ITC Fundamental Analysis

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 is 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
• ITC is a company which is engaged in
diversified businesses, company started an a
cigarettes manufacturer, but has successfully
diversified in other businesses as well, such as
FMCG, Hotels, Clothing and fashion,
Agriculture, packaged and processed foods,
stationery etc.
 PRODUCTS
• Cigarettes:
• 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. Cigarettes business forms major source of revenue
and profits for the company, it forms 40% of the company’s net
sales and 60% of profits for the company.
• Company has a strong distribution channel and rural penetration
across the country. This strong supply chain is being tapped by the
company in distribution of its products in the FMCG and personal care
segment, providing ITC a better penetration in rural market.
• The cigarettes business of the company is burdened by high
taxation which is the reason why company is now focusing on
FMCG and processed food business in order to mitigate its
business risk. In the future, company plans to expands the FMCG
products portfolio and become the market leader in FMCG and
food segment.
 Non cigarette FMCG, Personal Care and Hygiene:
• ITC is also engaged in FMCG, Personal care and Hygiene business. In the
non-cigarette FMCG segment, company’s portfolio is dominated foods and
confectionery items. Company has a wide variety of food brands such
as Sunfeast, which is a confectionery and processed foods brand,under
which company has launched many products such as Yippee! Which is
an instant noodle brand, Mom’s magic, a biscuits brand, Dark
Fantasy, which is a premium dark chocolate brand, Bounce, which
is a cream biscuit brand. Company also owns many toffee brands such
as Mint-O,which is a mint flavoured toffee, GumOn, which is a chewing
gum brand and Candyman.
• One of the most successful brands of ITC in food category
is Aashirwad, under which, company sells wheat flour, spices, ready to eat
meals and instant mix. Aashirwad has 26% market share in the wheat flour
segment.
• Company sells and distributes various personal care products under brand
names such as Fiama Di Wills which is a personal care brand, Essenza Di
Wills, Vivel, and Superia which is a soap brand.
• ITC has recently acquired two well known
brands Shower to Shower which is a leading brand
of prickly heat powders and Savlon which is a niche
brand in the antiseptic segment, these acquisitions
will help company enter the healthcare product
niche in India. ITC has recently crossed 10,000 crore
revenue milestone in the FMCG business.
• Apparel Business:
Currently, ITC’s apparel business has only 4% market
share, but company is planning to grow the sales at
20% per year. Company is also using E-commerce
route for sales and is selling its brands through online
fashion E-commerce websites such as Myntra,
Jabong etc.
• Stationery and Paperboards:
ITC is also in the stationery business under two brand
names, Paperkraft, which is a premium stationery brand
and Classmate, which is a popular brand catering school and college
stationery. Under Classmate, company makes a range of stationery
products such as notebooks, pens, etc.Company is the market leader in
the sationey segment and has 20% market share in organized stationery
segment.
• Agriculture:
ITC’s agri business is India’s second largest exporter of agri
commodities. ITC currently focuses on export of agri products in various
categories such as Wheat, wheat flour, barley, pulses, maize, soyabean. In
marine products, company exports fish and prawns which has been very
profitable for the company.Company aims to generate 18,000 crore
revenue by 2020 from Agri business.
• Hotels:
ITC Hotels is the second largest hotel chain with over 100 hotels across the
country.
Revenue Segements
Concluding the business analysis of
ITC, it can be said that company is well
diversified in various sectors, and is
performing well in all of them. What
makes ITC a reliable investment is it’s
clearly chalked out future plans, and
well defined deadlines for their future.
When businesses give such clear
expansion plans with pinpointed
revenue targets for the future, one
must rest assured that company has a
well thought out strategy to reach that
goal.
Analyzing past performance is
important because it gives you an idea
of what company has achieved in the
past and how will the company look
like in the next few years. Having
understood the business segments in
detail, let’s move forward and analyze
fundamentals of the company.
Basic EPS:

