Batch:2021-23

Roll no: 140039

Project report on “why ITC Ltd. share is stagnant for last 5 years”

Submitted to: Kalyan Agarwal Sir

By: Sneha Anand
Introduction
India is a developing economy, which means it has better job opportunities, offering better
salaries, giving higher disposable income in the hands of working population, which they
spend on improving their quality of life and standard of living. A large part of country’s
population is under 35 years of age, which spend major part of its income on food and
clothing. This definitely a good opportunity for companies engaged in processed food
segment, FMCG segment (such as soaps, cosmetics and personal care products) as well as
fashion, clothing and lifestyle business.
ITC Ltd. Was incorporated on August 24, 1910, under the name Imperial Tobacco Company
of India Ltd. The company’s multi-business portfolio encompassing a wide range of business-
cigarettes & Tobacco, Hotels, Information Technology, Packaging, paperboard & specialty
papers, Agri-exports, Foods, Lifestyle Retailing.
ITC first cigarette factory setup at Bangalore in 1913.They entered into packaging and
printing business in 1925. In 1975 they entered into hospitality sector, in 1994 hotels under
the company were transferred into the listed subsidiary company ITC Hotel Limited. In 2000,
they stepped into clothing, stationary products & gifting business.
ITC is rated among the World’s Best Big Companies, Asia’s ‘Fab 50’ and the World’s Most
Reputable Companies by Forbes Magazine, among India’s most Reputed Companies by
Business World and among India’s Most Valuable Companies by Business Today. ITC ranks
among India’s ‘10’ Most Valuable Company Brands’, in a study conducted by Brand Finance
and Published by the Economics Times.
Though the first six decades of the company’s existence were primarily devoted to the
growth and consolidation of the Cigarettes and Leaf Tobacco business, the seventies
witnessed the beginning of a corporate transformation that would usher in momentous
changes in the life of the company.
ITC is one of India’s Foremost private sector companies with a market capitalization of
nearly 254071.38 cr. and revenue for fiscal year 2020-21 was 13389.80 cr. ITC’s equity share
are listed on Bombay Stock Exchange, National Stock Exchange and Calcutta Stock Exchange.
Returns of ITCs in 1 Year: +6.0%, 3 Year: -34.3%, 5 Year: -18.87%. PE Ratio (x): 18.20, PB
Ratio (x): 4.15, Dividend Yield (%): 5.22, 52weeks low: 163.35, 52weeks high: 239.20.
After looking the above key metrices and returns of the company, the shareholders must be
thinking that weather they should invest in this company or not, if they are investing what
would be the time horizon i.e., for long- term investment or for short- term investment,
what would be its future return and what would be the company’s future growth and
expansion.
 Statement of problem
Why the share price of ITC Ltd. Company is stagnant from 5 years, even though it is
fundamentally strong, undervalued, and revenue is increasing year on year. Should the
shareholders invest in this company or remain invested in this company?

Objective of the study

The main aim of the study to provide the useful insight of the company’s fundamentals, its
valuations and future growth and expansion.

 To do fundamental analysis of the company.

 To do quantitative analysis.
 SWOT analysis of the company.
 To provide useful insight to long term investors for their investment in the company.
 Reason that would trigger the increase in share price the company.

Methodology
This descriptive study includes only secondary sources of data. Secondary data refers to
indirect collection of data from sources containing past or recent past information.
Secondary data is data collected by someone other than the actual user. It means that the
information is already available, and someone analyses it. The secondary data includes
magazines, newspapers, internet, journals, etc. It may be either published data or
unpublished data.
Published data are available in various resources including:

 Government publications
 Public records
 Historical and statistical documents
 Business document
 Technical and trade journals
 Company’s website or annual report published
Company Profile

 ITC Limited is one of India’s foremost private sector companies incorporated in

August 1910. It is an Indian multinational conglomerate company having headquarter
in Kolkata, West Bengal.
 ITC has a diversified presence in FMCG, Hotels, Agri-Business, Papers, Packaging,
and Paperboards etc.
 Thus the 5 key business verticals of ITC Ltd are:
1. Cigarettes Business
2. FMCG – Others
3. Hotels
4. Agri Business
5. Paperboards, Paper and Packaging

ITC started as a cigarettes manufacturing company and is now the market leader in this
segment. Company enjoys almost 80% market share in the cigarettes segment and it has
proved to be the cash cow for the company.

