ITC

22 Nov

Increasing prices of products a last resort – ITC

Update on the Indian Equity Market:

On Monday, NIFTY closed in the red at 17,417 (-2.0%). The top gainers in NIFTY50 were BHARTIARTL (+3.8%), JSWSTEEL (+1.6%), and ASIANPAINT (+1.0%). The top losers were BAJFINANCE (-5.6%), BAJAJFINSV (-4.8%), and TATAMOTORS (-4.6%). Sectoral losers were PSU BANK (-4.5%), REALTY (-4.2%), and MEDIA (-3.9%). There were no sectoral gainers for the day.

Excerpts of an interview with Mr. B Sumant, Executive Director, ITC with Business Standard dated 22nd November 2021:

  • Responding speedily to some of the emerging trends, ITC launched 120 products in FY21 and many of them were first to market products. These included sanitization products, such as Savlon disinfectant spray and for ease of cooking, the ITC Master Chef frozen snacks, pastes, and gravies were launched.
  • Innovations of ITC are crafted based on long-term consumer trends. ITC expects the demand for smart cooking solutions to be sustainable in the longer term and health and nutrition products gain strength with increasing awareness among people.
  • To enhance accessibility from the lower end of the market, ITC come up with low-unit-price products across segments like deodorants, ghee, and hygiene.
  • The demand for top-end innovative products as well as low-unit-price products from top-end people continued as they have money in their hand, they are looking for avenues to spend.
  • Raw material inflation affected the entire industry in 2QFY22. ITC did not pass the effect of raw material price hikes to consumers, as increasing the prices of the products is the last option. Rather than price hikes, ITC is focusing on effective cost management, premiumization, favourable business mix to mitigate costs and enhance efficiency.
  • The urban demand recovered faster after the 2nd Covid wave; it has moved from -5% to 14% for the industry as well as rural demand also increased from 1% growth to 17% growth over the FY21.
  • For ITC, the rural percentage has gone up even further, the share of rural sales has increased from 28% to 29%, while the urban share is around 71%. ITC has a steady focus on driving distribution penetration into rural India by various strategies.
  • Out of total sales, 7% of sales comes from E-Commerce. The modern sales also seeing a resurgence after the 2nd Covid wave because all outlets are opened. all other channels are higher than pre-Covid levels, but the wholesale which was impacted by the restrictions in inter-state movement during the pandemic.
  • ITC is witnessing encouraging results in supply chain optimization and cost efficiency due to the digitalization and use of technology. ITC leveraged digital technology across every node of supply chain.
  • ITC E-Store has been an effective platform to gain consumer insights and ITC reconstruct their entire strategy for E-Commerce.

 Asset Multiplier Comments

  • Hygiene products such as sanitisers and disinfectant sprays gained prominence during CY20 when the spread of the virus was rampant. Now, as the economy is returning to normalcy, demand for these products has reduced.
  • Rising commodity costs, freight rates and logistical challenges are the headwinds facing the industry and company.

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

  • The closing price of ITC was ₹ 231/- as of 22-November-2021.  It traded at 19x/17x/15x the consensus earnings estimate of ₹ 12.2/13.8/15 for FY22E/23E/24E respectively.
  • The consensus price target is ₹ 270/- which trades at 20x the earnings estimate for FY23E of ₹8/-

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.”

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21 Jun

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 21st 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.”

 

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18 Jun

A slew of health and wellness products to be rolled out soon: ITC

Update on the Indian Equity Market:

On Wednesday, NIFTY ended down 33 pts (-0.3%) at 9,881 as investors remained cautious amid geo-political tensions between India and China at the Ladakh border. Further, a steady rise in Covid-19 cases, both in India and globally, also dented investor sentiment.
Among the sectoral indices, MEDIA (+1.7%), AUTO (+0.8%) and REALTY (+0.8%) were among the gainers while FIN SERVICE (-0.8%), METAL (-0.8%) and FMCG (-0.5%) were among the top losers.
Among the stocks, MARUTI (+4.1%), BHARTIARTL (+3.4%) and WIPRO (+2.5%) were the top gainers. INFRATEL (-4.5%), KOTAKBANK (-2.3%) and ITC (-2.2%) were the top losers.

