ITC SHARES ARE GOOD FOR BUY?

ITC SHARES ARE GOOD FOR BUY?

ITC Ltd – Share Price Movement

·         The company has seen its share price decline more than 30% since the beginning of the year. The stock fell by almost 32% since January 1, 2020.

·         After seeing the bottom of Rs.135 in March-2020, ITC share price rose up to Rs.190 as on April 15, 2020.

·         But, the stock tumbled again by almost 15% from Rs.190 to Rs.161 on May 7, 2020.

·         Why ITC Ltd Share Price has been falling since last 3-4 sessions?

Why is ITC Ltd Stock Falling?

Government is Selling its Entire 7.94% Stake in ITC Ltd

·         The Union government is looking to raise Rs.22,000 Cr by selling its entire stake in ITC Ltd and Axis Bank Ltd.

·         The government holds stake in these companies through Specified Undertaking of the Unit Trust of India (SUUTI). Thus, SUUTI owns around 7.94% stake in ITC as on March 31, 2020.

·         Thus, Government is seeking to raise around to Rs.16,000 Cr by selling its entire stake of 7.94% in ITC Ltd.

·         According to the report, the government is looking to complete the transaction by the end of the first or second week of May.

·         Various mutual funds and LIC are expected to participate in the proposed share sale of ITC and Axis Bank. The proposed transaction is expected at a marginal discount of 2-3% to underlying trading price on the transaction date.

Governments’s Divestment Target of Rs.2.1 Lakh Cr for FY21

·         This move would be a part of the central government’s plan to raise Rs.2.1 Lakh Cr through divestment in state-run companies. In Union Budget for FY2021, the Government set an ambitious Disinvestment Target of Rs.2.1 Lakh Cr for FY21.

·         Government has already sold its entire stake in L&T Ltd.

·         LIC IPO

·         Also, the Government expects to raise around Rs.90,000 Cr to Rs.1 Lakh Cr through LIC IPO.

·         The partial stake sale in LIC and its subsequent initial public offer would be the crucial part of the Government’s ambitious target of Rs.2.1 Lakh Cr.

·         Without issuing LIC IPO, it would be almost impossible to meet the set divestment target for FY21.

·         Stake Sale in IDBI Bank

·         Government currently Holds 47.11% Stake in IDBI Bank. Thus, an equity sale is planned for IDBI Bank also.

·         Other Divestment Options in Pipeline

·         Expected Stake Sale in Air India, BPCL, Container Corp. of India, Shipping Corp. of India

Other Key Reasons for ITC Stock Fall

·         This share sale by the Government could only be a temporary overhang. While, the bigger concerns for ITC are :

1.     Changes in the Tax Structure : Hike in Excise Duty on Cigarettes – Effective Tax Rise of 10-13% (Announced in Budget 2020)

2.     The market is worried that the tax-starved government might go after tobacco products, after training their guns on liquor

3.     Business uncertainty due to the COVID-19 pandemic

4.     Concerns of labour unavailability at ITC factories due to nationwide lockdown

Is ITC Ltd a Value Buy for Long-term Investment?

·         Not all companies have the potential to give healthy returns to their investors over the long-term. Only companies that have strong corporate governance policies, have consistent financial performance, have fortified upper management and possess an economic moat reward their investors.

·         ITC Ltd which has come a long way in this regard, is one of India’s pioneers in the private sector.

·         The company has made an effort to reduce its dependence on cigarettes. It has been effectively able to channelize all its funds generated from the business of cigarettes. Thus, it is employing a decent capital into its FMCG (Non-Cigarettes business), Paperboard & Packaging business and Hotels chains.

·         Over last 15 years, the revenue contribution of Cigarettes/ Tobacco productions has come down from over 80% to less than half ie. 41% as on Dec-2019. while, Other segments in FMCG like food, apparel, consumer goods and stationary witnessed a phenomenal sales growth.

·         This gives a clear indication that ITC stock in future is sure to rise  high, as the company continue diversifying its products.

·         This, in turn, will help the investors to derive benefits from ITC for a long term investment.

A Journey Towards a Market Leader across all Business Verticals

·         ITC has been achieving a leadership in all the business ventures it had explored in India.

·         It has occupied a front runner position in the tobacco and paper business of the country. The multinational conglomerate also sells about 81% cigarettes and bidi in the entire Asia.

·         Its hotel chain business has occupied a significant position among the top three players.

·         In the FMCG sector, ITC share price has been capturing the market in high clutter categories like noodles, biscuits, salty snacks and personal care products.

·         In the upcoming years, ITC has also planned to amplify its Dairy Products on a large scale.

ITC Ltd – Quantitative Analysis

·         Lets see the key performance parameters of ITC :

1.     Return on Capital Employed (ROCE) = 34.62%

·         Strong ROCE number gives the an idea about how efficiently ITC is generating profits from its capital employed across its diversified business segments.

2.     Return on Equity (ROE) = 22.69%

3.     Debt to Equity Ratio (D/E) = 0.00

·         The Company is virtually debt free. Amidst the current lockdown due to COVID-19 pandemic, the debt-free companies have an extra edge over its peers by the investors.

·         The concern of repaying the interest on the Loans amid dampened revenue and cash flows would not be the case for ITC.

4.     Dividend Yield = 3.57%

·         Stock is providing a good dividend yield of 3.57%.

·         Also, the company has been maintaining a healthy dividend payout of 55.94%.

5.     Heavy Weightage in Key Indices

·         ITC Ltd stock is having a strong weightage in key Indices ie. Sensex and Nifty 50

·         Sensex has ITC weightage of around 4.7%

·         Nifty 50 has a weightage of 3.87% for ITC Ltd

·         A heavy weightage of ITC stock in India’s Key Indices infuse a great flows of passive funds. It would benefit ITC to build a huge valuation in the long-term.

ITC Ltd – Valuation

·         The current Price to Earnings Ratio (PE) of ITC Ltd is around 13. Whereas, the historical Median PE Ratio is 30.

·         It shows the stock is currently Trading at a very Good Discount to its Historical Valuation.

·         The current PE ratio is at discount to even 2008 Financial crisis, where the PE ratio of ITC was around 19-20.

·         Thus, we can say that there is very limited downside risk.

·         The current economic conditions due to COVID-19 lockdown, would have an adverse impact on ITC’s earnings for a quarter or two. However, the company would be able to sustain the earnings growth in the long run backed by improvement in cigarettes as well as FMCG segments.