🧐 ITC Investors Upset: Why?

ITC finally held the much-awaited investor meet to make them happy. But it backfired and the stock fell. Why?

Imagine this: All your friends have been asking you to meet them for a long long time. And when you finally decide to meet them, all they do is express disappointment in you. 

This is exactly what happened with ITC. The company finally held a long-awaited investors and analysts meeting on Tuesday. The anticipation had pushed ITC shares up by 4%. But soon after the meeting, the stock fell by around 1.5%. Wondering why?

Well, investors didn't hear what they wanted to: confirmation of a demerger.

ITC Split

For quite some time now, ITC has been talking about a demerger. Sounds like a breakup? It is. But without all that crying and sulking. 

Demerger means that the different business verticals of the company would separate and become different business entities. This would allow dedicated focus on each business vertical. No single vertical will hog all the limelight. 

In ITC's case, its hotel, fast-moving consumer goods (FMCG), and IT businesses would all become separate entities.

This idea has captured the imagination of the investors ever since it was conceived. 

And well, demergers are also kinda trending right now. Many established companies like General Electric and Johnson & Johnson are also splitting up. Conglomerates, much like joint families, seem to be becoming a thing of the past.

But just because everyone is jumping on the bandwagon doesn't mean ITC has to do so too. Let's examine if a demerger would actually be good for ITC.

Demerger A Good Plan for ITC? 

Even though ITC has been profitable (in Q2 2021, the company recorded a profit of Rs. 3,763.73 crores), its stock price has mostly remained the same over the last five years. 

There are two main reasons for this.

One, ITC's FMCG business is growing much slower than its competitors. Though ITC records higher annual profits than HUL, its market cap is almost half of that of HUL. 

Second, ITC's FMCG business is largely dependent on cigarette sales. 42% of the company's revenue and approximately 79% of its profit comes from cigarettes. Not only is this business in jeopardy due to higher taxes and increasing illegal sales, but also because many investors don't want to invest in the tobacco-focused company because of ESG (environmental, social, and governance) concerns. 

Also, the company's hotel business, which has long since been a cash drain, has been performing even worse due to the pandemic.

On the other hand, its IT arm ITC Infotech (which accounts for approximately 16% of ITC's total revenue) has been performing very well. But its great performance has had no impact on the company's stock, thanks to all the other baggage.

Investors feel that demerging the company will help unlock the stock's true value. But, why isn't the company demerging?

Well, such decisions are not easy to make. And ITC is not completely against the idea of a demerger but is considering its options. 

ITC Chairman Sanjiv Puri said the company would consider demerging its hotel business when the industry recovers.

So, what else was discussed at the meeting?

ITC's Future Plans

The company outlined many of its future plans for growth in the investor meeting. It is prioritising expansion and will spend an additional Rs. 3,000 crores per year to expand its capacity over the next three years. Plus, it will also spend 25%-40% of its budget to improve production capabilities, while 10% will go towards expanding its hotel business. 

Not just that, ITC is also looking to acquire more brands in the FMCG space and could consider a merger and acquisition for its IT business. It has already begun some acquisitions and recently acquired Sunrise Foods, a leading spice brand.

The company also knows that being the country's top cigarette maker has impacted its reputation, especially when everyone is focusing on sustainability. To compensate for this and attract more ESG investors, it is working towards sourcing 50% of its energy from renewable sources by 2030.

Do you think these changes will help the company attract more investors? Or is a demerger the only way to win them over?

You can listen to the entire investor and analyst meeting here.

P.S. This post has been created in collaboration with StockEdge.

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