Does ITC Deserve to be a Meme Stock?
ITC has been trolled for its never-changing share price. But does its performance justify this?
ITC Limited, the notorious meme stock of India, has been in the news lately for rallying up to Rs. 245.80 from Rs. 216. It gave around 12% returns in 7 days and got everyone talking.
But wait, haven’t we seen bigger rallies than this in the past?
Yes, lots of them! (Remember the likes of Ruchi Soya?)
In fact, this rally was nothing compared to the humungous returns that the other stocks have given, that too in a shorter time frame.
Then what is so special about ITC that just a 12% return had everyone jumping over the moon?
It's own beautiful track record.
Ehh, what?
Let's have a look at ITC's share price over the last 5 years:
If you observe closely, the current price of ITC is almost equal to its price 5 years ago. Well, except for a few ups and downs here and there.
Depressing, Isn’t it?
But wait, since we are so fond of hearing stories like: “If you had invested xx amount in xx stock 10 years ago, you would have xx amount today” Let's go back a few more years.
The share price of ITC in April 2013 was Rs. 239.19 and even now in October 2021, it is around the same range.
So, do you mean If I had invested Rs. 10,000 in ITC in 2013, I would essentially still have only Rs. 10,000 in my account?
Um, not really.
You see, ITC is known for its Dividend Pay-out. Its Dividend Yield is higher than FD Rates of many well-known banks. Also, it had declared a bonus of 1 share (yes, free shares for existing shareholders) for every 2 shares in July 2016. So, you would have made pretty decent returns on money invested in ITC.
Then why are there so many debates and memes over the returns of ITC?
Let us dive deep into the legacy of ITC to find answers. ITC was one of the earliest companies to be listed in Indian Stock markets in 1974-75. As of today, it is the 10th largest company in Nifty50 with a total market value of approx. Rs. 2.06 lakh crores having a weight of 2.71% in the entire Index.
ITC seems to be working really hard at reducing its dependence on its cigarette business. But, is this reduction in the cigarette business being compensated by an increase elsewhere?
Let us have a look at segment-wise contribution to revenue 5 years ago, and now.
Source: Annual Report of ITC (Gross revenue considered)
You see? The share of the cigarette business has fallen from 62% to 42%, and other segments are steadily growing with an impressive growth of other FMCG businesses.
But is the growth good enough?
The below graph depicts the 10-year growth in Revenue & Profitability of the FMCG Business of ITC:
Source: ITC Annual Report 2021 (Pg. 329)
Revenue from other FMCG has grown from Rs. 5,545 crores in FY12 to Rs. 14,728 crores in FY21. That is a whopping 165% growth in 10 years. Also, the results have soared from Rs. 92 crores (loss) in FY12 to profits of Rs. 1317 crores in FY21, with a net profit of 8.94% in FY21.
One hell of a ride, eh?
ITC has been working really well on its distribution, and brand recognition for the likes of Sunfeast, Aashirwad, Bingo, Yippee, Classmate, Vivel, Engage, Gumon, Candyman, and so on.
But is this growth good enough for a FMCG business? How does ITC fare against its competitors like HUL, P&G, Nestle, Godrej Consumer Products?
HUL recorded sales of Rs. 23,436 crores in FY12 to Rs. 47,028 crores in FY21 revenue recording the sales growth of 100% over 10 years’ time
Godrej Consumer products also recorded revenue growth of 127% in 10 years from Rs. 4,853 crores in FY12 to Rs. 11,029 crores in FY21
Nestle recorded growth of 77% in revenue from Rs. 7,515 crores to Rs. 13,350 crores in the same time frame
ITC’s FMCG arm is now making more than Godrej and Nestle.
But not everything is going well for ITC. Its hotel arm was turning out to be the biggest cash burner, and when things were starting to look good for ITC Hotels, Boom came the pandemic!.
Nevertheless, ITC had to diversify in order to sustain itself. But, was it really the right decision to invest so much into hotels and earn nothing out of it?
Whatever be the case, ITC has generated massive cash flow out of its operations.
It has generated cash of Rs. 1,03,940 crores only from its operations. In the same time frame, it has paid out a dividend of Rs. 66,991 crores. Look at the below graphs from ITC:
Source: ITC’s Annual Report (Pg.329)
You must be thinking ITC is a great company that distributes a significant chunk of money earned to its shareholders! But the market doesn’t see it that way.
To the market, it essentially means ITC does not know what to do with the cash generated. If they had known, they could have made fortune by investing the cash they have from its existing businesses.
So, what does the future growth of ITC look like?
Chairman of ITC, Mr. Sanjay Puri, while addressing 110th AGM talks about ITC Next Strategy to explore opportunities to craft disruptive business models for the future. ITC has fast-tracked its e-commerce journey and strengthened its D2C platform ‘ITC E-store’ reaching consumers in 11 metros. He also mentioned how ITC is foraying deeper into the much sought and fast-growing Agri-Business by launching a super app called ITC-MAARS to deliver seamless customised solutions to farmers, strengthening the sourcing efficiencies and providing AI-based personalised advisories. Also, its wholly-owned subsidiary, ITC Infotech, has delivered impressive growth in recent years and can play a major role in seizing future opportunities and providing ITC with cutting-edge solutions!
ITC is one of the biggest cash-rich companies in the Indian market. But as compared to its FMCG rivals, it has a huge potential left to be unlocked.
Will ITC be able to catch up?
Only time will tell. Until then, Read on.
A big shout-out to Vilas Shetty for contributing this piece.
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