ITC Fundamentally weak or strong News Impact 2024

[00:00:00] Hey folks, CA Rachana Ranade here and welcome you all to another episode of Finance Simplified.

[00:00:05] The podcast and the name of the stock is ITC so let's get started.

[00:00:14] It is of course the favorite stock of memours and there have been so many memes around this stock.

[00:00:20] I have read I'm sure at least more than 150 memes about this but my personal favorite is this one.

[00:00:26] I think the 3 idiots seen has been given a totally different investor angle in this one.

[00:00:36] But I think the stock actually asked people to shut their mouth when it gave a 75% return in a period of 1 year starting March 22 to March 23.

[00:00:48] But this stock has been in news off late because of BAT.

[00:00:54] I understand about the news of BAT that is nothing but British American Tobacco.

[00:01:00] This company held almost 29% stake of ITC and that was valued at 1.5 lakh crore.

[00:01:08] Around 13th March 2024 this company BAT which is like one of the biggest shareholders of ITC.

[00:01:14] They sold 3.5% stake in ITC limited and they sold it in the open market at a price of 400 rupees 25 pesos.

[00:01:22] Around 43 crore shares aggregating to 17485 crores were sold in the open market.

[00:01:30] Now first of all we need to understand that whenever such a huge supply means almost 43 crore shares.

[00:01:38] How much do we buy 43 shares?

[00:01:40] Correct, of one company they have sold 43 crore shares.

[00:01:44] If there is such a huge supply of any specific stock in the market what do you feel?

[00:01:48] Basic economics, supply is more, demand is more or less similar in that case ideally price should fall.

[00:01:54] But what happened instead of 13th March in fact the stock showed a gap up opening and also it has closed almost 4.5% higher as compared to the previous day.

[00:02:08] Now in spite of such a huge supply why did this happen was a big question.

[00:02:12] For that when I try to understand what could be the reason we found out that BAT is one of the strategic investors or key investors means what do I mean by that?

[00:02:22] See BAT has been the investor in ITC since inception almost.

[00:02:26] So they have been invested in ITC for almost 100 years now.

[00:02:30] So what do you feel whatever shares BAT had?

[00:02:34] Were they freely available for trading?

[00:02:36] Answer is no, they were not freely available for trading they had it with themselves.

[00:02:40] Will this be counted in the market capitalization of ITC?

[00:02:44] Yes, but will this be counted in free float market capitalization of ITC?

[00:02:50] Answer is no. This point is very important point.

[00:02:54] Typically free float market capitalization is nothing but total market capitalization minus whatever number of shares multiplied by its price obviously is not freely available for trading.

[00:03:06] What could be the examples whatever stake promoter has held that is not freely available for trading.

[00:03:10] Whatever stake any strategic investor has held that is not freely available for trading shares which are locked in they are not freely available for trading these are some examples right?

[00:03:18] So they are not counted in the free float market capitalization when BAT sold the shares.

[00:03:22] So now you can imagine what happened free float of ITC in fact increased.

[00:03:28] Now you might be like why am I giving so much importance to free float market capitalization has increased in case of ITC because ITC is a part of Nifty.

[00:03:36] I will say that well Nifty's calculation is not based on market capitalization it's based on free float market capitalization and that is the reason why ITC's weightage in Nifty will increase to some extent.

[00:03:52] So if that be so index funds basically passive index funds they are definitely going to buy ITC.

[00:03:58] So whatever is going to be the supply that is going to be absorbed by these index funds at least other than index funds or specifically talking about these fund houses who may buy do we already know few fund houses who have already bought the shares.

[00:04:12] Yes when BAT sold the shares almost 9.2 crore shares of ITC were bought by GIC Singapore and almost 12.4 crore shares were bought by ICIC Prodential.

[00:04:26] There were multiple block bills but these two I thought were one of the bigger ones so that is why I thought of telling this to you.

[00:04:32] So I hope you have understood all in all now just to sum up this entire news number one was there a supply of shares yes would that be otherwise considered as a bad news yes.

[00:04:41] But number three was this absorbed very nicely yes majorly by DIS and FIS.

[00:04:48] And number four because this led to an increase in free float market capitalization for ITC that was also taken as a positive news.