Basic EPS is a measure of how much

profit a company is making on per
share basis. In other words, it’s a
measure of how much money each
share of the company will receive if all
the profits earned during the year is
distributed to its shareholders.
•In the past 5 years, ITC’s Basic EPS has
seen a growth of 9.1% CAGR, while is
2012, the EPS was Rs. 7.93 per share,
in the years 2016, company’s EPS was
Rs. 12.16 per share.
Cash EPS:
Cash EPS is a measure that looks at
how much cash flow the company has
generated during the financial year.
Cash EPS shows how much cash the
business is generating in a year. Cash
EPS not only includes Cash received by
the business for the products sold or
services provided, it also includes any
upfront payments, such as cash
advance received by the business.
ITC’s Cash EPS has seen a growth of
9.7% CAGR, while in 2012, company’s
Cash EPS was Rs. 8.52 per share, in
2016 its Cash EPS was Rs. 13.52 per
share.
Revenue from operations/Share:
Revenue from operations is a measure
of how much revenue a company is
generating from its core business.
Revenue from operations does not
include income from non operating
activities such as sales of assets, sale
of subsidiaries, income from
investments made etc. Revenue from
operations/share measures how much
revenue a company is generating from
its core business on per share basis.
Company’s Revenue from
operation/Share has seen a growth of
7.3% CAGR in the past 5 years. In 2012,
company’s Revenue from
operations/Share was Rs. 32.2 per
share, in 2016, it was Rs. 45.78 per
share.
Net Profit Margin:
Net Profit margin is the key ratio which
is used to compare profitability of two
or more companies working in the
same sector. Net profit margin is a
measure of how much percentage of
total sales remains with the company
as profit after all the expenses are
paid.
ITC has pretty healthy and stable profit
margin for the past 5 years. In 2012,
company’s Net profit margin was
24.47% while in 2016 it was 26.72%
ROCE:
ROCE or Return on Capital Employed,
is a measure of how efficiently the
capital of a company is being used to
generate profit. ROCE is expressed in
percentage terms. A company with
ROCE of 20% means out of every 100
rupees employed as capital, company
is able to make a return of rupees 20.
ROCE of ITC has been pretty stable in
the past 5 years. In 2012, company’s
ROCE was 31.02% and in 2016 it was
28.18%. Company’s ROCE has seen a
slight drop recently, as it has been
acquiring brands like Shower to
Shower and Savlon using internal
resources in funding the acquisition.
Debt/Equity:
Debt to equity ratio tells us how much
of the total financing of the company
comes from creditors (those who lend
money at an interest) and investors
(those who invest in the shares of a
company). Higher debt to equity ratios
is an indication that majority of
company is financed by loans and
other debt (such as debentures and
bonds).
ITC has been a zero debt company,
which means company is either
financed by its internal sources or by
shareholders. A zero debt company is a
good investment as it does not have to
pay any interest and can keep all its
profits, or can distribute to its
shareholders as dividend.
Dividend percentage to Net profit:
The dividend payout ratio measures
the percentage of net income that is
distributed to shareholders in the form
of dividends during the year. In other
words, this ratio shows the portion of
profits the company decides to keep to
fund operations and the portion of
profits that is given to its shareholders.
Company’s dividend percentage to net
profit has increased in the past 5
years. In 2012, company’s Dividend
percentage was 57.09% while in 2016
it was 69.48%. This means, company is
sharing larger portion of its net profit
as dividends with its shareholders.
Dividend/Share:
Dividend per share is the amount of
dividends a shareholder receives on
per share basis. Dividend per share
includes all the interim dividends paid
during the financial year as well as the
final dividend paid at the end of the
financial year. Dividend per share is
calculated by dividing total dividends
paid during the year from total
number of shares outstanding.
ITC’s dividend per share has seen a
steady increase in the past 5 years. In
2012 company’s dividend per share
was Rs. 4.5 per share while in 2016 it
was Rs. 8.5 per share. The dividend per
share has doubled in the past 5 years.
 Future Expansion plans:
• Food and Beverage segment:
Company is planning to expand its processed foods business by setting up 8 new food
processing plants by 2019, which requires capital expenditure of Rs. 4,000
crores. Company Chairman Y C Deveshwar has set the target of making ITC
the biggest player in the FMCG segment by year 2030 targeting revenue of Rs.
100,000 crore from the FMCG business.
• Company is also expanding its fruit juice business under brand name B Natural, which
it acquired in 2014 from a bangalore based company. Currently, B Natural brand holds
7% market share in the juice segment, which the company plans to expand to 11%.
• Healthcare (New business for the company):
One of the biggest expansion plans of the company is that ITC is planning to enter multi-
specialty hospital segment, which will tap into opportunity offered by expanding
medical tourism segment. Company will compete with major players of the healthcare
segment such as Apollo Hospital, Fortis Healthcare, Max healthcare.
• Company aims to provide a complete portfolio of healthcare solution through its
business such as multi-speciality hospital, such as medical healthcare centers, mobile
healthcare centers, nursing homes, diagnostic centers, dispensaries, pharmacies, clinics,
laboratories and drug and medical accessory stores. It will also include nutrition and
dietetic counselling centres, medical college, nursing college, medical research center
and training facilities.
What makes ITC a good investment:
• Here are some fundamentals that make ITC a good investment for long
term.
• Company is more than 100 year old, started business by making and
selling cigarettes.
• Company has been consistently performing well for the past many years.
• Company has High ROCE and zero debt, and strong free cash flows.
• Company is market leader in cigarette industry with 80% market
share. Major part of company’s revenue comes from cigarettes business.
• Company diversified in FMCG and foods segment, with a wide variety of
products to offer company has recently crossed 10,000 crore revenue
milestone and targets 100,000 crore revenue from FMCG segment by
2030.
• Company has also acquired two big brands from Johnson and Johnson
that is Savlon and Shower To Shower, by which company wishes to
expand in healthcare and hygiene niche.
• Company owns largest chain of Hotels in India, and aims to
become market leader in the segment.
• Company is expanding its business to multi speciality hospitals, taking
advantage of medical tourism and affordable health care provided by
country.