- The shares of the $33 billion tobacco to atta to hotels giant have rallied nearly 25% in the past one month.
- While the stock has been at the receiving end of severe criticism by Indian Twitterati, it has performed better than some of the heroes like Britannia and Marico.
- Those buying the ITC stock are primarily betting that with a COVID vaccine closer than ever before, the economy will be back on track, people will consume more, travel more, and the hotels will be back in business too.
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Meanwhile, the Twitterati had a great time mocking the ₹2.5 lakh crore ($33 billion) giant that generates nearly $2 billion in cash every year, mostly from the tobacco business, which also makes four out of every five rupees in the company’s operating profit.
ITC is the biggest cigarette maker in the country, and the sixth largest in the world. But when data, as of September 2020, showed that the revenue from cigarettes fell 3.9%, the street couldn’t take it and battered the stock. The contribution from the hotels fell to just 1% though it wasn’t a surprise given the ongoing pandemic.
Basically, only about a third of its business, mostly the fast moving consumer goods (FMCG) segment, showed a silver lining with a 15% growth compared to a year earlier.
However, when the trolls got bored of all the heckling, the 110-year old giant bounced back. There were many factors fuelling the rebound but the biggest contributor was the progress in vaccine development in different parts of the world and the hope it generated.
Those buying the ITC stock are primarily betting that with a COVID vaccine closer than ever before, the economy will be back on track, people will consume more, travel more, and the hotels will be back in business, which used to contribute about 4% of the revenue before the pandemic took the wheels off.
CLSA, a multinational research and broking firm, while upgrading its recommendation from ‘neutral’ to ‘outperform’ said that ITC may clock “an acceptable margin” of 9% in FY21 and other brokerages feel that it may scale up to 12% margin in the next five years. Some of the target price for the stock, in the next one year, imply another rally as high as 25% over and above the spectacular run in the last few weeks.
What about cigarettes?
The share of cigarettes as a share of ITC’s revenue has been falling for at least the last five years, and it has been a conscious choice on the part of the management.
In all the trolling and selling, the street forgot that this vertical of ITC is a cash cow unmatched in its yield in corporate India. While it may still see a decline in the number of sticks sold, and there is a fear that the government may further discourage smokers with tax hikes on cigarettes, it is still a thriving business.
According to CLSA, at the current price, the tobacco segment of ITC is valued ten times its one-year forward earnings i.e. a price-to-earnings ratio of 10.
What is a P/E ratio?
Price-to-earnings (P/E) ratio is a metric used to value businesses and it shows how much an investor is willing to pay for a share in future profit. It rises when the profits are more certain and are likely to be high.
Higher the P/E ratio, more value the company. It is usually very high, sometimes as high as 60, for consumption giants like Hindustan Unilever or Nestle. So, for ITC’s cigarette business, an investor is willing to pay ₹10 now for every rupee earned in profit a year down the line. And that is too small a price to pay, according to CLSA, and therefore the stock price is likely to gain as the fears recede.
Most of ITC’s business is dependent on consumers feeling confident enough to spend. The recent rebound in the share price is a reflection of the market’s hope that the economy will improve and ITC, too, will gain from it.
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