For years, ITC’s mainstay—cigarettes—kept many institutional investors away from one of India’s most valuable companies.
This was despite ITC being the country’s second-largest fast-moving consumer goods (FMCG) company, and churning out large amounts of cash and dividends.
As more and more investors sought “sustainability” bragging rights, ITC suffered. This demand for socially responsible investing contributed to a decline in the stock’s value, which fell over 10% between January 2017 and February 2022, while the benchmark index BSE Sensex doubled. ITC became fodder for countless Twitter memes.
But the past year, since March 2022, has been an entirely different story. Investors just can’t get enough of the company—the stock is up 80%, far outpacing the 7% gains in the BSE Sensex.
On Monday, the stock hit its all-time high of Rs 388 (US$4.7), with the massive run-up seeing ITC outperform the benchmark indices over a three-year period too.
What’s driving this reversal in ITC’s fortunes? Surprisingly, it’s the same tobacco industry, which has made potential shareholders fall in love with the company now.
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“Some stocks sleep for a long time before they take off,” said Daljit Kochhar, the founder of KT Advisory, a Delhi-based investment-banking practice.
It’s not just the stock’s performance that has made heads turn. The December 2022 results, announced last month, saw ITC clock its highest quarterly profit, crossing the Rs 5,000-crore (US$611-million) mark.
Firing on all cylinders, the company posted solid profit growth across its sprawling empire, including the cigarette business, FMCG, agri products, paper-and-packaging, hotels, and even its software arm, ITC Infotech. Operating margins have also shot up, and true to its reputation, the company declared a healthy dividend. What’s not to like?
But the more things have changed, the more they have stayed the same. ITC’s decades-long diversification initiatives have come a long way, and the company has become a top player in most segments in which it operates. In terms of revenue, it is second only to Hindustan Unilever Ltd in the highly competitive FMCG sector. But the company’s fortunes still revolve around the cash-cow it shies from talking about—the century-old cigarette business. ITC controls ~80% of the legal cigarette market in India, and the segment contributes ~80% of the company’s operating profit.
If the ITC stock’s underperformance in earlier years was mainly due to its cigarette business being on the backfoot, its outperformance now is also being attributed, for the most part, to the improvement in the segment’s fortunes. “The key lever for the company will remain cigarettes and the stock’s valuations will depend on cigarette performance,” said Sachin Bobade, VP Research at Dolat Capital, a Mumbai-based investment-management firm.
