ITC: Key Business Highlights

ITC is a market leader in organized cigarettes industry in India. ITC stands at 79% market share in cigarettes segment in volume terms. Secondly, Godfrey Phillips India Ltd secures 11% share & VST Industries Ltd at 8%.

Over last 10 years the revenue contribution from other FMCG business increased from 12% to 22%. FMCG Brands of ITC have created significant market place with quality preference as well as popularity. Even though there were large brands already securing consumer preference. But ITC brands secured vast market holding.

(A) Change in ITC revenue contribution from segments in last 10 years

ITC research on change in revenue contribution in last 10 years
ITC research on change in profit contribution of segments in 10 years

(B) Business Segments Growth

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ITC research segments growth in cigarettes & FMCG

(i) Cigarettes

ITC cigarettes brands include Insignia, India Kings, Classic, Gold Flake, American Club, Navy Cut, Players, Scissors, Capstan, Berkeley, Bristol, Flake, Silk Cut, Duke & Royal.

Cigarettes Industry: After 4 consecutive years of decline, Indian cigarette industry reported an increase of 1.5% in 2018.

Cigarette taxes in India ranks among the highest in the world. Therefore, high tax rates make cigarettes unaffordable to a large section of consumers & in turn the overall tobacco market experiences slow growth. The cigarette industry in India declined from 100.9 billion sticks in 2013 to 82.5 billion in 2018. During the same period, retail sales value has increased from Rs. 568 billion to Rs. 831 billion.

Moreover, share of legal cigarettes declined considerably from 21% in 1981-82 to mere 9% by 2019. Furthermore, 13% increase in cigarette taxes with effect from 1st February 2020 will provide further fillip to the large & rapidly growing illicit cigarette trade in the country. Due to this change, there will be increase in cigarettes pricing.

There is volumes drop in last 3 years. But ITC achieved margin expansion.

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ITC research on growth in segment margins in last 10 years.

(ii) FMCG Others

ITC research report with details of growth of FMCG margin growth
  • Despite the intense competitive environment, ITC brands created a significant market positioning.
  • Moreover, ITC brands represent annual consumer spend of Rs 18,000 crore in aggregate.
  • ‘Bingo!’ snacks, ‘Aashirvaad’ atta, ‘YiPPee!’ noodles and ‘Dark Fantasy Choco Fills’ super-premium cream biscuits were the key drivers of growth in the Branded Packaged Foods Businesses.
  • On the other hand, ‘Engage’ deodorants, ‘Vivel’/‘Fiama’ shower gels & bodywash and ‘Savlon’ handwash reported robust growth in the Personal Care Products Business.
ITC research report with details of FMCG brands under distinct categories

FMCG Revenue for FY20 amounted to Rs. 12,875 crore, segregated in following brands:

ITC research report with details of FMCG brands revenue breakup

In terms of consumer spend, size of ITC major brands:

ITC research report with details of size of ITC brands interms of consumer spend

Overall estimated Revenue of FMCG Industry is Rs. 5.83 lakh crore.

Responsive to New Trends:

  • ITC finds product expansion opportunity in the noteworthy consumer trends including emergence of health & wellness products.
  • Secondly, increasing preference for products rooted to ‘Indianness’ & with regional/cultural connects.
  • Growth in demand for ‘on-the-go’ consumption formats in low-unit packs.
  • Also, influence of social media & digitalisation on consumer preference & consumer behaviour.
  • Moreover, ITC Life Sciences and Technology Centre is now working on various dimensions of health that will enable ITC to roll out products that help improve cognition, immunity, manage cholesterol, retention of calcium, among others.
  • So, a pipeline of products on the health vector is currently a work in progress.
  • In addition, ITC has a steep target to meet. By 2030, the aim is to realise Rs 1,00,000 crore (US$ 14.30 billion) of revenues from the branded consumer goods. Therefore, roughly a 16-17% year-on-year growth.

In addition, ITC recently in May 2020 acquired Sunrise Foods Private Ltd, which is  market leader in eastern India in the spices category with a legacy of over 70 years.

In following months of FY21, demand in the Education & Stationery products may continue to be subdued, pending resumption of the educational institutes. Strong momentum is witnessed in essential consumer goods.