Mr B Sumant, Executive director of ITC, in an interview said the company has always been ‘vocal for local’, and has introduced products designed in India, sourced in India and made in India. Here are the excerpts of the interview with Business Standard dated 17th June,2020:

• On capacity utilization rate, he said ITC is meeting market demand for its products. The way they design their factories – the ‘Make in India’ Integrated Consumer Goods Manufacturing and Logistics (ICML) facilities that are spread across the country, it is for the long term. So, they always keep enough extra reserve capacity in all plants.
• There were many challenges when they started the operations, but now they have adapted with agility to the new ways of working which includes adhering to all social distancing and hygiene norms. ITC had to realign all its operations adjusting to the new normal.
• Food sales have seen a gradual evolution during the pandemic. The first phase of the lockdown was all about consumers stocking essential products, including staples and spices. Then, people realized that this was going to continue for a while and products like biscuits and noodles started selling. Then over time, consumers also went on to buy discretionary food products like snacks and chocolates. Now, people realise that the current situation is here to stay for a while so normal consumption is progressively being resumed. A lot of do it-yourself products are getting preference as people are trying to recreate the experience of a restaurant at home.
• ITC has launched a range of innovative products in the health and hygiene space during lockdown:
o They witnessed demand for surface cleaning and came up with the Savlon disinfectant spray, which was created in a record time.
o Nimwash, a fruit and vegetable cleaning product.
o Savlon Wipes, another product suiting the times and designed for convenience.
o 50 paise Savlon sachet, taking the sanitizer to the masses.
o B Natural + in association with Amway, where a natural immunity building ingredient was included.
• ITC is also working on a range of products where clinical trials are going on. There is a pipeline of health and wellness products that will be rolled out going forward.
• When asked about any thought regarding change in rural strategy with the changing landmark, he replied that ITC’S multi-pronged presence and engagement with rural areas is quite extensive and an area that receives significant strategic consideration. Given that the recent reforms can give new wings to the critical food processing sector, ITC’S continuing farmer engagements, agri-linkages, distribution reach and initiatives are well poised to respond to the emerging demand impulses. ITC has been focusing on expanding our presence in the rural markets even before the pandemic.
• When asked how sunrise would add value to Ashirvad, he said that Spices is a local business — every locality, every state and every province have their own taste and flavor preferences. Sunrise is very popular in the east — it has got a wide range of products.
• ITC has always been vocal for local. Over the years, they have invested extensively in developing a vibrant portfolio of world class Indian brands which support millions of farmers and creates largescale livelihoods in the country. A bouquet of 25 Indian vibrant brands have been created from scratch. As a relatively late entrant into FMCG, they were up against all the global giants. But ITC went extra lengths to bring in differentiated products and are proudly Indian because all their world-class products are designed in India, sourced in India and made in India with Indian R&D capabilities.
• As a part of their “Nation First” philosophy, ITC focus on domestic procurements, unless circumstances compel to do otherwise. For Fabelle, for example, the chocolate comes from Madagascar because India is not a chocolate growing country. The ingredient is grown only in certain parts of the world. A majority of ITC’S brands anchor domestic agri value chains and create largescale livelihoods. B Natural, ITC’S fruit juices and beverage brand sources fruits directly from Indian farmers instead of importing concentrates. Also, its notebook brand Classmate sources pulp through largescale forestry programmes. Similarly, ITC’S Mangaldeep brand of agarbattis supports indigenous bamboo value chains, instead of importing raw agarbattis.

