ITC Ltd

CASE STUDY
 About the Company
Established in 1910, ITC is a diversified conglomerate, present across categories– FMCG, Cigarettes, Hotels, Paperboards & Agri-business. ITC is a
market leader in the cigarettes category with volume and market share of ~75%.

The company’s consistent focus on research & development and brand building has resulted in creating Aashirvaad the no. 1 in branded atta, Bingo
the no. 1 in snack foods(no.2 overall), Sunfeast the no. 1 in the premium cream biscuits segment, Classmate the no. 1 in notebooks, Yippee The no.
2 in noodles, Engage the no. 2 in deodorants (no. 1 in women’s segment)and Mangaldeep the no. 2 in agarbattis (no. 1 in dhoop segment). Though
the cigarettes division is still the major source of revenue.

In terms of annual consumer spend, ‘Aashirvaad’ is today over ` 4000 crores; ‘Sunfeast’ over ` 3500 crores; ‘Bingo!’ over ` 2000 crores; ‘Classmate’
and ‘YiPPee!’ over ` 1000 crores each and ‘Vivel’, ‘Mangaldeep’ and ‘Candyman’ over ` 500 crores each.
The business groups comprise the following: Revenue contribution for
2018

ITC

FMCG Other business

Other branded
Cigarette Hotels Paperboard Agri Business
package foods

Sales: 52.08% Sales: 25.74% Sales: 3.19% Sales: 8.63% Sales: 10.36%
GROWTH
Revenue/Sales
Company delivered a resilient
performance during FY2018 due to a
steep escalation in tax incidence on
c i ga re tte s u n d e r t h e G ST r e g i m e ,
subdued demand conditions in the
FMCG industry and supply chain
disruptions caused during the transition
to GST.

ITC is also the leading company in the

paperboards and specialty packaging
segments in India, and has a strong
presence in hotels and in the trading of
agricultural commodities.

A strong brand, a wide product portfolio,

an established distribution network, and
stro ng res earc h a n d d eve l o p m e nt
capability wi l l dr i ve the Co mpany
growth further.
GROWTH
EBITDA
T h e C i ga re tte I n d u st r y i n I n d i a i s
dominated by 3 companies. ITC is the
market leader, with a market share of
more than 75%. The cigarette business
remains the mainstay of ITC’s revenues
and profitability.

Under FMCG: ITC’s “FMCG – Others”

business has been the fastest growing
segment for ITC in past years and has
witnessed many brand and product
launches. Many of ITC’s key brands are
not only large but leading players in
their respective segments.

ITC is investing in 20 modern state-of -

the-art integrated consumer goods
manufacturing and logistics facilities
across the length and breadth of the
country to enable its FMCG businesses
to rapidly scale up.
GROWTH
PAT
ITC's Paperboards, Paper and Packaging
division is the market leader in India in
the paperboards segment, with a wide
range of products.
Factors like capacity additions across the
globe and reduction of import duties
under various regional Free Trade
Agreements (FTA), especially with
ASEAN (zero duty imports under ASEAN
Free Trade Agreement), continue to
impact the profitability of the sector.
ITC Hotels chain is the second-largest
Hotel chain in India, with 104 hotels at
70 locations in India, operating across
multiple market segments.
Improvement in average room rates
(ARRs) and higher growth in the Food &
B e v e ra g e s e g m e n t w i l l d r i v e t h e
Revenue and PAT of the company.
 Growth EdgeMeter =4

An EdgeMeter is relate to grading a certain aspects of a company within 1 to 5, 5 denotes the highest rating. Since
judgement on equity is subjective because different people will have different expectation from their investments,
it is better to study each aspect and give individual grading to arrive at the final evaluation of a stock.
EFFICIENCY
Cash from
Operations
Cash from operation of the company
has been increasing on consistent basis
for the last 3 years and going forward it
is expected to perform in similar line.

High cash generation has enabled ITC to

invest aggressively in other fast growing
businesses and thereby enable the
company to diversify into other, non-
stringent segments.
EFFICIENCY
Working Capital
Days
Working capital days of the company is
stagnant at around 30 to 40 days in last
five years.

Working capital days of the company has

decreased from 40.23 days in 2015 to
33.54 days in 2018 which is a good sign.
EFFICIENCY
Free Cash Flow

Free cash flow per share of the company

has been positive for all the years.

I t s h o ws t h e co m p a ny ’s a b i l i t y to
d e v e l o p n e w p r o d u c t s a n d m a ke
acquisition thus increase cash flow.

It helps in enhancing shareholders faith

in the company.
EFFICIENCY
Asset Turnover

The company’s asset turnover is 0.79

and has shown de-growth for the past 5
years.

This indicates that company is not

utilizing its assets very efficiently.
 Efficiency EdgeMeter =3

An EdgeMeter is relate to grading a certain aspects of a company within 1 to 5, 5 denotes the highest rating. Since
judgement on equity is subjective because different people will have different expectation from their investments,
it is better to study each aspect and give individual grading to arrive at the final evaluation of a stock.
PROFITABILITY
EBIDTA Margin

ITC has a strong margin profile with

EBITDA margin of 38.46%.

