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.
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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.

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