1. Cigarettes

 This is major contributor in the business of ITC Ltd. The company earns

majority of their revenue form this business vertical.
 Its contribution to the revenues is 41.5%. However, this business
vertical’s contribution to EBIT is a whopping 84.8%.
 With the ease of lock-down and increasing normalcy in metro cities and big
towns, volumes and revenue in this segment are recovering.
 Despite several curbs by the authorities, Smuggled Cigarettes available in
large extent.
 This is to tell us how much ITC is dependent on their cigarettes business. ITC
is trying very hard to diversify their overall business, but they haven’t been
much successful in doing that.
 It doesn’t comply with ESG (i.e., Environmental, Social and Governance)
parameter, which gives negative impact to the company in terms of social as
well, cigarette smoking impact other people as well, hence institutional
investor seems less interested in investing in this company because of ESG
parameter.
 2. FMCG – Others
 FMCG-Others have increased its contribution in revenue mix by 1.1% from
25.8% in Q3FY20 to 26.9% in Q3FY21.
 FMCG – Other’s business verticals contribution to revenue is pretty healthy.
The company has launched over 100+ products across Hygiene, Health and
wellness, Natural categories between April 2020-December 2020 with respect
to increasing demand for staple and packaged food products.
 Health & Hygiene products have sustained growth trajectory. Hygiene
products like Savlon, Disinfectant Sprays contributes 5% of the FMCG
revenue and their sales have doubled year on year via e-commerce channels.
3. Hotels
 The Hotel segment of company continues to be a loss-making segment in this
quarter too. Their contribution to revenue has fallen from 4.3% in Q3FY20 to
1.8% in Q3FY21.
 Despite this there is strong recovery on sequential basis, Hotel Business
performance is below pre-Covid-19 level by 50%. But there is increase in
revenue in hotel segment due to increasing mobility, tourism, etc.  by 3 times
in comparison with last quarter.
4. Agri Business
 Contributions of Agri-Business towards Revenue Mix is the highest in this
quarter. Its contribution to revenue has increased by 2.4% in this quarter from
16.3% in Q3FY20 to 18.7% in Q3FY21.
 In total revenue (%) of Agri-Business of 18.7%, the major portion i.e., 18.5
driven by wheat supplies for Ashirwad Atta and & trading opportunities
tapped for Rice, Soya, & Wheat.
 Wheat is also exported to Bangladesh, Sri Lanka, Malaysia and UAE.
5. Paperboard, Papers & Packaging
 This business vertical of the company has reported fall in their contribution to
revenue mix by 0.9% YoY.
 It has seen recovery in their volumes and increase in exports in this quarter.
Subdued demand in domestic markets have greatly affected the revenue
growth of this business segment.

ITC Ltd – Quantitative Analysis

Let’s see the key performance parameters of ITC:

Return on capital employed = 32.32%
 Strong ROCE number gives an idea about how efficiently ITC is
generating profits from its capital employed across its diversified
business segments.
1. Return on equity= 25.9%
2. Debt to equity ratio = 0.00
 The Company is virtually debt free. Amidst the current lock-down due
to COVID-19 pandemic, the debt-free companies have an extra edge
over its peers by the investors.
 The concern of repaying the interest on the Loans amid dampened
revenue and cash flows would not be the case for ITC.
3. Dividend yield = 5.20%
 Stock is providing a good dividend yield of 4.6%. The company has
declared dividend of Rs.10.15 per ordinary share for FY20.
  Also, the company has been maintaining a healthy dividend pay-out of
55.94%.
4. Heavy Weightage in Key Indices
 ITC Ltd stock is having a strong weightage in key Indices ie. Sensex
and Nifty 50
 Sensex has ITC weightage of around 4.7%
 Nifty 50 has a weightage of 3 % for ITC Ltd
 A heavy weightage of ITC stock in India’s Key Indices infuse a great
flow of passive funds. It would benefit ITC to build a huge valuation
in the long term.

SWOT Analysis of ITC Ltd.

Strength
 Monopoly in Cigarette market.
 Strong brand recognition and product portfolio.
 Distribution network.

Weaknesses
 Dependence on tobacco revenues.
 Non ESG compliance.
 Unrelated diversification

Opportunities
 Consumption of Personal care Products.
 Rural market
 E-choupal
 Dairy production

Threats
 Competition both Domestic & International
 Increasing Tax on Cigarettes
 Regulatory restrictions on Cigarettes
 Ban on smoking

Is ITC Ltd a Value Buy for Long-term Investment?

