Fundamental Analysis of ITC – Future Plans, Financials & More

Fundamental Analysis of ITC: From being mocked as a meme stock to impressive returns, ITC has seen everything. As of the writing of this article, its 1-year return stood at close to 70%. However, now with the tobacco giant hitting 450 levels, does it make sense to buy it?

Can investors expect similar returns in the future? We’ll attempt to answer these questions and others by performing a fundamental analysis of ITC in this article.

Fundamental Analysis of ITC

We’ll begin our analysis by getting ourselves acquainted with the various businesses of ITC. Yes, it is much more than a cigarette company. Next, we’ll look at the tobacco sector landscape. After this, we’ll quickly move through the financials of the stock. A highlight of the future plans of the company and a summary conclude the article at the end.

Company Overview

ITC was established 112 years ago as the Imperial Tobacco Company of India in 1910. Over the years, it grew into the nation’s largest tobacco company with multiple business interests.

Though the company markets itself as an FMCG player, it is a tobacco company in the true sense. Furthermore, it is a monopoly stock as it controls almost 78% market share of the Indian tobacco industry.

What’s more? As a feather in its cap, ITC is the sixth largest publicly listed enterprise in India with a market capitalization of over Rs 5,43,000 crore. It is a diversified company with a presence in FMCG, agribusiness, paperboards & packaging, hotels, and technology industries with brand leadership in various segments.

It manufactures and markets cigarettes, branded flour, cereals & spices, biscuits, packaged snacks, incense sticks, notebooks, noodles, shampoo, soaps, frozen foods, perfumes, fruit juices and more.

ITC houses some of the most famous Indian brands including India Kings, Gold Flake, Capstan, Aashirvaad, Sunfeast, Yippee, Bingo, Classmate, Mangaldeep, Savlon, Fiama, Engage, B Natural, Dark Fantasy, Fabelle, and more.

The scale of ITC’s operations can be gauged from the fact that it owns more than 200 manufacturing facilities and 113 hotel properties. It employs close to 24,000 people.

We got a good understanding of the business for our fundamental analysis of ITC. Let us learn about its different business segments in detail in the next section on segment analysis.

Segment Analysis

ITC segregates itself into five segments:

1. FMCG – Cigarettes is the largest and most profitable division of ITC accounting for 37% of the total revenues and 75% of the total earnings before interest and taxes (EBIT) with an EBIT margin of 60%.  
2. FMCG – Others is a fast-growing business segment under which it sells a broad range of personal care, snacks, kitchen staples, hygiene and other products. It registered revenue and EBIT CAGR of 8.8% and 28.5% over the previous five years respectively.
3. Hotels business of ITC is focused towards the premium market and has grown at a fast rate. However, it is comparatively small and brought an EBIT of Rs 557 crore in FY23.
4. Agri business is engaged in the sourcing, procurement and export of agri commodities including leaf tobacco.
5. Paperboards, Paper & Packaging is the second largest division for ITC in terms of EBIT contribution. It includes the B2C business of stationery as well as the B2B packaging business.
6. Others includes the group’s IT services, investment and other businesses. 

The figures below represent the share of different revenue segments of ITC for the past five fiscals. 

Segment	FY19	FY20	FY21	FY22	FY23
FMCG – Cigarettes	42	41	38	37	37
FMCG – Others	23	22	25	23	23
Hotels	3	3	1	2	3
Agri Business	18	18	22	23	22
Paperboards, Paper & Packaging	11	11	10	11	11
Others	4	4	4	4	4

The data below highlights the change in EBIT margins of different segments of ITC over the past few financial years.

Segment	FY19	FY20	FY21	FY22	FY23
FMCG – Cigarettes	67	67	60	60	60
FMCG – Others	3	3	6	6	7
Hotels	11	8	-85	-14	21
Agri Business	8	8	7	7	7
Paperboards, Paper & Packaging	21	21	20	22	25
Others	9	13	23	26	16

 We learnt about different businesses of ITC and their respective contribution towards the earnings of the stock. Now we’ll move forward to studying the tobacco industry landscape for our fundamental analysis of ITC.

Industry Overview

The tobacco industry is one of the most regulated in India with strict rules across the entire value chain from manufacturing to sale of the product. Although the country is the second largest consumer of tobacco globally, legal cigarettes (the key product of ITC) make up only 8% of the total domestic tobacco market.

