What A 45% Rally This Year Says About Cigarette-To-Hospitality Major ITC’s Future Trajectory

In a market that has been subdued for a while, shares of ITC, the country's largest cigarette maker, have surged as much as 45 per cent since the start of the year, massively outperforming the NSE’s Nifty 50 and becoming the top gainer. 

The robust performance of the cigarette-to-FMCG-to-hotels conglomerate, which commands a market valuation of Rs 3.8 lakh crore on the BSE, comes as a surprise as it underperformed in 2020 and 2021 even when the markets staged a strong rally. 

The Covid-19 outbreak and the subsequent lockdowns had dealt a heavy blow to several of its verticals. The company's stock price was stuck in the range of Rs 200-225 for the longest time before it started rising around March this year and breached the Rs 300-mark last month.

What is driving this sudden interest towards ITC after a two-year lull? 

Banking On Post-Covid Uptick

The conglomerate seems to be emerging from the Covid carnage stronger with most of its businesses firing on all cylinders.

With the lifting of the lockdowns and easing of norms, more people are choosing to travel, giving a boost to ITC’s hotel business. Even its paper, agri and FMCG businesses are performing well. Its newer brands in the FMCG space are only adding to its expansion in the space.  

"All the businesses of the company are firing and the stock trades at less than one-third multiple of Hindustan Unilever. All the businesses are doing well—cigarette, hotels, agri and FMCG businesses are showing strong growth,” says Sanjiv Bhasin of IIFL Securities.

At its annual general meeting (AGM) last month, the company, which has nurtured 25 brands in the FMCG space, said it will continue to deliver robust growth despite concerns such as inflation. ITC, a leading FMCG player, also launched 110 new products this year. 

"... it is immensely encouraging that your company's newer FMCG businesses have garnered an annual consumer spend of Rs 24,000 crore. The carefully selected portfolio, with substantial headroom to grow, is estimated to have a total addressable market potential of Rs 5,00,000 crore by 2030, which is amongst the highest in the Indian FMCG space," said Sanjiv Puri, chairman and managing director, ITC, at the AGM.

Puri spoke about how the traditional business segment of cigarettes, too, recovered with the normalisation of economic activity. It is now ahead of the pre-pandemic levels, he said.

The company has also been reportedly looking to review its organisational structure. Last year, Puri had hinted at the possibility of demerger or merger of businesses along with the listing of IT arm ITC Infotech. With respect to the hotel industry, he had said that it was not the right time to look at an alternative structure right away and would wait for recovery. 

The Number Game

On Monday, ITC reported that its net profit for the first quarter of the current financial year rose 33 per cent to Rs 4,462 crore from Rs 3,343 crore during the same period last year. Its revenue from operations advanced 39 per cent to touch Rs 19,831 crore from Rs 14,240 crore in the year-ago period.

ITC’s revenue from its cigarettes business jumped 29 per cent to Rs 7,464 crore as against Rs 5,802.67 crore in the corresponding quarter last fiscal. Cigarettes Segment EBIT (pre-tax profit) jumped 30 per cent annually and the brand has reinforced its market standing in the segment, the earning statement added. This uptick was aided by the "stability in taxes on cigarettes, backed by deterrent actions by enforcement agencies," which enabled green shoots of volume recovery from illicit trade, said ITC.

The conglomerate’s revenue from the FMCG segment rose 19 per cent to Rs 4,459 crore as compared to Rs 3,731 crore in the year-ago period. This, it said, was led by a "robust growth in discretionary/out-of-home categories" and its staples and convenience foods remained resilient.

ITC's hotels segment’s revenue went up four times to Rs 581 crore in comparison to a lower base of the pandemic-impacted corresponding quarter. In the April-June quarter, ARR (average room rent) and Occupancy were "ahead of pre-pandemic levels". The revenue rose by 41 per cent over the pre-pandemic first quarter of financial year 2019-2020, the statement added. "Retail (packages), Leisure, Weddings & MICE segments (Meetings, Incentives, Conferences and Exhibitions) drove growth," the company said. 

Its paperboards, paper and packaging segment also saw a bump in revenue which touched Rs 2,267 crore, up 43 per cent from Rs 1,582.65 crore in the same period last year with "strong demand across end-user segments". Its sustainable products portfolio continues to be scaled up, said ITC.

On the back of wheat, rice and leaf tobacco exports, ITC’s agri business reported revenue of Rs 7,492.14 at a growth rate of 82.29 per cent.

Revenue from other segments, which includes its information technology services, branded residences, etc., was up 8.17 per cent to Rs 735.84 crore as against Rs 680.26 crore of Q1 FY22.

Driven by such robust performances of its businesses, Bhasin is confident that ITC will continue to be an outperformer on the index. “We have a buy on the stock from Rs 200 levels and we have no intention to sell. Investors should hold the stock and add it on declines as the stock will be an outperformer on the index. The stock can go up to Rs 375 over next one year," says Bhasin.

(With PTI inputs)