ITC: Will it continue to underperform​

From the Desk of DreamLadder: May 09, 2020

Lot of people ask this question – Why ITC has been underperforming despite trading at cheap valuation while valuations of other FMCG companies have gone through the roof.

 

Yes, they are right in their observations. Large FMCG companies like HUL & Nestle have given 18-20% CAGR return in last 5 years while Dabur/Marico have given 8-12% return during the same period. Now you want to compare how ITC has done? ….  It has given minus 6% return means you have lost 6% on annualized basis.

 

What about valuations? ITC might be expensive so saw the price correction…. In fact ITC has got de-rated from 27x TTM to 13x while its peer saw valuation moving up from 45x to 60x.

 

You might ask this question… Is it because they have done better in terms of earning growth? The answer is NO. ITC has delivered 9% PAT growth in last 5 years while others have delivered in the range of 8-12% during the same period (HUL: 12%, Nestle: 11%, Marico: 13%, Dabur: 8%)

 

Now obviously you will ask why this has happened? Often people say that ITC is a cigarette company and government doesn’t like cigarettes or you can blame inefficient capital allocation by the company for diversification done earlier.

 

The biggest reason for this has been the supply of stocks. Price of a stock is nothing but a function of demand and supply. So, supply of FIIs largely from ESG (Environmental, Social, and Governance) and government through SUUTI. During last 4 years, FIIs have continuously reduced the exposure (down from ~21% to <15%). Similarly, Govt has sold almost 3% and now owns 8% in ITC.

 

ESG motivated FIIs have sold at every rise in the stock price during last 4-5 years while Govt has also been using this to meet its weak finances. But why buyers have not lap it up knowing the cheap valuations. MF did buy this stock… in fact their stake has gone up by ~7% during the same period. The answer is no portfolio manager is willing to take chance against the FPI and SUUTI guerilla size holdings.

 

Now the bigger question is… How to play this? There has been media report that govt is planning to sell its 8% stake in ITC. I think if this materializes, overhang on the stock will disappear. If you are not perturbed by the notional loss on your holding, you can accumulate the stock or wait for this overhang to go before you want to take the plunge



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