ITC has acquired Sunrise, Savlon and Nimyle in the past few years. These have grown manifold since their acquisition.
• ITC is exploring an “alternative structure” for hotels. Given the pandemic, this decision will be revisited and final decision will be taken when things normalize.
• ITC have adopted an asset right strategy for the hotels business, which is making appreciable progress with a healthy generation of leads and pipeline for management contracts.
• ITC have progressively invested in a number of Integrated consumer goods manufacturing and logistics facilities (ICMLs) in the first phase and any further expansion will be paced out over time. However, investments across segments will continue towards capacity gearing in line with demand, technology upgrades and cost reduction to strengthen competitiveness and accelerate growth.
• ITC have been trading at 2013 levels when the benchmark indices have gone up sharply. His message to the investors is that ITC is sharply focused on creating long term sustained value for stakeholders. From FY17 to FY20, ITC’s EPS grew by 47%. The Return on segment capital employed have moved up from 61% in FY17 to 72% in FY20. In FY21, some business segments were impacted on account of the pandemic, but they recovered in 2HFY21. A number of structural interventions have been made to sustain higher levels of competitiveness, growth and profitability.
• The company is building an FMCG business at scale, leveraging unique enterprise strengths, purposeful innovation, investment ibn digitization, among others. In other segments like agriculture and paperboards, ITC continues to strengthen their leadership position and build new levers of growth and competitiveness.
• In the agri business, ITC is accelerating value added agricultural products, while in paperboards, sustainable and plastic substitute packaging solutions will be a new vector of growth. ITC will continue to explore more opportunities that lie at the inter-section of their unique enterprise strengths, sustainability, and digital.

Asset Multiplier Comments

• ITC’s business segments have been performing well on the back of demand growth, aiding topline performance. With margins expected to improve moving forward we believe profitability to grow further.
• We believe lockdowns are temporary hurdles and expect recovery post 1QFY22E. We believe stable cigarette taxation and FMCG profitability are key positives in near term.

Consensus Estimate (Source: tikr. com and market screener websites)

•  The closing price of ITC was ₹ 205/- as of 21-Jun-21. It traded at 16x/15x the consensus EPS estimate of ₹ 12.5/14.0 for FY22E/ FY23E respectively.
• The consensus target price of ₹ 250/- implies a PE multiple of 18x on FY23E EPS of ₹ 14.0/-.

Disclaimer: “The views expressed are for information purposes only. The information provided herein should not be considered as investment advice or research recommendation. The users should rely on their own research and analysis and should consult their own investment advisors to determine the merit, risks, and suitability of the information provided.”