ITC and Its Cigarette🚬 Addiction

Bigger cult than Kim Kardashian!

ITC Limited is an Indian company founded in 1910 as Imperial Tobacco Company, founded & owned by British American Tobacco plc a British MNC that manufactures and sells cigarettes, tobacco, and other nicotine products.

Opened the first cigarette factory in 1913, packaging, printing in 1925, hospitality sector in 1975, clothing & stationery in 2000. It was renamed to ITC Ltd in 1974, this company is one of the oldest public listed company in India which started its business almost 111 years ago.

Fast forward to now, the company’s gross revenue is Rs.50,968 crore for the year FY 2020, company is among the top three taxpayers in the private sector in India. Its FMCG products reach over 14 crore households in India and employ almost 28,000 individuals.

Business Division

1. FMCG(cigarette)- Includes cigarette brands like Insignia, India Kings, Lucky Strike, Classic, Navy Cut, Players, Scissors, Capstan, Berkeley, Bristol, Flake, Silk Cut, Duke and Royal, and most famous Gold Flake responsible for 45.77% of revenue. This division is a cash cow having the highest margin for the company and gives 84% of total profits.

2. FMCG (Others)- Includes Aashirvaad Atta🫓, Dark Fantasy🍪, B Naturals, Yippee Noodles 🍜, Candyman🍬, Sunfeast, Vivel, Mangaldeep, Classmate📘, savlon🧴 etc. ITC food is India’s 3rd largest. This division helped the company‘s transition from a Tobacco company to an FMCG company. It is also one of the most active segments in terms of product launch and is responsible for 27.66% of revenue and 2% of the total company’s profit.

3. Hotels- ITC Hotels is India’s third largest chain with over 100 hotels having flagship hotels like ITC Grand Maratha Hotel (Mumbai), ITC Grand Chola (Chennai) and Lavasna Fortune Hotel courtyard (Lavasna) and so on. The company operates hotels in 4 different categories- 1. ITC Luxury Collection, Welcome Hotels, Fortune Hotels, and Welcome Heritage Hotels. Responsible for 3.94% of total revenue and profits close to 1%.

4. Paperboards, Paper & Packaging- In this particular segment they are the leader in the market by volume. The company provides packaging📦 to various companies, even TATA’s Tetley Tea is also packed by ITC. Responsible for 10.12% of revenue and 7% of total profit

   

5. Agriculture Business- In this segment company buys or grow food ingredients like Soyameal, Wheat🌾& Wheat Flour, Rice🍚, Pulses, Barley, Maize🌽, Shrimps🦐, Prawns, Fruit Concentrates, Frozen Foods and Organic Foods Products and uses it in its business in all above segments like Cigarettes, FMCG and Hotels etc, and also sell to other places as well. This division is country’s second-largest exporter. Responsible for 12.75% of revenue and 4-5% of total profits.

6. ITC Infotech- This segment is into Cloud, Intelligent Automation, Digital Workplace and Cybersecurity responsible for the net profit of Rs. 541 crores as per FY-2022.

Revenue and Profit

Moment of truth

Till now everything looks like a fairy tale. Let’s face the moment of truth, the company’s 84% of profit still comes from cigarettes only.

1. The cigarette business is considered as not good business

2. This division does not follow the ESG norm means, a company is more lucrative investments if fulfills the norm. ESG = Sustainable Business.

3. Illegal cigarettes are hitting ITC hard. Illegal cigarettes alone lead to a loss of ₹15,000 crores.

4. The cigarette business is in consolidation.

ROCE of ITC was 45% in year 2015 which has come down to 31% in year 2019.(ROCE means return on investment)

Cigarettes contribute 84% of total profits of the company and this segment has started declining sales. Basically, the jumbo giant company is standing on one leg only that is cigarette and this leg has started paining. The company needs to shift the business asap to other segments. This might be the reason the share price was almost stagnant

Apart from the recent run, we have not seen any major run since 2017. According to my due diligence, the fundamentals have nothing to do with the last run because company is too big to and slow just like a PSU. The stock is good to have but I do not think it is future-proof investment.

Thank you for reading!