[00:04:56] Now the next question that pops up in our mind is why could have BAT sold their stick.

[00:05:02] Now when I try to analyze the chart of BAT that is how it looks like and if you see here the stock price has gone back to 2010 levels right now.

[00:05:13] Now ideally company needs to boost the investors confidence in such cases and one of the tool could be announcing a buyback.

[00:05:21] Now if they were to announce a buyback then obviously they need a lot of money and this money could have been raised through what by selling the stick in ITC.

[00:05:30] Just to give you one point about this it was mentioned in the news that BAT plans to use the proceeds from ITC stake sale to buy back its own shares worth.

[00:05:39] GPP 1.6 billion 1.6 billion rupees no 1.6 billion GBP over a period ending December 25th or sorry December 2025 starting with GPP 700 million in 2024.

[00:05:53] So I hope you have understood that what could have been the reason why BAT sold stick in ITC it has got nothing to do with the fundamentals of ITC.

[00:06:03] It is to fund a requirement which BAT had.

[00:06:07] Now let's understand about one more news which was so much discussed regarding ITC which was about the demurger of its hotel business.

[00:06:16] This is the news back which dates back to 2023 but still I think this is also important for us to quickly discuss about this.

[00:06:22] It is expected that the demurged business of hotel is expected to list on the stock exchange around November 2024.

[00:06:29] Now in what we'll have there recently also we heard about some demurger news that was about Tata Motors and it was mentioned that the PV and EV is going to be separated from the CVs from the commercial vehicles.

[00:06:39] Now what happens when such demurgers happen?

[00:06:42] Investors who believe in a specific theme they get an additional investment opportunity to invest in a specific focused theme for example if I'm talking about ITC and if I feel that our ITC hotels is really doing very well and because I want to own a part of ITC hotels I will have to buy ITC cashier.

[00:07:02] But now if I'm giving the choice that ITC hotel cashier you'll get separately.

[00:07:06] I would definitely want to invest only in that business. So from an investor perspective I get an option.

[00:07:11] From a company perspective what happens is that because when they demurge businesses they can focus better on each and every single business.

[00:07:19] If the focus is clear the performance improves, the moment performance improves it shows up in the financials and in fact many experts believe that after ITC's demurger the when the hotel business is set aside

[00:07:31] ITC's ROCE that is returned on capital employed and also ROIC both are expected to increase by almost 10%.

[00:07:39] So I think it's going to be a win-win for even investors as well as the company.

[00:07:44] So if we have understood about this news in short.

[00:07:47] So in this section which is the last section we are going to understand about the business model in absolute brief because I'm sure everyone knows what ITC does but we are also going to understand the QOQ and YOI performance quickly based only on two parameters one is revenue and one is profitability.

[00:08:00] And number three very important we are going to talk or we are going to really analyze whether this statement holds true.

[00:08:07] What is the statement? The statement is that many people believe that ITC is wanting to move away from cigarettes business.

[00:08:15] They're moving away from cigarette to a non-sigarette business, whether that is happening we'll try and understand the trend over the last five years.

[00:08:21] So all these three things we're going to cover in this specific section.

[00:08:25] So first let's quickly get started with five major business verticals.

[00:08:28] The very first one is cigarettes everyone knows that.

[00:08:30] Second one is FMCG as a business vertical and a moment I use examples like Sun Feast, Ashiruvadatta, Bingo, Glassmate.

[00:08:39] Everyone is aware about these brands all belong to ITC and all are under the same business vertical of FMCG.

[00:08:46] If I'm talking about hotels, ITC hotel everyone knows pretty famous Fist or Hotel chain and they also have one more chain which is called as Welcome Hotel.

[00:08:53] Fourth one is Agri Business and ITC's Agri Business is the country's second largest exporter of Agri products.

[00:09:01] Products like wheat, wheat flour, rice, coffee, all these are what are exported by this company.

[00:09:06] And last one is paperboards, paper and packaging that this is not a very big division of the company but the Pukhtha is in the same language.

[00:09:13] Cardboard, right? Cardboard, Pukhtha.

[00:09:16] So that is what can we consider under this segment of paperboard, paper and packaging.

