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Why is ITC Ltd Stock Falling?

Updated: ITC Ltd Q1 FY21 Results Analysis

Introduction

Why is ITC Ltd stock falling? COVID pandemic and the subsequent lockdown April-May 2020 dented the performance of ITC Ltd in Q1 FY21. Net Profit declined by 26.2% YoY to Rs.2,343 Cr in June-quarter due to the dampened sales across Cigarette, Hotels and Papers and Packaging business verticals. Lets discuss the Q1 FY21 results analysis of ITC in detail.

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ITC Ltd Stock Analysis

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
Business Verticals of ITC Ltd

ITC Ltd Q1 FY21 Results Analysis

Lets see the Q1 FY21 Financial Highlights of ITC Ltd.

ITC Ltd Q1 FY21 Results Analysis
  • Revenue from operations during the quarter fell 17.4% year-on-year to Rs.9,502 Cr in Q1 FY21 from Rs.11,503 Cr last year due to nationwide lockdown for almost 45-days in April and May 2020. 
    • Big boost for Personal Care Segment amid current COVID outbreak was a silver lining.
    • During the lockdown period, ITC launched two products under the Savlon brand – advanced hand sanitizer Savlon Hexa and surface disinfectant spray.
  • Operating Expenses in Q1 FY21 decreased by 1.2% YoY to Rs.6,855 Cr from Rs.6,937 Cr in Q1 FY20. The % fall in operating expenses is lower as compared to the Revenue fall.
    • It has directly impacted the Operating profit (EBITDA) and EBITDA Margins of the company.
    • The EBITDA fall is very high compared to the Revenue fall. Because, the Operating Expenses remained almost same due to the higher fixed cost incurring.
  • Operating profit (EBITDA) ITC decreased by almost 42% YoY in Q1 FY21. The sequential fall is also higher 36.4% as compared with Q4 FY20.
    • EBITDA margins have also taken a bit hit and contracted by 12.1% YoY and 8.6% QoQ with the fall in EBITDA.
  • Profit before Tax (PBT) also declined by 35% YoY and 30.7% QoQ in Q1 FY21. Since, the company is virtually debt-free, there is no interest payment cost incurred.
Net Profit (PAT)
  • In line with the decline in Revenue, Operating Profit and PBT, the Net Profit of ITC also declined by almost 26.2% YoY to Rs.2,343 Cr from Rs.3,174 Cr in Q1 FY20.
  • The QoQ fall in Net Profit is almost 38.3% from Rs.3,797 Cr in Q4 FY20. But, here we should take into account the Tax Rates also. In Q4 FY20, tax rate was 16% due to higher tax paid in Q1 FY20 and Q2 FY20.
  • Whereas, for Q1 FY20, the tax rate was 25% as per the new corporate tax rates announced by FM Nirmala Sitharaman.
  • The corporate tax rate cut is the positive thing in FY20 for ITC Ltd also. Last year, ITC Ltd paid taxes at the rate 34% in Q1 FY21. While after the corporate tax rate cut, the effective taxation for ITC has come down to 16% in Q4 FY20 and at 25% in Q1 FY21.
  • This move was very encouraging for the shareholders, since the tax rate cut directly resulted into the improved profitability of the company.

Business Verticals of ITC LtdRevenue & EBIT Mix

ITC Ltd – Segment-wise Revenue & EBIT Growth
  • All the segments except FMCG and Agri Business reported negative sales growth in Q1 FY21 due to the sales affected by the lockdown in April-May 2020.
  • Also, only FMCG business was able to report positive EBIT (Earnings Before Interest and Taxes) growth of 60% due to the improved margins, strong demand for packaged food products and products across personal care segments amid COVID scenario. Example, Savlon – Hand wash and Surface Disinfectants.
  • Recovery in cigarette and FMCG in May and June is encouraging. FMCG, paperboards and packaging are now operating at 80-85% of normal levels.
  • The company has not witnessed downtrading trend or any meaningful drop-outs of cigarette consumers due to lockdown.
  • Packaged food enjoyed pantry loading benefits and part of personal care also recovered. The company has good portfolio to capitalise on health and hygiene trend.
Business Verticals of ITC LtdRevenue & EBIT Mix
  1. Cigarettes
    • This is major contributor in the business of ITC Ltd. The company earns majority of their revenue form this business vertical.
    • Their contribution to the revenues came down to 32.1% (from 42% as on Q4 FY20) mainly due to subdued sales of Cigarette verticals amid COVID pandemic. However, this business vertical’s contribution to EBIT is a staggering 91%. This is very interesting to analyse.
    • This is 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.
  2. FMCG – Others
    • Cigarettes also are a part of FMCG but we have to present their numbers separately to get a clear understanding of their business.
    • FMCG – Others business verticals contribution to revenue is pretty healthy, but it contributes very marginally to EBIT numbers. Here, too the company is trying very hard to grow.
  3. Hotels
    • The company also has many ITS hotels in domestic as well as international locations. This business vertical hardly contributes to the company’s EBIT.
  4. Agri Business
    • The company is also involved in agricultural business. Though the revenue contribution is decent, EBIT contribution still disappoints.
  5. Paperboard, Papers & Packaging
    • This business vertical of the company is performing comparatively better than the other business verticals (excluding cigarettes).