This is because of the stringent and discriminatory taxation and other laws on tobacco products. These regulations have created areas of opportunities for illicit tobacco producers across other forms of consumption such as gutka, zarda, snuff, etc.

Thus, amidst such a business environment, the per capita consumption of cigarettes in India stands lowest among developing and developed nations. An old report from 2018 stated that per capita consumption of cigarettes in China stood at 2043 per annum against India’s figure of 89.

This leaves a huge headroom for the growth of the tobacco industry in India as the nation slowly moves towards an organised market. Furthermore, going forward a rise in disposable income, increasing urbanization, an increase in the number of female consumers, and similar factors will lead to the growth of the tobacco industry in India.

ITC – Financials

Revenue & Net Profit Growth

The sales and profits of ITC have grown at a steady pace over the past few years at a CAGR of 8.94% and 8.70% respectively. The company reported a net profit of Rs 19,477 crore on revenues of Rs 76,518 crore in FY23.

The table below showcases the revenue and net profit growth of ITC over the last five years.

Fiscal Year	Operating Revenue	Net Profit
2023	76,518	19,477
2022	65,205	15,503
2021	53,155	13,383
2020	51,393	15,593
2019	49,862	12,836
5-Yr CAGR	8.94%	8.70%

Profit Margins

Moving on to studying margins for our fundamental analysis of ITC, the stock has demonstrated consistency in margins across our study period with minor fluctuations (excl. FY20 because of the effect of the pandemic). This is because of the primary contribution of earnings from the tobacco division which is a mature business in itself. 

The table below presents the operating profit margins and net profit margins of ITC for the previous five financial years.

Fiscal Year	Operating Profit	Net Profit
2023	36.4	27.4
2022	34.2	25.5
2021	36.5	27.2
2020	40.9	31.5
2019	39.7	26.5

We noticed above that the cigarette giant boasts high-profit margins. Let us see how it translates into overall profitability by studying its return on equity.

Return on Equity / Net Worth(RoE / RoNW)

We shall study only return on equity / net worth (RoE / RoNW) for our fundamental analysis of ITC. This is because it is a debt-free stock and management intends to maintain the nil leverage status. 

Overall, ITC is a highly profitable stock with a strong return on equity of 27.8% as per its recent FY 2022-23 results. The table below showcases its RoE over the previous few years.

Fiscal Year	RoE / RoNW
2023	27.8
2022	24.4
2021	21.8
2020	23.4
2019	21.3

Debt Analysis

An in-depth debt analysis is not relevant to our study as ITC is a debt-free stock with negligible debt. It has maintained its low debt status for a number of years.

Future Plans Of ITC

So far we looked at the previous fiscals’ data for our fundamental analysis of ITC. In this section, we’ll try to know what lies ahead for the company and its investors.

1. The management is focused on leveraging digital capabilities towards future earnings growth of various divisions such as agri business and FMCG.
2. Furthermore, the company will continue to focus on a multi-pronged go-to-market strategy for its various products to drive higher growth from urban areas as well as tier regions.
3. Overall, product premiumisation and strengthening of supply chains will play their due role towards topline and margin expansion.

Fundamental Analysis of ITC – Key Metrics

We are almost at the end of our fundamental analysis of ITC. Let us take a quick look at the key metrics of the stock.

CMP	₹463	Market Cap (Cr.)	₹5,61,828
EPS	₹15.4	Stock P/E	28
RoE	28%	Dividend Yield	2.9%
Promoter Holding	0%	Book Value	₹56
Debt to Equity	0.00	Price to Book Value	7.9
Net Profit Margin	27%	Operating Margin	36%

In Conclusion

Strong monopolistic moat, fast growth prospects across various segments, tobacco division serving as a cash cow, consistent earnings growth and various other factors make ITC a well-balanced stock. Volume recovery in its cigarette business helped the company to clock earnings and consequently the increase in stock price. 

Going forward, investors should closely monitor quarterly earnings data for different divisions and any regulatory change in the tobacco industry. Do you think ITC will be able to grow faster in the coming years? What are your views on the stock? How about we continue this conversation in the comments below?

Written By – Vikalp Mishra

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