as a stock has been more active on our Whatsapp and Twitter handles than perhaps on our screens. Do you agree with Mr Puri that despite the fact that the different segments like FMCG, hotels are doing very well, the Street is still not valuing ITC properly?
I will agree to a lot of the things which were discussed in the AGM and comments today. So, of course, ITC continues to look very good from a medium to long term perspective. It is the cheapest large FMCG company available at 15X PE multiple FY23. Also this year looks good at the current juncture. It is definitely opening up unlock trade for its hotel, paper and possibly even cigarettes business given 52 crore vaccination doses have been administered. So even if the third wave takes place, the number of fatalities will be low. So the impact on hotel and paper and cigarettes will be much lower than in FY22.
Also this year should be a good year for the cigarette business as there has been no tax hike. In this AGM presentation, we liked the focus on technology and sustainability. ITC continues to do a lot of lateral hiring, especially in its FMCG business, which brings a lot of value to the pool and a dividend yield of 5% is good. We have seen more disclosures by the company in the recent past. We are now getting more clarity on its infotech business and detailed presentation in the quarterly. The stock has underperformed in the last six years and so value is there.
The reason for underperformance is essentially two – one, of course is the ESG angle. We know that tobacco is a red area from the ESG prospective. ITC has been proactively engaging with the ESG indices which are being given and in some of those indices, it has done really well. Yes the second shareholder feedback is how do we play different businesses of ITC in a specific manner? Currently if someone wants to play ITC or FMCG, he has to buy the ITC stock which also has cigarettes, paper, hotel, agri, etc. That has been a feedback from investors that can we play different businesses separately.
ITC in this AGM has said that in their hotel business they will examine alternate structures. That is really interesting. Of course, it would depend upon the Covid dynamics. Once the recovery happens, I hope there is some movement in this and that will really rerate the stock. Then, the Street will also have visibility on some other value unlock happening. The most interesting part will be the FMCG.
Coming back to this AGM, we like the super app for rural, we like new subsidiaries like the one for nicotine derivative exports and for FMCG, A lot of clarity was given on why ITC is doing well. For example, the Marketing Command Centre, Sixth Sense, e-commerce focus, the lifesciences technology centre focus, etc. So yes, the company is taking a lot of feedback from the investors and implementing. But for the real rerating of the stock, two things have to happen – some clarity on the unlock in terms of the different businesses and higher growth in the FMCG through inorganic means. The management said they are quite happy in terms of inorganic growth. If more such stuff can happen, the Street will like it. We see Rs 241 as the target price for ITC.
In the last few years, ITC has been stuck in the Rs 180-310 range and nothing has really changed. Would carving out the hotel and FMCG into separate entities be the only trigger that can really propel ITC’s share price significantly?
Not necessarily. EPS growth is the most important number to start with. Over the last one year, the pandemic had a huge impact on the hotel industry because of the pandemic and it impacted other firms also. We have seen cigarette sales also suffer whenever strict lockdown was there. This year in May, we saw the same thing but to a lesser extent.
If there are no more pandemic related lockdowns, I would say it is a very good year for the cigarette business given that no tax hikes have happened and we have seen stickiness here. Secondly, in the hotels and the paper business we can see a faster bounce back and that will again lead to better appreciation from the investors. So the demerger etc, if at all, may happen on a longer term basis, but this year, because of the cigarette business seeing good EPS and volume growth, that also should drive more interest from the investors.
But yes, the real unlock over the longer term can happen if the demerger or a structuring of ITC hotels and FMCG businesses takes place.
