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Investment Experts Project Positive Turnaround For ITC Stock

ITC is emerging as a foods company (more comparable to Nestle than HUL): Branded packed food consistently gaining saliency given the management focus (saliency increased from 71% of other FMCG in FY14 to 81% in FY20)

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ITC’s FMCG segment is possibly one of the most under-appreciated businesses in the Indian consumer space in recent times as per JM Financial. We suspect the market may not have taken a holistic look yet; our understanding of Indian consumer categories tells us that ITC FMCG today addresses market opportunities that are c.INR 2.1tn (USD 28bn) in size in aggregate. Even if one excludes a couple of nascent Dairy products from the portfolio, the addressable opportunity for ITC is still USD 22bn - larger than even HUL’s ‘size of markets’ and more than 3x that of Nestle India’s. Profitability is low at present, but we reckon that with investment-phase largely done (though some new categories are still in incubation stages), profits and cash-generation would get much bigger here onwards (margin expanded c.300bps over past two years).ITC in FY30 could clock an FMCG EBITDA that is higher than the combined FY20 EBITDA of Nestle India, Britannia, Tata Consumer.If that be the case, using current market cap of these companies as benchmark for ITC FMCG’s FY30-based valuation (discounted to present value), FMCG alone would justify half of ITC’s present market value. Seen another way, this implies that cigarettes business (85% of profits) is currently valued at just 4-5x PE.

We estimate the aggregate size of the addressable markets for ITC’s FMCG segment to be INR 2.1tn in size – bigger than HUL’s INR 1.4tn, >3x larger vs Nestle’s: ITC has created a large FMCG business from scratch starting early-2000s. From zero-base, the segment has since scaled to INR129bn in FY20 with the business having grown at CAGR of 14-15% in the last ten years. Almost all of it is organic with acquisitions being very few and small in overall size. The company entered various different categories at different points of time - this wide spectrum of categories required it to invest ahead of time, given that its sight was set on creating a business that will be huge in scale in times to come – one that would help offset possible slackness in the pace of growth of the cigarettes business (the company deserves credit for having foreseen this possibility in the early-2000s itself). The business has since created 25 mother-brands across different consumer categories that together command annual consumer spends of c.INR200bn (USD 2.7bn) –ITC holds a no.1 or no.2 position in some of the important sub-segments in its operating categories, but there are also many in which it is yet to build sizeable presence. The company has also exited a few categories along the way – ones where it felt unit-economics would not be in favour. From a size-of-opportunity perspective, ITC now operates in segments that total up to INR2.1tn in size in terms of consumer spends – c.80% of these are in Packaged Foods space where it has demonstrated a right-to-win by introducing differentiated products in an otherwise crowded category. Biscuits, instant noodles, salty snacks are not easy categories but ITC has been able to carve a position for itself - leadership position in cream biscuits, no. 2 in noodles, leadership in bridges segment plus overall leadership in South India in potato chips in the salty snacks space.

Dividend yield of c.6%, core cigarettes business trading at single-digit PER (FY22) – valuations cannot get more compelling than this: As we outlined above, it is quite likely that ITC’s FMCG EBITDA in FY30E would be greater than the combined EBITDA that Nestle India, Britannia, Tata Consumer (three of the largest listed Foods businesses in India) presently clock in aggregate. These three companies’ market caps (ex-cash) total to INR2.7tn at current market prices. Taking the same valuation for ITC in FY30 (discounted back to present value) when its FMCG EBITDA is likely to be higher than what these three companies earn today on a combined basis, we believe ITC’s FMCG segment alone could account for nearly half of its current market value. Cash on books of INR360bn accounts for another 18% of the current market cap. Net of these and the book value of other segments, the residual value for cigarettes would be just about INR514bn for a business that generates an annual post-tax profit of c.INR110-120bn – that’s a forward PER of just 4-5x.On the other hand, if the FMCG segment is valued more ‘traditionally’ (4x FY22 sales vs sector average of 7-8x sales), then the implied valuation of the cigarettes business still works out to 7-8x FY22– lower vs most global tobacco stocks barring Imperial.

As per Centrum

  • In our deep dive analysis into ITC’s foods business we conclude that it is at the cusp of a take-off both in terms of top-line and margins. We expect the other FMCG revenue/EBITDA CAGR of 11.7%/34.0% over FY20-23E with EBITDA growing by over 70% to12.3% by FY23E and stock price to deliver 93% from CMP (Rs.182) in a 2yr holding period.
  • ITC is emerging as a foods company (more comparable to Nestle than HUL): Branded packed food consistently gaining saliency given the management focus (saliency increased from 71% of other FMCG in FY14 to 81% in FY20)
  • It is the only company which has successful brands from staples (Aashirvaad) to RTC and RTE (Sunfeast, bingo, Yippee etc.): ITC has made consistent investments in brand building over the past decade helping create brands across the branded packed food categories from staples a and dairy to RTC and RTE. Aashirvaad/ Sunfeast/ Bingo/ Yippee now account for Rs.60bn/40bn/27bn/13bn in consumer spend terms.
  • Going ahead foods division will drive both its top-line and bottom-line: Food business has enough arrows in its quiver ranging from industry growth, brand mat