Many eyebrows will be raised at our decision to select ITC as the Fortune Scrip for this fortnight. I can understand the anguish of readers as, even when market indices have turned buoyant and several scrips have reached sky-high levels, ITC has put up a dismal show, stagnating at around Rs 200. This is clear from the fact that investors are offloading ITC shares even as they rush to buy other FMCG stocks.

Notwithstanding the current scenario, we have dared to select ITC as there are solid reasons to believe that the stock will be a money spinner for investors who are ready to wait for 3 to 5 years. As is well known, the century-old ITC, originally a British cigarette company (Imperial Tobacco Company) has now diversified into several verticals, including FMCG, food, personal care, education, stationery, hotels, paper boards and speciality papers, packaging, agribusiness and information technology. Not only is it doing very well on the financial front, paying hefty dividends to its shareholders, it has emerged as one of the most valuable companies in the country, excelling in professional management, quality standards of its products, operational efficiency and remarkable corporate governance. A couple of years ago, the company was the darling of investors and among the top blue chips on Indian stock exchanges. But in the current environment, it faces the headwinds of campaigns by civil society and the government against the health hazards of smoking. Most governments worldwide, including India, have imposed a blanket ban on the advertising of tobacco and tobacco-related products. Besides, various steps have been taken to discourage smoking, including heavy taxes on tobacco products.

TOBACCO ‘JINX’

As a result, the stock market too has been influenced by the ‘ESG’ formula — a move to avoid companies which harm the environment, social health and corporate governance. With ITC being a leading tobacco player, several FIIs, FPIs and other big investors have started avoiding investments in ITC stocks while those holding ITC shares have been offloading them. This has disturbed the market sentiment in the ITC counter, pushing down the stock price and investor interest in the scrip. Despite this reality, I would like to stick to my opinion that ITC is an excellent buy in terms of a longer perspective. Consider:

Despite the current atmosphere against tobacco and tobacco products, ITC has maintained its top position in the cigarette segment and enjoys an 84 per cent market share in the organised sector, bordering on monopoly status. Despite government campaigns against cigarette smoking, compulsive smokers have remained ‘sticky’ customers of ITC’s popular brands like Wills Navy Cut, Gold Flake Kings, Gold Flake Premium Light, Gold Flake Super Star, Insignia, India Kings, Classic Verve 555, Silk Cut Scissors, Capstan, Players and Royal Wave. There is no question of new competition because nobody would now venture into the field of cigarette manufacturing. However, two major problems that can adversely affect the company’s cigarette business are illegal imports and the government’s tax policy. Despite these hurdles, cigarettes still remain a highly profitable business for ITC, which derives almost 80 per cent of its profit from this segment.

EGGS IN OTHER BASKETS

Having realised that the tobacco segment is going out of favour throughout the world, a visionary ITC management has taken a significant initiative to systematically enter and expand its activities in non-cigarette segments. Interestingly, cigarettes’ contribution to total revenues, which was 100 per cent earlier, has come down to around 42 per cent. The company has diversified into packaged food business, confectionery products, hotels, paper and paper boards, agribusiness and information technology.

ITC is emerging as a significant FMCG player in the fast growing business segment and has started competing with peers like Hindustan Unilever, Nestle, Britannia and P&G. In the mid-2000s, the company made a flash entry into the FMCG segment and reached a turnover of Rs 500 crore in 2005. From then onwards, the pace of growth quickened to cross the Rs 13,000-crore mark in 2020. The way the FMCG segment is growing, it will emerge as a major contributor to the company’s revenues during the next 5 years. The company’s brands like Ashirvad atta, Sunrise Foods, Sunfeast biscuits, B Natural mint-O, Candyman, Gunon, Master Chef and Farmland have become very popular and the future prospects for its food business (which includes snacks foods, ready-to-eat meals, fruit juices, dairy products and confectionery) are highly promising.

In the hotel business, ITC has emerged as the second largest chain of hotels in the country with over 90 hotels spread throughout the country. Though the hotel business is not doing that well at present due to the pandemic, once the situation gets normal there are good chances for the business to pick up.

In view of the growing opposition to the tobacco business, the company’s market valuation has nosedived. There are also rumours that the company may demerge its businesses into 3 companies. Of course, the management has not supported these rumours but has admitted that it is seriously considering enhancing shareholder value. If any kind of demerger takes place, it will unlock shareholder value as happened in the case of the Reliance and L&T groups.

POSH DIVIDENDS

The company’s policy has always remained investor-friendly, and it has made as many as 8 bonus issues (1:5 in 1980, 1:1 in 1989, 3:5 in 1991 as well as in 1992, 1:1 in 1994, 1:2 in 2005, 1:1 in 2010, 1:2 in 2016). Besides these free scrips, the company has been regularly paying dividends at handsome rates, the rate for the Covid-19 year of fiscal 2020 being 500 per cent and for the previous fiscal year 2019, 1,015 per cent. How many companies in the country have showered such largesse on their shareholders?

Despite the overall economic slowdown in the last few years, the increasing smuggling of cigarettes into the country adversely affecting the company’s cigarette business, and the Covid-19 pandemic, ITC is going from strength to strength on the financial front. During the last five years, its net revenues have expanded from Rs 36,583 crore in fiscal 2016 to Rs 45,620 crore in 2020, with the profit at net level shooting up from Rs 9,328 crore to Rs 15,136 crore during this period. The company’s financial position is very strong, with reserves at the end of March 2020 standing at Rs 60,778 crore – over 49 times its equity capital of Rs 1,229.22 crore, that too after as many as 8 bonus issues. ITC is a cash-rich, debt-free company with its interest burden for fiscal 2020 being a small 12 per cent of its sales turnover.

Prospects ahead are all the more promising. The company is fast expanding its FMCG business. In response to the surge in demand for packaged foods amidst the pandemic-related lockdowns, the company has scaled up its manufacturing of staples like noodles, biscuits, dairy products, etc. During fiscal 2020, Ashirvad atta and Yippee noodles have grown by 30 per cent yoy, Sunfeast biscuits and Bingo grew by 7 per cent and Savlon and Nimyle brands also registered exceptional growth. During the year, the company also launched over 60 new products.

While the share of FMCG in the company’s sales is on the rise, that of cigarettes is on the decline. The company’s cigarette portfolio has been consistingly declining from 63 per cent in FY 2016 to 40 per cent in FY 2021. It will decline further in the coming years and FMCG will emerge as a major value driver. As the cigarette business still contributes a substantial amount in overall profits of the company, it enables the company to give a further boost to its FMCG business.

PATIENCE WILL PAY

Going ahead, the tobacco business will be contributing less and less and FMCG will continue to scale new highs year after year. The net result will be that the stock will remain a blue chip and the era of despondency in the market over ITC will be a thing of the past. Discerning investors will have to be patient for 3 to 5 years to reap a rich harvest from their investment in ITC. If you have enough patience, you can certainly go for this highly significant investment avenue. And the price between Rs 170 and Rs. 200 is an ideal range to accumulate these shares.