Why is ITC failing to keep up with emerging market trends?

ITC Ltd.’s Share Price often fluctuates between INR 190 and 200. With a century-old legacy, the company had started expanding its operations from cigarettes in the 1970s. Originated as the Imperial Tobacco Company, the company was primarily involved in the business of Cigarettes for over a century. As of today's date, over 80% of the market share of the tobacco industry is captured by ITC Ltd., and ITC brands like Gold Flake and Classic have attained an iconic status in spite of limited if not nil marketing and advertisement. 

However, the government does not promote the sale of cigarettes, and therefore this is labeled as a ‘sin product’. There are regulations on advertising the product openly or having an attractive package. Investors who look after the environmental, social, and governmental objectives, would be unlikely to invest in a stock that supports a business contrary to their ethics. 


ITC Ltd. is undoubtedly India’s one of the “bluest blue-chip stock”. The largest Cigarette Company in India has its price stuck with a pin even after having a diversified business headquartered in the City of Joy.

For the past 5 years, the average Compounded Annual Growth Rate has been -3.1%, which is even below that of Sensex. It has diversified into many different streams of businesses like luxury hotels, Paperboard, FMCG Products, etc. Most of these diversifications have worked, making ITC a household name for most of us. 

Further in this article, we are going to discuss the main factors because of which the Share Price of ITC Ltd. has been stagnant for all these years:

The great Uncertainty in the Cigarette Business:

The legal tobacco market in India is only 20% of the actual Tobacco consumption market. Getting 80% of this market share is also huge, but there are a number of limitations in each of the aspects of the business. 

ITC cannot advertise its cigarette business openly because of government regulations. There are limitations of distribution because of licensing requirements. 

The level of taxes has been on a constant rise. “When in need, the smokers have to pay” - this statement is being fully utilized by the government in its motion to increase taxes on tobacco products. The collection of taxes from such products have more than doubled in the past decade. Due to a constant increase in taxes, the consumers may prefer to switch to different kinds of tobacco consumption.

ITC has only employed 10% of its total Capital Employed in the Cigarette Business, which leads to a whopping 85% of all profits of the company, which is very beneficial for the company. 

Another issue has been noticed. There is a constant decline in the number of Smokers with every coming day. Moreover, due to the pandemic, and the fact that Covid-19 affects the lungs, many smokers have quit smoking in order for them to be safer from the disease.

This decline has been highly affecting the bottom-line growth of the company. As with a decrease in this segment, there is going to be a great decrease in revenue, leading to a great decrease in profits. 


Cash Consuming Luxury Hotels

The hotel business does not appeal to all demographics. It only appeals to the richer class of people. Being the second-largest hotel business with over 100 outlets, the business consumes around 24% of the total Capital Employed by the company. It is not very easy to estimate the contribution of this stream of business to the profits of the company, as the Luxury Hotels Business only contributes 1% of the total profits of ITC Ltd.

Hence we can conclude that the Hotels business is a highly Cash Consuming Business taking away the huge case reserves of around Rs.25,000 crores on which ITC Ltd. is sitting. 

This also causes the investors to be unsure about the actions which the company will take with that kind of pile of cash. Therefore, investors do not want to hold on to investments in ITC.

Agri, Paperboard, and FMCG areas

These are the expansions of ITC which have shown considerable success or potential for success at the company. The percentage of Capital consumed by each of the following are: FMCG consumes 27% of total capital consumed; the agribusiness consumer 12% of the total capital; and the Paperboard business consumes 25% of the total capital employed. 

On the other hand, if we compare the profit percentages: the FMCG Business contributes 2% of total profits in contrast to Agri-Business contributing 4% of the profits. Whereas, the Paperboard Business contributes 9% towards the profits of the company. 

These are the primary businesses that allowed ITC to become a household name in today’s date. 

The low Profits earned from high Revenue Generating business:

As it is evident from this graph, except for the Tobacco business, which provides for 44% of total revenue, but 85% of total profits, all other businesses have been consuming a lot of cash, and increasing the expenditure on the account. The highest expenditure incurring business is the FMCG business, which brings in 26% of the total revenue but brings in only 2% of the total profits of the company. 

Current Activities on the Market:

There have been a number of bulk stock buys on ITC in recent times. Mostly highlighted is the bulk buy of ITC stocks by Radhakrishan Damani. Due to such bulk buys, there has been little movement along with the stock prices in recent times. Given below is a 30 Day chart for ITC Ltd Share price.


The Bottomline:

The company has diversified and attained varying degrees of success in its different ventures. Nonetheless, the share prices have not shown equivalent success as the diversification has. 

Many analysts suggest that a demerger of the companies of ITC may bring about a change in the current scenario for the ITC share price. As we have seen that the tobacco business is highly profit-yielding, but the Hotel Business consumes all the cash. Similarly, the FMCG business incurs a lot of expenses, in contrast to the profit-generating Paperboard business.

Being a major stakeholder in multiple industries, any step undertaken by ITC as a conglomerate is bound to shake trees in the Indian market.


That’s all for this week! We hope you liked it and would love to know your thoughts in the comment section. This article is written and curated by Harsh Harlalka and Prapti Kedia.

(Harsh Harlalka is a 2nd year student pursuing B.Com(H) at St. Xavier’s College (Autonomous), Kolkata and a Junior Associate of the Xavier’s Finance Community.)

(Prapti Kedia is a 2nd year student pursuing BMS at St. Xavier’s College (Autonomous), Kolkata and a Junior Associate of the Xavier’s Finance Community.)


References:

  1. https://economictimes.indiatimes.com/markets/expert-view/why-itc-is-failing-to-keep-up-with-market/articleshow/84400460.cms?from=mdr

  2. https://blog.finology.in/investing/what-stops-ITC-stock-price-from-rising

  3. https://www.moneycontrol.com/india/stockpricequote/cigarettes/itc/ITC

  4. https://www.businesstoday.in/magazine/cover-story/story/payoff-time-for-itc-300660-2021-07-08