The agriculture business continues to

support ITC’s other businesses in terms
of sourcing of the required raw materials.

Going forward recovery in cigarette

volume, better profitability in FMCG
segment, strategic investments i n
imported pulp substitution, improving
pulp yield and higher realization to aid
margin growth.
PROFITABILITY
PAT Margin

PAT m a r g i n o f t h e c o m p a n y h a s
improved in FY18 to 24.08% that means
company is more efficient at converting
sales into actual profit.
PROFITABILITY
ROCE

Overall ROCE for the company is at

35.39% decreasing since past 5 years.

It means that more rupee of profit are

not being generated by each rupee of
capital employed.

The cash cow or the cigarette business

e n j o ys RO C E o f o ve r 2 0 0 % d u e to
superior pricing power and low capital
intensity.
PROFITABILITY
ROE

ROE of the company is 24.07%.

Its decreasing since past 5 years.

This indicate that the company is unable

to efficiently utilize its equity base to
generate return for investors.
 Profitability EdgeMeter =3

An EdgeMeter is relate to grading a certain aspects of a company within 1 to 5, 5 denotes the highest rating. Since
judgement on equity is subjective because different people will have different expectation from their investments,
it is better to study each aspect and give individual grading to arrive at the final evaluation of a stock.
SOLVENCY
Debt Equity

Debt was minimal at below Rs 50 crore,

against a large net worth of over Rs
52,500 crore, as on March 31, 2018.
SOLVENCY
Interest Coverage

Interest coverage ratio of the company

last year was 152.30 down from last year.

This indicates that the company can

easily pay the interest on its
outstanding debt till now.

This also means that the company can

even think of any expansion or
acquisition if need arises.
SOLVENCY
Current Ratio

Current Ratio of the company is 2.85

which means company has enough
liquid assets to cover its short term
liabilities.

ITC had liquid investments of around Rs.

21,776 crore in addition to a cas h
balance of around Rs. 2,900 crore.

Large liquid investments on its books

remain a strong source of financial
flexibility for the company.

Current ratio has decreased YoY due to

some new investments .
 Solvency EdgeMeter =3

An EdgeMeter is relate to grading a certain aspects of a company within 1 to 5, 5 denotes the highest rating. Since
judgement on equity is subjective because different people will have different expectation from their investments,
it is better to study each aspect and give individual grading to arrive at the final evaluation of a stock.
VALUATION/
PRICE
PE Ratio
Current PE ratio of the company is 31.59.

Industry PE is 31.29

Thus its fairly valued according to this

ratio.
VALUATION/
PRICE
Dividend Yield
Dividend Yield of the company is 1.68
and it has increased from last year.

This is again a positive sign for the

company.
 Price EdgeMeter =3

An EdgeMeter is relate to grading a certain aspects of a company within 1 to 5, 5 denotes the highest rating. Since
judgement on equity is subjective because different people will have different expectation from their investments,
it is better to study each aspect and give individual grading to arrive at the final evaluation of a stock.
QUALITY
Shareholding
Pattern
FII have decreased their stake from
20.08% to 17.04% in 9 quarters.

DII have increased their stake from

35.79% to 38.20% in 9 quarters.

TOP PUBLIC SHAREHOLDING

LIC of India - 16.19%

Specified undertaking of UTI - 7.96%

General insurance corporation - 1.71%

 Cigarette: GST implementation was the second tax increase in 2017-18 following the excise revision
announced in the Union Budget in February. It continued the trend of year-on-year tax hikes.

QUALITY Cigarettes were placed in the highest tax slab and compensatory cess was also introduced.

Some of the key recent interventions include the launch of innovative variants viz., `Classic‘ Rich &
Smooth (triple segment filter with superior filtration), Classic Verve low smell (demi slim format),
`Hollywood' (triple segment filter) and `Flake' Taste Pro (dual segment filter).

Sector Potential FMCG: This sector is the 4th largest sector in the Indian economy with Household and Personal Care
accounting for 50 per cent of FMCG sales in India. The urban segment (accounts for a revenue share of
around 55 per cent) is the largest contributor to the overall revenue generated by the FMCG sector in
India. In the last few years, the FMCG market has grown at a faster pace in rural India compared to
urban India. Semi-urban and rural segments are growing at a rapid pace and FMCG products account
for 50 per cent of total rural spending.
Tracker Nielsen’s data, as of December
2018, showed that ITC’s FMCG sales Paper, Paperboards and Packaging: Over the next five years, the domestic industry is projected to grow
expanded 20% in r ural mar kets, at 6-7% CAGR to reach 20 million tonnes by 2022, with the paperboard (48% of the market) and writing
compared with 16% for the broader
industry. & printing paper (30% of the market) segments estimated to grow at a CAGR of ~7.5% and ~6.0%,
respectively. Within paperboards, demand for value-added paperboards (VAP) in India is projected to
In the nine months ending December, grow at a healthy CAGR of ~10.5%, driven by growth in demand from the FMCG, pharma, publishing,
ITC had added 2.3 lakh outlets, taking its and good & beverage industries. In the writing & printing paper segment, cut-size paper is projected to
reach to 61 lakh. register the fastest CAGR of 9.5%, driven by the education and office stationery segments.
Out of this, ITC directly reaches to more Key Risks:
than 20 lakh outlets.
•Higher taxation and stringent regulatory norms on cigarette poses threat to cigarette volume growth.
• Growing contraband market of cigarettes also poses significant threat for the cigarettes business..
• Competitive pressures in the FMCG segment.
•Slow down in macro-economic environment would impact hotels business.
QUALITY
Management

