💰Invest in ITC?

Shedding light on whether to invest in ITC and the reasons for the underperformance in the D-Street.

History of ITC

ITC was started back in 1920 in the name of Imperial Tobacco Company and later they changed the name to Indian Tobacco Company. Back then, ITC was selling only Tobacco products, but later they diversified into FMCG, packaging, stationery, and hospitality sectors. Now, they have expanded their business not only across Indian tier 2 and tier 3 cities but also across Sri Lanka and Dubai. They also have dirtied their hands in the agriculture industry helping farmers of India improve the productivity per hectare.

💡Unknown fact: ITC also has an IT sector - ITC Infotech India started in 2006 and it is one of the fastest-growing IT industries.

Products of ITC

• Tobacco: Indian Kings, Classic, Gold Flake, Navy Cut.

• FMCG: Aashrivaad, Sunfeast, B-Natural, Gum on, Ghee, Sunbeam coffee, frozen foods, Yipee. (Yipee was launched as a rival to Nestle's Maggie in 2010)

• Salted Snacks: Bingo

• Grooming: Fiama Di Wills soaps and shampoos.

• Clothing: John Players and Wills Lifestyle.

• Paper: Classmate and stationery.

• Misc: Home Lites matchboxes, Mangaldeep, Salvon.

Reasons for underperformance

Well being diversified in the various sectors in India and being a monopoly in the tobacco industry, ITC still underperforms in the stock market when compared to its competitors like Dabur, HUL, and Nestle. But ITC is a monopoly in the cigar industry in India holding 75% to 85% market share. And also from 2013, ITC's profit and sales have doubled but its share price has not increased at all. Why?

• Over diversification: This could be a serious problem as many industries would fumble on where to concentrate their returns and sales.

• Returns on FMCG: ITC has a very low market share in the FMCG when compared to HUL and Nestle and it is not sufficient to manage the show.

• Low ROI on Hotels: ITC Grand Chola, ITC welcome, etc have low return on investment.

Main Catch - Sin Tax

Any product that has an impact on the environment and health falls under Sin tax and ITC's cigarette falls under the Sin tax and they are paying the largest tax bracket of 56%, which means they are paying half of their revenue to the government. And every time the budget bill is passed, taxes are increased every year for tobacco products.

So how does this affect ITC? Well, once the taxes are increased, ITC has no other go but to charge its consumers (who are smokers in this case) and force the smokers to move into cheap or local cigars and sometimes even in illegal ways.

Invest in ITC

Yes, invest in ITC. That's because ITC is a stock that has a very low beta value and a very high alpha value. If you want to know more about what are alpha and beta values, you can check one of my previous blogs.

You can see from the above meme that, even after the Nifty has fallen, ITC hasn't. That's the power of low Beta value stock. ITC has a long-term beta value of 0.782. Moreover, ITC is one of the companies that provide a dividend yield of ~4% which is really fantastic.

Well, one surprising thing happened after the union budget bill 2022-23 passed, the prices of ITC have increased by almost 7.16% in the last five days. Why?

Finance Minister Nirmala has announced no tax hike for tobacco this year which in turn boosted the ITC share price. And as I said before, an increased tax on tobacco would hurt ITC badly as they are the monopoly in tobacco.

Morgan Stanley said the Budget decision will likely be viewed as a ‘reflection of future policy’ on tobacco.

I too have optimistic views on ITC and it is one of my favorite stocks and highly recommended for retail investors because of the low Beta factor. I hope that people (smokers) will become more conscious of their health and they will opt for premium branded ones and ITC being the monopoly, they have a huge growth potential down the lane and it can be a boon to long-term investors.

This is my subjective perspective overview of ITC and not a *recommendation.