  Not all companies have the potential to give healthy returns to their investors over the
long-term. Only companies that have strong corporate governance policies, have
consistent financial performance, have fortified upper management and possess an
economic mortar reward their investors.
 ITC Ltd which has come a long way in this regard, is one of India’s pioneers in the
private sector.
 The company has made an effort to reduce its dependence on cigarettes. It has been
effectively able to channelize all its funds generated from the business of cigarettes.
Thus, it is employing a decent capital into its FMCG (Non-Cigarettes business),
Paperboard & Packaging business and Hotels chains.
 Over last 15 years, the revenue contribution of Cigarettes/ Tobacco productions has
come down from over 80% to half ie. ~40% as on Dec-2020. while, Other segments
in FMCG like food, apparel, consumer goods and stationery witnessed a good sales
growth.
 This gives a clear indication that ITC stock in future is sure to rise high, as the
company continue diversifying its products.
 This, in turn, will help the investors to derive benefits from ITC for a long-term
investment.

Findings
 It can be clearly understood that the
cigarettes business has the lion’s share in the business of ITC Ltd.
 The Revenue contributions of the various business
verticals give clear image of the ITC has not yet been able to successfully
diversify in their businesses.
 From valuation perspective, the cigarette
business of ITC still has lot of growth opportunities.
 Overall, there has been no change in the
business of ITC Ltd.
 The company is rated negatively on 2
parameters (environment & Social), because of which institutional investors
may avoid this stock.
 High dividend yield of 6-7% which will go up even further if stocks fall.

Suggestion

1. Demerger of non- cigarette business into separate entities: The

company should focus on FMCG for their future growth. The company
 should increase the profit margin for their products in order to increase
their profitability. If demerger of non- cigarette business happens than
their would be big investment by the institution investor because of ESG
compliance.

2. Reduce its Diversification: The ITC business is way too diversified, here
the problem with diversification is first we should go into business in
with we can dominate, not just because we have to open a business for
sack of diversification like IT business, hotels. The company should
allocate capital from high ROC business to a low ROC business.

3. Should reduce the dependency on cigarette business: cigarette business

is considered as a sin business and it does not comply with ESG norms. It
is also very government dependent, for example we might have seen
that ITC stock moves massively during the budget season. The reason is
because government can impose a 10% percent tax, 20% percent tax,
whatever they feel like they impose. And suddenly the ITC’s dependence
on cigarette business is so high that the stock moves with what the
government says.

4. Should not give frequent dividend: so, when a company gives out a lot
of dividends, it indicates that the company does not know what to do
with the money. Suppose that if ITC is making Hundred rupees, that
hundred rupee is coming into ITC’s account. Now if ITC does not know
where should I invest these 100 rupees? Should I build a new brand,
should I start a new distribution center? It is not very sure it will take out
that money and give it to innvestors.so that’s indicates that ITC so far
has not been able to figure out what to do with all the cash flow that is
happening.

5. Should open its own retail shop: FMCG industry is changing massively,
entered the space for example: Grofers is there, Reliance retail, D-mart,
so many of these sub-brands have come into the picture. Now, what
happens is that there is something called as distribution. So, the way
distribution happens like if ITC has to sell his Bingo chips, firstly they are
going to manufacture this and they are going to send it out to like their
 local distribution hubs. Then these are going to sell it to small retailers.
Eventually we are going to buy it from here. This is called distribution
network. Now, with advent of Dmart, Grofers; they are going to take
replace all these big brand products like chips with their own brands. It
creates lots of uncertainty.

6. Should tie up with other brands: The company can come up with new
initiatives to tie up with the Retail food joints like Mc Donald, Pizza Hut,
Dominos etc. and other food joints so they use Aashirvaad atta at a
discounted rate or discount coupon can be given to the out outlet if they
are using it, hence it will increase the demand in the market.

7. Increase its export to other country: The company can launch a new
idea where they can export branded Atta to other exporting countries
where they are already exporting wheat. This would increase their sale
on large scale and which would also increase the profitability and
goodwill of the company.

References
www.google.co.in
www.moneycontrol.com
www.moneycontol.com
www.bseindia.com
www.economictimes.indiatimes.com
www.thehindu.com