Cigarettes Business of ITC Ltd

  • The Cigarette business has been a consistent revenue generator for ITC and it will remain the same in coming times as well.
  • The total consumers of all these tobacco products in India are 27 crore+. Out of these, 10 crore consumers are of cigarette and beedi. And out of these, 80% of the consumers are the users of beedi and the rest 20% use cigarettes. Beedi is an unorganized kind off market. This mean that, there is a lot of opportunity for the company to grow more in their cigarettes business.
  • ITC Ltd has a market share of more than 80%.

ESG Parameters for ITC

ITC Ltd - Analyzing on ESG Parameter
ITC Ltd – Analyzing on ESG Parameters

The ESG (ie. Environmental, Social and Governance) parameter for ITC Ltd is shown above.

Institutional Investors
  • Nowadays, the institutional investors give a lot of importance to ESG parameters. ESG stands for Environment, Social and Governance.
  • If there is any environment affecting activity/product of the company then that company is marked negatively. In the case of ITC, cigarettes are the reason.
  • In terms of social as well, cigarette smoking impacts other people as well.
  • From governance side, there is no problem. ITC is a very well-managed company.

ITC Ltd – Quantitative Analysis

  • Lets see the key performance parameters of ITC :
    1. Return on Capital Employed (ROCE) = 34.62%
      • Strong ROCE number gives the an idea about how efficiently ITC is generating profits from its capital employed across its diversified business segments.
    2. Return on Equity (ROE) = 22.69%
    3. Debt to Equity Ratio (D/E) = 0.00
      • The Company is virtually debt free. Amidst the current lockdown 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.
    4. Dividend Yield = 5.20%
      • Stock is providing a good dividend yield of 5.20%. The company has declared dividend of Rs.10.15 per ordinary share for FY20.
      • Also, the company has been maintaining a healthy dividend payout of 55.94%.
    5. 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 3.87% for ITC Ltd
      • A heavy weightage of ITC stock in India’s Key Indices infuse a great flows of passive funds. It would benefit ITC to build a huge valuation in the long-term.
ITC Ltd – Valuation
  • The current Price to Earnings Ratio (PE) of ITC Ltd is around 16.85. Whereas, the historical Median PE Ratio is 30.
  • It shows the stock is currently Trading at a very Good Discount to its Historical Valuation.
  • The current PE ratio is at discount to even 2008 Financial crisis, where the PE ratio of ITC was around 19-20.
  • Thus, we can say that there is very limited downside risk.
  • The current economic conditions due to COVID-19 lockdown, would have an adverse impact on ITC’s earnings for a quarter or two. However, the company would be able to sustain the earnings growth in the long run backed by improvement in cigarettes as well as FMCG segments.

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 moat 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 less than half ie. 32.1% as on June-2020. while, Other segments in FMCG like food, apparel, consumer goods and stationary witnessed a phenomenal 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.
A Journey Towards a Market Leader across all Business Verticals
  • ITC has been achieving a leadership in all the business ventures it had explored in India.
    • It has occupied a front runner position in the tobacco and paper business of the country. The multinational conglomerate also sells about 81% cigarettes and bidi in the entire Asia.
    • Its hotel chain business has occupied a significant position among the top three players.
    • In the FMCG sector, ITC share price has been capturing the market in high clutter categories like noodles, biscuits, salty snacks and personal care products.
    • In the upcoming years, ITC has also planned to amplify its Dairy Products on a large scale.

Summary

  • It can be clearly understood that the
    cigarettes business has the lion’s share in the business of ITC Ltd.
  • The EBIT 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.

Notes: –

  • Information related to cigarettes has just been presented for investors’ knowledge. We don’t promote any smoking or tobacco consumption products.
  • The numbers that are used are approximate and have been rounded for presentation purposes.
  • We are not in any way saying that this is a bad company or that the stock of this company is bad.
  • We are also not suggesting anyone to immediately go and buy this stock or invest in the stock markets.
  • Only an analysis has been presented here. No judgments or final statements are being made here.

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