ITC management is looking at portfolio

expansion in its food division to achieve
the stated vision of the company of
achieving Rs 1 lakh crore turnover from
FMCG Business by 2030.

Addressing the company's 102nd annual

general meeting Deveshwar said ITC is
on the path to become India's largest
FMCG company without taking into
account its cigarette business.
 ~* Cigarette: ITC has raised prices for three of its brands –Bristol by 6.7% to Rs. 64 (pack of 10 sticks, Flake
Excel by 11% to Rs. 60 (pack of 10 sticks & Capstan by 14.5% to Rs. 55 (pack of 10 sticks. These brands
account for 20% of overall cigarette volumes for ITC, implying 2.2% price hike. Combined with price hikes
taken in December 2018, the weighted average price hike for ITC is now around 3%.
The price hike will improve Cigarette EBIT in FY2020.
~* FMCG Business: ITC is seeking to expand its FMCG business in double digits next fiscal by quickening
the pace of product launches, deepening distribution into the rural hinterland and building integrated
hubs for output, stocking and delivery of items such as cookies, packaged flour and soaps. Company has
introduced milk, ghee, curd, and paneer in Bihar and West Bengal and milk shakes in the South.

Future outlook ITC has launched more than 60 new products in FY19 and wants to continue this pace of product
introductions next fiscal as well to drive business growth and expand distribution reach to population
centres of up to 5,000 people.
The company has already operationalised five ICMLs (integrated consumer goods manufacturing and
ITC intends to make fresh investment of logistics). These hubs make FMCG products, such as packaged foods and personal-care items and have
1700 cr in West Bengal which would warehousing and outbound logistics integrated with the respective output facilities. ITC said it is in the
include a personal care product process of setting up 20 ICMLs across the country as part of its planned investment of Rs 25,000 crore over
manufacturing line and investment in the next couple of years.
decor paper manufacturing capacity in ~* Hotel segment: Increase in ARR (Average Room Rate) and newly commissioned properties at ITC
Tribeni to substitute imports. Kohinur (commissioned in Q1 FY19) and ITC Grand Goa Resort & Spa (commissioned in October'18) will
drive the growth.
T h e co m p a ny w i l l a l s o ex p a n d i t s
Dhulagarh facility and milk productivity ~* Agri Business: The Business continues to step up initiatives in the area of value added agriculture to
and procurement programme across 300 create new vectors of growth by leveraging its agri-commodity sourcing and processing expertise and the
villages. strong distribution network. These include packaged prawns, fruit puree, fresh fruits and vegetables and
dehydrated onions under the 'ITC Master Chef' and 'Farmland' brands.
The up-coming super premium luxury ~* Paperboards, Paper and Packaging: Higher realisation, strategic investments in imported pulp
hotel, ITC Royal Bengal, is also nearing substitution, process innovation leading to improved pulp yield and benefits of a cost-competitive fibre
completion and will be operational in chain will drive the growth. Factors like capacity additions across the globe and reduction of import duties
the next few months. The ITC Green continue to impact the profitability of the sector.
Centre and infotech park is also in
a d va n c e d s t a g e o f c o n s t r u c t i o n .
 Quality EdgeMeter =4

An EdgeMeter is relate to grading a certain aspects of a company within 1 to 5, 5 denotes the highest rating. Since
judgement on equity is subjective because different people will have different expectation from their investments,
it is better to study each aspect and give individual grading to arrive at the final evaluation of a stock.
 Final EdgeMeter Matrix
Aspects Grade
Growth EdgeMeter 4
Efficiency EdgeMeter 3
Profitability EdgeMeter 3
Solvency EdgeMeter 3
Price EdgeMeter 3
Quality EdgeMeter 4
Total 20

The maximum Grade for a company could be 30. Any company above grade 20 is worth considering. Any
company below 15 is poor and can be avoided.
This document and the process of identifying the potential of a company has been
produced for only learning purpose. Since equity involves individual judgements, this
analysis should be used for only learning enhancements and cannot be considered to
be a recommendation on any stock or sector. Our knowledge team has limited
understanding and we all are learning the art and science behind this.

Thank you
WWW.STOCKEDGE.COM
WWW.ELEARNMARKETS.COM