ITC - an investors dilemma.

ITC is a fascinating stock...near 5 year lows...looks very alluring.

Let's start with the obvious risks:

  • ESG.
  • Taxes on Tobacco.
  • Diworsified with poor capital allocation,declining roce.
  • May take a few years for FMCG to become a critical size of profits.
  • Illegal Cigarettes which are a growing problem.
  • SUTTI stake overhang.
  • Vaping can disrupt smoking.
  • If Marijuana becomes legal,many smokers may switch.

The Borderline:

  • Average growth expected in tobacco revenues. 
  • No promoter.
  • Huge cash pile but management has not been able to deploy it effectively.
  • Index stock so ETF's will continue to pour in.

The Good:

  • Corporate tax cut beneficiary.
  • Possibility of value unlocking via demerger.
  • ITC choupal-google for more info.
  • Complete Domination:ITC sells 4 out of 5 cigarettes in the country.
  • Cigarettes form only 11% of Tobacco consumption and are better than beedi,gutka etc and as affluence goes up value can migrate to cigarettes.
  • Cash Machine.
  • Good dividend payout(could be better)>60% of profits.

Ultimately everything has a price...consider this:

Base Case:

If the company grows PAT at just 6-7% it can deliver earnings of about Rs25 in a decade(FY30).

       At 15 times...370 per share
                   20 times...500 per share
                   25 times...625 per share

Cumulative Dividends will be about 100 per share.

Bull Case:

If its FMCG segment dominates multiple can become 25 times to even 40-45 times.
In that case earnings per share can grow faster at 9-10% per annum,EPS can become about 30 in a decade’s time.

                 At 35 times...1050 per share
                   50 times...1500 per share

Cumulative Dividends will be about 120 per share.

Bear Case:

Company trades at a single digit multiple.
Earning growth of only 2-3% CAGR means FY30 EPS will be about 16-17 per share.
Cumulative Dividends will be about 65 per share.
It could destroy value and price could be about 120 per share at 7 times earnings.

Even in this case I am assuming that there is no complete ban on tobacco which could be the worst case but let's not go there,not yet.
--------
Update(March 18,2020):The company has revised their dividend payout to 80-85% of PAT.



Disclaimer:Please do your own due diligence before investing,no one can predict the future.

Comments

Post a Comment

Popular posts from this blog

IDFC Ltd. : it melts like an icecube?

Image
IDFC Ltd(CMP: Rs. 14.15 and market cap of about Rs. 2260 Crores) is looking interesting now after the fall. IDFC Ltd. is holding 40% in IDFC First Bank and 100% in IDFC AMC. Apart from this, a dividend payout of Rs 640 Cr. is also due after the selling of other assets,this is more than a quarter of the market cap. First let's look at the AMC part: The AMC alone would easily be worth much more than the current market cap. As of end of FY20,the AUM stood at Rs. 1,03,912 Crores which is almost up 50% from Rs. 69,352 Crores. Market share of the AMC has improved to 3.85% from 2.84% a year ago. Now let's take a look at the bank: The 40% holding in the bank can be reduced to 15% after October 2020. The current market capitalization of the bank has fallen below Rs. 10000 Crores,down more than 64% in the last one year. With this price decline and worsening of the asset quality and now with the macro challenges,it will become very difficult
Read more

Equity or Real Estate in India

It's been some time, so I decided to write a small blog post after this question came up during a discussion with a friend.   Is Equity better than real estate in India, or is real estate the best? This has always been a contentious argument where people tend to side with one or the other. I am biased in favor of the Equity markets.    Real estate in India is now quite mature, and unlike the earlier times when 'land' was selling at throwaway prices and some made multi-fold returns, However, even in some of those cases, the calculated CAGR would be 15-20% over a 20-30 year period which is terrific but quite comparable to the equity market indices. Fundamentally, land prices cannot have a return that is superior to businesses. If that were to happen, why would one actually want to set up any factory or farm as they would be better off profiting from owning the land itself? So what works for markets: 1.One can start with very little capital and work from home or literally fro
Read more