Consensus Estimate: (Source: market screener, investing.com websites)

• The closing price of ITC was ₹ 181/- as of 17-Jun-20. It traded at 15.8x/13.9x the consensus EPS estimate of ₹ 11.9/13.5 for FY21E/ FY22E respectively.
• The consensus target price of ₹ 235/- implies a PE multiple of 17.4x on FY22E EPS of ₹ 13.5/-.

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.”

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04 Jun

It is time to really transform the agriculture sector – ITC

Update on the Indian Equity Market:

On Wednesday, NIFTY closed above 10,000 at 10,061 (-0.83%). Top gainers in NIFTY50 were M&M (+5.4%), Bajaj Finance (+3.2%) and Kotak Bank (+3.1%). The top losers were Zee (-2%), NTPC (-1.9%) and Infratel (-1.9%). Top sectoral gainer was PSU BANK (+5.2%), REALTY (+3.1%) and BANK (+2.0%) and sectoral losers were IT (-0.4%), and METAL (-0.2%).

Excerpts of an interview with Mr Sanjeev Puri, chairman & MD-ITC Ltd with Livemint dated 2nd June 2020:

  • We need to really accelerate the economic growth in areas that create large livelihoods. There is no other sector in India, like agriculture, where nearly 50% of the livelihoods are engaged in. India needs to really transform the agriculture sector.
  • Government has moved to amend the nearly six-decade-old Essential Commodities Act to bring better price realization for farmers and to attract investments into the farm sector.
  • The government has laid the foundation for some transformative reforms, by providing alternative market access to farmers and the modification to the Essential Commodities Act.
  • These are powerful tools, which over time, will bring the buyers and sellers of agri-produce close and enable a lot of collaboration.
  • More competitive value chains in the farm sector and investments in food processing will ensure enormous job opportunities.
  • He believes that India needs to go the whole hog on value addition there, need to improve the productivity of the agriculture value chains, we need to create a strong ‘phygital’ (a physical and digital) system to empower the farmers and connect them to markets.
  • By creating a very competitive value chain, with a lot of focus on value addition, India will be able to take a bigger share of the global trade in food processing and agriculture.
  • Agriculture is nearly half of India’s workforce. However, the quality of earnings there is definitely on the lower side. They actually need to improve the quality of earnings by improvement in productivity, in the quality of produce, get into pesticide-free production, get into organics, get into horticulture, which raises the incomes. They need to move forward as far as processing is concerned and add a lot of value to agri produce.
  • The central/state governments and the industry need to work together to bring the migrant labourers back from their villages.
  • Corporates themselves are under pressure during this time of the pandemic, because of the stalling of economic activities. This is the time when they have to show enormous amounts of compassion.

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

  • The closing price of ITC Ltd was ₹ 197/- as of 3rd June 2020.  It traded at 16x/ 14x the consensus earnings estimate of ₹ 12.1/ 13.8 for FY21E/22E respectively.
  • The consensus price target of ITC Ltd is ₹ 237/- which trades at 17x the earnings estimate for FY22E of ₹8/-

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.”

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22 May

We are deriving far more value by being together than being separate: ITC

Update on the Indian Equity Market:

On Thursday, Nifty ended 0.4% higher at 9,098. The top gainers among the Nifty 50 were ITC (+7.1%), Hindalco (+5.8%) and Asian Paints (+5.1%) while the losing stocks for the day Bajaj Finserv (-3.6%), Bajaj Finance (-2.9%) and NTPC (-2.9%). The gaining sectors for the day were Auto (+2.6%), FMCG (+2.2%) and Metal (+1.8%). The worst performing sectors were Pvt Bank (-0.7%), Financial services (-0.7%) and Bank (-0.6%).

