In this briefing:
- Tobacco: A Framework for Analyzing the Sin Sector from an ESG Perspective, with a Focus on ITC
- Titan Co Ltd (TTAN IN)
- State Assembly Results: Setting up a Direct Clash Between Indian Voters and Global Investors?
1. Tobacco: A Framework for Analyzing the Sin Sector from an ESG Perspective, with a Focus on ITC
Contrary to the perception that the rising adoption of socially responsible investment practices has caused Big Tobacco to be shunned by portfolio managers, our shareholding analysis shows that institutional holding in most of these ‘sin’ stocks has increased in the last 4 and 8 quarters.
Nevertheless, Big Tobacco suffered a pounding in 2018. Investors had bought into tobacco premising reduced risk products (Eg: e-cigarettes, Heat Not Burn products) would reduce regulatory risk and reverse decades of sales decline. As it turned out, regulators frowned at the popularity of vaping amongst teens in the US, calling out companies for baiting youngsters into long-term smoking habits. Regulators also told off companies for marketing e-cigarettes and HNBs as healthier options, as tobacco still kills.
Ethical portfolios with negative screens (for example, ones that will not invest in tobacco stocks) have underperformed in the long-term past. There is a growing tribe of funds committed to responsible investing with positive ESG screens. For such funds, we present in this insight a framework for analyzing the sector from an ESG perspective. A deep dive into ITC Ltd (ITC IN), the only cigarette major to turn in a positive performance this year, vindicates, in our view, its efforts to materially de-risk its asset and revenue profile, coupled with very high levels of commitment towards community development.
2. Titan Co Ltd (TTAN IN)
Titan Company Limited manufactures and sells watches, jewellery, eyewear, and other accessories and products in India and internationally. The company operates through four segments: Watches, Jewellery, Eyewear, and others. It is one of the few companies operating in organised jewellery retail industry of India. We visit stores & markets in Kochi (Kerela) and Chennai (Tamil Nadu), the biggest consumption markets to understand structural changes that have taken place in the industry, with an objective to tweak our revenue and margin estimates. We believe consensus might be underestimating growth from the jewellery segment which is the largest contributor with 81.60% of Sales as of FY2018. Our revenue estimates for FY19 and FY20 are 5.8% & 2.98% higher than consensus, primarily based on higher than expected market share gains from unorganised players. Our EBITDA margins for FY 19 & FY20 are 1% & 1.30% higher than consensus estimates primarily based on product mix which is in favour of studded jewellery and operating leverage as sales across stores pick up. Our EPS for FY19 & FY20 is estimated at INR 18.60 and INR 24.26 per share which is higher than consensus by INR 2.47 and 4.05 per share for FY 19 and FY 20. Based on an average forward multiple of 49x we arrive at a target price of INR 1187, representing a 30% potential return from current market price.
3. State Assembly Results: Setting up a Direct Clash Between Indian Voters and Global Investors?
The results of the state assembly elections especially of Rajasthan, Madhya Pradesh and Chhattisgarh reveal the growing dissatisfaction of the electorate with the economic policies of the ruling Bharatiya Janata Party (BJP). BJP policies such as demonetisation (which was initially hailed as a brilliant decision) and the manner of implementation of the Goods and Services Tax (GST) dealt a severe blow to employment-intensive sectors like agriculture and the micro and small industries. The BJP had also allowed the agrarian sector in India to bear the burden of deflation, causing widespread peasant disenchantment, which became visible in massive farmer demonstrations culminating in the recent gathering in Delhi. Global investors should be prepared for significant increases in government expenditure on rural welfare schemes and farm income support to alleviate rural distress. In the absence of surpluses from the Reserve Bank, the government would have to expand the fiscal deficit for such schemes. If, on the other hand, the newly appointed RBI governor transfers the realized portion of the central bank surplus (the contingency reserve) to the government, such expenditure will weaken the central bank’s balance sheet at a time of global volatility. For the global investors the India risk has only increased.
