PremiumAt first glance, it seemed like ITC Ltd made all the right noises in its 110th annual general meeting (AGM) on Wednesday. Here is a sample of the news headlines: ‘ITC to launch super app this year’, ‘ITC to explore inorganic opportunities’ and ‘ITC may demerge hotels business, list IT arm’. Talk of just one of these three – a super app, acquisition-led growth or value unlocking – would have sent any ordinary stock to the moon.
But the ITC stock is cut from a different cloth. The impressive statements at the AGM only produced a dead cat bounce in the company’s shares. ITC shares rose 2.6% at open on the National Stock Exchange, but quickly gave up those gains and retreated back to pre-AGM levels of Rs209.
At closer look, it turns out some of the statements were not very impressive after all. On the demerger and value unlocking possibility, the management was non-committal and reiterated that these measures are regularly evaluated and will be done at the right time. Analysts are quick to point out that while rumours of value unlocking and demerger have risen in the past, there is no concrete news for investors to get excited about. In any case, even at the AGM, the statements related to demerger of non-cigarette businesses arose as a result of shareholder queries. It clearly looks like shareholders are more keen on the demerger than the company itself.
What about the announcement that the company is looking to launch a Super App this year, which will help create a robust ‘phygital’ eco-system to deliver seamless customised solutions to farmers? “Every company wants to launch a super app, so it is not a big game changer," said a consumer analyst with a multinational broking firm, requesting not to be named. The least the company could do is simultaneously apply for a digital payments license to show intent about its digital ambitions. It’s hardly surprising investors remain unmoved about these initiatives.
ITC also said it was exploring inorganic opportunities in its fast-moving consumer business (FMCG). Overall, analysts have said none of the announcements are likely to contribute meaningfully to revenue growth, unless the firm does something out of the ordinary, such as a large acquisition.
Moreover, there is little in the AGM announcements that suggests improved growth outlook for ITC’s cigarette’s business, which is its mainstay, contributing around 85% of its earnings before interest and tax (Ebit). “The company can keep adding more revenue streams, but unless the contribution of those revenue streams to profits increases, it is challenging for ITC’s shares to re-rate," said an analyst with a domestic broking firm, requesting anonymity.
In its June quarter results review report, analysts from Motilal Oswal Financial Services Ltd said, “Profit before tax growth over FY20–23E (6.9% CAGR) is likely to remain similar to growth in the preceding five years (6.6% CAGR)." CAGR is compounded annual growth rate.
The broker added, “With the cigarettes business likely to contribute over 82% to ITC's overall Ebit even in FY23E (from 85% in FY20), there is no material reduction in the dependence on this segment – which is beset by concerns of a) weak Ebit growth for several years now, b) the overhang of a possible GST increase going forward, and c) ESG-related issues over tobacco, leading to a reduction in valuation multiples." ESG stands for environmental, social and governance.
Perhaps, it would have soothed investors’ nerves if the company had made some announcements regarding the FMCG business demerger. The sooner ITC’s non-cigarette businesses are de-merged, the better for investors as the ESG drag on valuations will be lifted from these businesses.
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