(iii) Hotels

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ITC research report with details of ITC hotels business revenue growth
ITC research report with details of ITC hotels business margin growth

Portfolio of Hotels include:

  • 30 Five-Star Deluxe/Five-Star Properties with nearly 6200 rooms.
  • 45 Fortune Hotels with nearly 3300 rooms
  • 35 Welcom Heritage Properties with nearly 900 rooms

In total ITC includes 110 properties over 70 locations. ITC Hotels work on Asset light strategy, managed properties account for 50% of ITC hotel group. The Brand names under ITC include ITC Hotels (Luxury), Welcomhotels (Upper-Upscale), Fortune (mid market to up-scale segment), WelcomHeritage (Leisure & Heritage).

Also famous culinary brand names ‘Bukhara’, ‘Dum Pukht’, ‘Royal Vega’, ‘Dakshin’, ‘Avartana’, ‘Kebabs & Kurries’, ‘Ottimo’, ‘EDO’, ‘Pan Asian’ and ‘West View’.

The hotels Business severely impacted because of outbreak of COVID-19 pandemic towards the end of FY20.

(iv) Paperboards, Paper & Packaging

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ITC research report with details of ITC paper packaging business revenue growth
ITC research report with details of ITC paper packaging business margin growth

Paperboards & Specialty Papers: Value-Added Paperboards (VAP) for FMCG, Pharma, Publishing and Food & Beverages industries. The Business sustained its leadership position in the sale of eco-labelled products, volumes of which grew by appx. 33% in FY19.

Packaging & Printing: The Business caters to the packaging requirements of leading players across several industry segments viz. Food & Beverage, Personal Care, Home care, Footwear, Consumer Electronics, Pharma, Liquor and Tobacco. New product development focuses on antifungal coated cartons, micro-perforation for specific laminates, braille feature for labels and cold seal laminates for chocolates. Thus, this segment services well the in-house requirements of cigarettes & FMCG segments of ITC.

(v) Agri Business

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ITC research report with details of ITC Agri business revenue growth
ITC research report with details of ITC agri business margin growth

Leaf Tobacco: Provides strategic sourcing support to Company’s Cigarettes Business meeting all requirements at competitive prices.

Other Agri Commodities: Value added segment with brand names for products including Ready to eat, frozen foods, fruits & vegetables :

  • ITC Master Chef
  • Farmland

The agri business provides inputs to the Food & Beverages Business. Strong revenue growth during FY20 driven by trading opportunities in oilseeds & pulses as well as scale-up of the value-added portfolio, especially spices, frozen shrimps & frozen snacks.

Subdued demand for leaf tobacco in international markets, relatively steeper depreciation in currencies of competing origins & adverse business mix weighed on Segment Results.

(C) Free Cash Flow

ITC research report with details of growth of Free Cash Flow

Free cash flow of ITC grew at 30% for FY20. Thus, Consistent growth of free cash flow along with Sales & Profit expansion denotes strong position of the company.

(D) Enterprise Value

As on 15 July 2020:

  • Market Cap of ITC is Rs. 2,43,263 crore. Enterprise Value (Market Cap+Debt-Cash & Bank) amounts to Rs. 2,35,993 crore.
  • Cash & Investments amount to Rs. 36,326 crore as on 31 March 2020.
  • EV/EBITDA = 10.80
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References:  Annual Reports, News Publications, Investor Presentations, Corporate Announcements, Management Discussions, Analyst Meets & Management Interviews, Industry’s Publications. 

Disclaimer: The report only represents personal opinions and views of the author. No part of the report should be considered as recommendation for buying/selling any stock. Thus, the report & references mentioned are only for the information of the readers about the industry stated.

Author: PA Wealth Advisors

Financial Advisors, Investment Advisory Services, Portfolio Management, Mutual Funds Official Website : www.pawealthadvisors.com

3 thoughts

  1. If we would have looked at ITC from only FMCG sector it would have stood no chance in front of the competition but, as a whole with their tobacco business which is a cash cow ITC has a huge advantage.

    And now as they have started to improve margins in FMCG sector it feels like King(tabacco business) has prepared his prince(FMCG) for the battle ahead.

    If you are interested you see my article which I recently wrote on ITC and it was appreciated by famous ITC shareholder and investor, D.Muthukrishnan.

    Here is the link for it: https://arjunbadola.com/itc-itd-gold-flake-a-godfather-for-their-fmcg-segment/

    It great following your blog cheers!

  2. Probably ITC does not leave business margin for the retailers ,so small retailers stack Britannia in biscuit segment , ITC must be price competitive for retailers ,should go for products for common people also just as yepee noodles has become popular now . Redtapeism if any should be abolished , transparency in official matters and corruption if any should be looked into .If possible sectorwise office should be opened in other parts of the country .

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