So ITC is back to levels last seen in Dec of 2016. The stock often necessitates intense debate on whether it is genuinely undervalued or a value trap? I had a small chat with a friend, whom I reckon has one of India's finest research minds. I'm posting his views in this thread.
There are multiple ways to look at ITC. Starting with a base of 100 customers from Q1 of FY09 they are down to 87 as of now. As a consumer business, ITCs inability to attract and retain customers has been the biggest reason behind PE contraction from 35x to 25x in a 10 yr period.
Most surveys among millennials show falling intent as far as smoking is concerned and they are primarily running on pricing. Pricing, however, has limitations. It impacts the ability to recruit new consumers and encourages the migration to higher brands such as Marlboro and B&H.
So valuations must reflect the limited ability to attract consumers which in ITC's case is missing. The company spins it and shows how its 'pricing power' is key. But Pricing Power is actually adding new consumers PLUS hiking costs. Not the other way around!
Core business, not really a cash cow in the sense they are forced to construct other businesses to mask the tobacco image. Hotels a clear case in point. Just think about it. Think about it as a promoter, who is perennially questioned on morality.
ITC's FMCG business is as big as Britannia today at Rs.12,500cr. But at 5.5% they make one-third of Britannia's margins and RoCE is like 10% after 20 yrs. Besides they trade at 100% premium to BAT. But at a 50% discount to Lever. There is no case for a comparison with the latter.
So on valuation grounds which reference point we want to choose is up to us, as consumer recruitment and retention is a huge problem. Smoking is a settled issue on everyone's mind. One can't be negative on an Rs.12,000cr cash flow stream.
That's more cash than all the appliances, paint, and FMCGs earnings in India barring HUL. Just sit back and imagine. The point is ITC is run as a fiefdom, and one can create magic with that cash. Like one Flipkart every year. But they haven't. I really wish they do.
