ITC, formerly the Indian Tobacco Company, is India’s largest cigarette company. Founded in 1910, it is regarded as one of India’s bluest blue-chip companies, and ranks among the top 15 Indian companies by market capitalisation. It is cash-rich and profitable, diversified, and professionally run. Its distribution network, which touches around six million outlets, is enviable, to say the least. Its business is defensible by moats, and it pays regular dividends.

A look at its shareholder returns over the years, however, does not bear this out. ITC has not kept up with the broader markets or peers. Over the last five-year period, market index BSE Sensex has seen returns, in absolute terms, of around 85%. Hindustan Unilever—India’s undisputed leader in FMCG, a space ITC is increasingly keen on—returned a cool 165%. VST Industries, a Hyderabad-based cigarette company, returned around 97%.

And ITC? Around -6%.

This, despite ITC being far from distress. The company is highly profitable, cash-rich, and debt-free. Yet, its price-to-earnings (P/E) multiples are trending towards multi-year lows, even as the BSE Sensex flirts with new peaks.

While analysts extol the virtues of the business positioning and its inherent potential, they unanimously attribute a large part of ITC’s muted shareholder returns to its association with tobacco. Cigarettes contributed 46% of ITC’s revenue in the year ended March 2020 and brought in 85% of its operating profit.

The company has leaned heavily into this narrative. Year after year, ITC—like many of its most ardent customers—has stressed stressed Financial Express ITC’s plan to kick the butt; FMCG business set for rapid growth, these products to drive sales Read more its intention to kick its tobacco dependence. In 2019, cigarettes, for the first time, accounted for less than half less than half Economic Times ITC: From a cigarette addict, ITC turns into a social smoker Read more the company’s gross sales.

In parallel, the company has, over the last two decades, consciously invested cash surplus from its cigarettes division in other sectors. This has led to an over 25X increase 25X increase The Ken The FMCG fix for ITC’s smoking habit Read more in the non-cigarette businesses, where it has built brands across branded packaged foods, personal-care products, education, and stationery, among others. It also operates hotels, paperboards, paper and packaging, agri-business, and IT businesses. All told, ITC’s non-cigarette businesses comprised ~54% of net revenues in the year ended March 2020.

With its non-cigarette businesses—especially FMCG—firmly in the ascendance, can the sin good tag really be the reason for ITC’s underperformance?

AUTHOR

Daljit Kochhar

Daljit is the founder of KT Advisory, a boutique strategy consulting and investment banking practice based in New Delhi. He has effectively counselled executive boards at multinational companies, operated and led change in a logistics business with a revenue stream more than US$ 2 billion, guided family run businesses towards institutional funding; and conceptualized and delivered real estate projects. Daljit is a keen distance/ marathon runner and a wannabe (barbeque) pitmaster.

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