Edited excerpts of an interview with Mr Sanjiv Puri, Chairman & Managing Director, ITC Ltd; dated 21st May 2020 from Retail Economic Times:

 

  • His understanding of the new normal: This current problem is not going away soon and will have to run the businesses and carry on with life and economic activity, taking safety precautions.
  • There are challenges in this current situation because of the impact on economic activity and certain sectors are very sharply impacted. ITC sees a fair amount of opportunities for them, particularly in their FMCG businesses. There is a lot of opportunity in the health, wellness, and nutrition and hygiene space. Consumers trust in the brands will add to the opportunities as well as the current geopolitical situation. There are going to be opportunities for sure, according to him and it is for the Company to be watchful and agile and make the best of the opportunities that fit into their capabilities and strategies.
  • In terms of the government package that is required, he added, one needs to reach out to the most vulnerable section of the society. The largest stimulus that can happen is actually getting back to work and how to adjust to the new normal. The longer one takes to adjust to the new normal, the bigger is the stress and the more resources will be required to pull it out. In order to get back to the new normal and get back economic activity in the new normal, first, the government has to tackle the issues of liquidity.
  • Going forward, India will see some measures to boost consumption. The reforms for the agriculture sector can have a transformative impact over a period of time. But at the same time, those measures are not going to give impact immediately but the medium term, these augur well for the economy.
  • FMCG the sector is slowly getting back to the normal demand levels. The demand varies across the categories. ITC is seeing good demand for staples.
  • The Company is seeing some stress but at an aggregate level for foods and personal care. Mr Puri believes over time, as the capacities scale-up and the distribution and logistics improves further, the opportunities in this category will go up further.
  • There are segments like education and stationery which have been severely impacted for the moment because the sessions of the schools have changed and the business is heavily indexed to the school sessions. But ultimately, children will have to go back to school and students will have to go through education.  So, it is more a timing issue than anything else.
  • ITC Hotels are adversely impacted. ITC hotels are supporting quarantine facilities/ dealing with helping some stranded guests. Most of the hotels are not operational as of now which is in line with the guidelines of the government.
  • The agriculture business of ITC is slowly getting back to normal and is indexed to food consumption, paper and paper board consumption. There is a little bit of lagging but once the economy fully opens up, ITC is hopeful to see more demand for paper boards and packaging.
  • Outlook for ITC 5 years down the line: 10 years back, it was 60% tobacco and 40% non-tobacco. Today, it is actually the other way around; about 60% is the non-tobacco. 80% of the capital employed is in non-tobacco business. 90% of employees are in the non-tobacco business which reflects the kind of investment ITC is making in the non-tobacco segments. This gives headroom for these segments to grow. Given the positioning of the Company, they are confident of expanding their footprints quite a lot in these segments.
  • Outlook for Tobacco Business: The biggest challenge that the tobacco segment faces in India is the threat of the illegal segment. As taxes have been rising, the illicit industry has been rising. Over a period of five-six years, the taxes on cigarettes tripled and at a CAGR level, the tax rate grew at about over 15% whereas the revenue growth was between 4% and 5%. ITC will see some improvement in the business once there is stability in the tax regime.
  • Dividing the two business- FMCG and Tobacco: There are a few things that are advantageous when they are combined as an organisation. ITC is able to leverage a large and robust distribution and logistics highway which are high-cost elements in any company’s operations. Splitting these two segments will mean duplication of resources. At some point of time in future, when each of these businesses is mature, the splitting thing will be revisited. But in today’s context, ITC is creating a lot of value through synergy.
  • The non-tobacco businesses are expected to grow at a much higher rate in the next 3-5 years. There will also be the base effect that must be factored in. But the rate of growth in the non-tobacco the segment will certainly be much faster, according to Mr Puri.

 

Consensus Estimate: (Source: market screener website)

  • The closing price of ITC Ltd was ₹ 188/- as of 21-May-2020. It traded at 15.5x/ 13.5x the consensus EPS estimate of ₹ 12.1/13.9 for FY21E/ FY22E respectively.
  • The consensus target price of ₹ 241/- implies a PE multiple of 17.3x on FY22E EPS of ₹ 13.9/-.

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.”

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