ITC Company analysis

Industry Overview :  Indian tobacco, introduced by the Portuguese in the 17th century, is appreciated worldwide for its rich, full-bodied flavour and smoothness. It is now an increasingly well-known as well as respected commodity in global tobacco markets and has found its way into cigarettes manufactured in several countries. All due to this tobacco is one of the major commercial crops in India. Despite the health hazards associated with it, the tobacco industry contributes significantly to the economy in terms of employment, income and government revenue. It was the second largest sector in terms of central excise revenue contribution after oil and gas sector. The industry also acts as a major foreign exchange earner for the government. Besides tobacco farming and production, the Indian tobacco industry also consists of companies involved in manufacturing, sales and distribution of tobacco products like cigarettes, cigars, beedis and chewing tobacco.

The Tobacco Board of India is a facilitator for tobacco growers, traders and exporters. By creating synergies between these stakeholders, the Board fosters a vibrant enterprise, with a deep social conscience and strong national commitment.The Board estimates demand and regulates the production of FCV tobacco to match demand to ensure a fair price for the produce.

Exports of Indian tobacco and tobacco products have witnessed steady growth. Exports rose at a CAGR of 9.0 per cent to US$ 918.9 million in 2014–15 from US$ 502.2 million in 2007–08.In 2014–15, India exported 246 million kgs of tobacco and tobacco products.India ranks third in terms of production of tobacco and in exports, after Brazil and the US.Indian tobacco is exported to about 100 countries.India exports unmanufactured tobacco primarily to Western Europe, South and Southeast Asia, East Europe and Africa. Western Europe is the key market for Indian tobacco exports.

Fiscal year ended March 2015 was another tough year for the Indian tobacco industry, continuing its challenging environment from FY14. The increase in excise duty induced pressure on the sales volume of cigarette companies in the sector. The tobacco production index saw a marginal growth in FY15, lower than that of the last fiscal year. Steep increase in excise duties and stringent packaging norms has contributed to the lower consumption, particularly of branded cigarettes. Of late, there has been a rise in the sale of illegal and counterfeit products in India. Price hikes by cigarette manufacturers in FY15 resulted in the improvement of profit margins, despite a lower sales volume. However, the consistent rise in excise duty, illegal and counterfeit products and regulatory restrictions remain the biggest challenges for the organized players in the sector.

Company overview : ITC Tobacco mejor is one of the oldest company in India. It is the company set up by British American Tobacco (BAT) Global Tobacco giant.

In 1905, BAT set-up Peninsular Tobacco. Peninsular was involved in cigarette manufacturing, tobacco procurement and processing. It set up a full-fledged sales organization named the Imperial Tobacco Company of India Limited (Imperial) in 1910. To cope with the growing demand, BAT set up another cigarette manufacturing unit in Bangalore in 1912. To handle the raw material (tobacco leaf) requirements, a new company called Indian Leaf Tobacco Company (ILTC) was incorporated in July 1912. The poor quality of tobacco obtained from Bihar prompted ILTC to search for better alternatives, leading to the establishment of the South India Leaf Area (SILA) in Andhra Pradesh

By 1919, BAT had transferred its holdings in Peninsular and ILTC to Imperial and that company was the same ITC with the different name and also become the Holding company for Indian business of BAT. As the demand for tobacco is increasing and so the revenue is also increasing, the company setup the distribution network for operation.

Around 1960, Indian Govt force MNC to reduce their holding, company Reduced the holdings of parent and increased Indian holding to 25% from around 6% in 1969-70.

Also ITC realise that as their single product strategy is not so Good as it is not good for health and also subject for Increasing taxes by govt , company decided to diversified in many other sector around 1971. First was marine product export.

The name of the company was changed to ITC Ltd in 1974. In 1975, ITC start production of its filter cigarettes brand wills filter, it become popular immigeatly. 1975, ITC set-up first hotel in Madras,Todas Chennai.  The company diversified into the textile industry with Tribeni Handlooms in 1977. The same year, ITC set up Bhadrachalam Paperboards. In 1981, ITC diversified into the cement business and bought a 33% stake in India Cements from IDBI. This investment however did not generate the synergies that ITC had hoped for and two years later the company divested its stake.
In 1986, ITC established ITC Hotels, to which its three hotels were sold. It also entered the financial services business by setting up its subsidiary, ITC Classic Finance. In 1994, ITC commissioned consultants McKinsey & Co. to undertake a detailed study of the businesses of the company and make suitable recommendations. McKinsey advised ITC to concentrate on its core strengths and withdraw from agri-business where it was incurring losses. During the late 1990s, ITC decided to retain its interests in tobacco, hospitality and paper.  ITC either sold off or gave up the controlling stake in several non-core businesses. ITC divested its 51% stake in ITC Agrotech to ConAgra of the US, the world’s fourth largest company in the food business. ITC Zeneca, the seed manufacturing company, and ITC Palm Tech were also merged with the new agri-business entity. Tribeni Tissues (which manufactured newsprint, bond paper, carbon and thermal paper) was merged with ITC

SHAREHOLDING

Financials and Ratios

 2010-112011-122012-132013-142014-152015-16
Revenue21167.5836046.2329901.2733238.6038834.6139427.02
Net Profit4987.6 16162.377418.398785.219607.739844.71
EPS6.457.849.3310.9611.9312.26
Net Profit Margin23.2424.4724.8026.4326.3126.71
Dividend per share4.54.55.2566.268.50
Dividend Payout69.0457.0955.9254.3152.1469.48
ROE31.3632.8833.3633.51313129.94
ROCE29.4131.0231.3131.6829.5428.18
ROA19.6121.2721.8022.3921.7319.88
Asset Turnover83.3786.9087.8984.7282.6074.39
FY 11 and FY 17 ITC give Bonus. In FY 11 it was 1:1 and in FY 17 it is 1:2. ITC

Future Prospects : ITC, Tobacco major, is well placed in very important Sector. Hardly anyone will say it but I am writing that

Addiction of Tobacco is difficult to Stop. No matter how much price you raise or how big caution you print on box with bad photos. Your customers hardly stop using it or they hardly switch to another company as their STOP them to do so. I am not supporting Smoking but Writing what I saw among my friends.

ITC, is partly lucky company as they are owners of all major big brands of cigarettes. Govt restrictions are helping them to reduce the increasing compitition. You may call it Economic Moat as Warren Buffett mentioned it. Right now, it is looking very Good condition as the hospitality and FMCG business is starting to perform. Having some brands like Aashirwaad aata, yipee nudals, Sunfeast, engage Dio, Classmate, John player, Bingo, Superia, Vivel de will, Dark Fantasy, mint-o for that matter. So even if Govt forcefully shut the Tobacco business, the company will keep operating with their FMCG, Hotels and IT business.

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About Ashutosh Tilak

Tracking Indian Capital Market since 2010. Finance Student, On this blog I am writing about finance and Investing. You can contact me analystashu@gmail.com or @androidashu & @InsideFinanc on twitter