[00:09:22] So just quick brief details about what does the company do with this law.

[00:09:26] Let's go on to the QOQ and YOI performance.

[00:09:29] So first have a look at this.

[00:09:30] Now if you see segment revenue only we are talking about the revenue right now on a QOQ basis, be it cigarettes, be it others, be it Agri, be all these three all are in negative.

[00:09:42] Paperboard packaging is barely in positive 0.5%.

[00:09:45] The biggest positive is hotel with 29.74% growth QOQ but I don't think this has to be even considered Y.

[00:09:52] Q3 is always better as compared to Q2 because hotels is a cyclical business.

[00:09:56] In Q3 we will have holidays like Diwali, Christmas and that is when typically people love to travel and typically hotels business does see usurge in this.

[00:10:04] So not a very relevant data for analysis per se.

[00:10:07] Let's understand about the profitability.

[00:10:09] This as far as VBT is concerned be it against cigarettes, others, Agri, paperboard everywhere QOQ there is a degrowth.

[00:10:16] I mean you can see negative numbers right but hotels 80 to 0.54% again you know the reason why seasonal is that right now let's understand the YOI performance.

[00:10:26] This is also important on a YOI basis.

[00:10:28] Be it's almost positive if you see cigarettes 3.58% positive FMCG others 7.6% hotels 18.26% good now this is YOI, seasonality is gone here right.

[00:10:41] If you see Agri is just minus 2% downturn and paperboard packaging is almost 9.76% down so there's only one area where on a YOI we see almost at 10% negative growth.

[00:10:53] If I'm talking about PBT, PBT will see our cigarettes a shade higher with 2.3% FMCG 24.14% growth YOI hotels fantastic 57.53% growth YOI Agri and paperboard again both in negative with 13.3% and 51.16% respectively.

[00:11:11] So all in all if you ask me finances are not looking like super duper hit average above average is what I can see.

[00:11:18] Let's see how the performance of the company is seen post demurder I would be really happy to see that as well.

[00:11:25] But now let's try and focus on the point of whether they are really shifting from cigarette business to non-signate business or not and for that we'll look at a 5 year snapshot.

[00:11:34] So if you see here you'll understand the first one is FMCG cigarettes right now how much is the overall revenue if you see here back in Q3 FY20.

[00:11:45] The revenue was 5,311 crores which was contributing to what 41.41% of the total revenue.

[00:11:52] Now if I come to Q3 FY24 from 41.41% it has just gone down to 40.29% so over last five years their revenue contribution cigarettes car revenue contribution as

[00:12:03] has gone down barely by 1% 1.7%. Now what I've done FMCG others hotels agree business and paperboard I've taken the summation as a non-signate business now this has gone up from what to what from 58.59% to 59.71%.

[00:12:19] So over a period of 5 years ago the revenue has barely increased by 1%. Obviously it has to be that right so I don't see that they are moving from cigarettes to non-signate in a big way the differentiator is barely 1% but also that's a very important thing.

[00:12:32] But also let's have a look at the profitability numbers profitability will definitely see that from cigarette business it has gone down from 83.5% to 78.47% what profitability contribution of cigarette segment to the overall profitability of the company that has gone down from 83.5% to 78.47% and non-signate has gone up from 16.5% to 21.53%.

[00:12:54] So shade better for profitability perspective not that great from the revenue perspective.

[00:12:59] Ultimately let's also talk about the profit margins generated by each business right now if you see your cigarettes is again has been a consistent big chunk for ITC above 60% throughout of course it has been slowly and steadily decreasing from 70.7% to 62.63%.

[00:13:17] Happy about hotels though I'm not going to consider FY21 and Q3 F1 and Q3 F2.22 reason being very simple Corona but FY20 it was 15.76% profit margin which has jumped up to 27.32% that is a very good jump I must say and even FMCG others has jumped from 3.26% to 8.29%.

[00:13:40] I hope you have understood about this fundamentals in a simple way.

[00:13:43] Thank you for joining us on this episode of Finance Simplified I hope you enjoyed listening to this podcast and also found some value in it if you did don't forget to share it with your friends and relatives till then take care.