What is holding up the long-awaited ITC rally?

ET Intelligence Group: ITC, the country’s least expensive FMCG company by relative valuations, is allocating disproportionate funds and manpower to non-cigarette revenue categories to speed up its transformation into an all-weather consumer powerhouse from India’s biggest cigarette maker.“About 80-85% of our capex is going toward the non-cigarette businesses,” ITC’s newly appointed CFO Supratim Dutta told ET. “About 90% of our employees are working on non-cigarette businesses. The company’s focus is not only to have a great cigarette business but also to create many more businesses toward which the incremental capex is getting incurred.”The century-old ITC, the most valuable company based in eastern India, already earns 60% of its top line from non-tobacco businesses.Dutta and his colleague, executive director (finance) Rajiv Tandon, acknowledged the divergence of the stock price and the company's performance. The management is evaluating suggestions received from investors to help maximise shareholder value, they said.According to Tandon, the evolving concept of ESG-themed investing is being reflected in the stock market reception of ITC. Citing the views of financial experts Aswath Damodaran and Raghuram Rajan, he held that ESG will work until it is not at odds with shareholder returns. “If as an ESG-focused investor you are investing in a company which is trying to transform itself with the help of its anchored business, then it is ironical that you paint us with the ESG brush because we have a tobacco business,” argued Dutta. “In ITC, you have the top-notch ESG performance as well as top-notch operating performance.”Dutta also pointed out that the multiple for ITC’s cigarette business is at a discount to global cigarette majors such as Philip Morris or BAT.“In India, where the cigarette market is 9% of the total tobacco consumption and a demographic profile that is different from the West, we deserve a much higher multiple of global tobacco,” he said. “These things, we are hoping, will be discovered by the market sooner than later. Many on the Street appreciate what we are doing. In the meanwhile, our job is to communicate very sharply with investors and to perform really well on the ground. The price has to follow as there is no substitute for fundamentals.”The finance veterans envisage ITC as a large FMCG conglomerate that includes cigarettes and the newer FMCG businesses. As part of the related diversification, the company forayed into FMCG to leverage its strengths of distribution, knowledge about the local market and use of the agribusiness inputs.According to them, it makes a lot of sense for all the businesses to stay together to harness the synergies of the group, scale up and become more competitive. While the other businesses are dwarfed by the size and scale of the cigarette business, they on their own are performing best in their class. “Every business has to stand on its legs in terms of the cash flow and cash generation — and most of our businesses have crossed that hump,” said Tandon. He believes even in FMCG, a K-shaped trend will be seen going forward — the profit will go in an upward direction and the capex will move in downward.

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