India focused Portfolio Advisory - Exp of 40+years, Das Capital Management and Advisors

Arun Thirumalai

India focused Portfolio Advisory - Exp of 40+years

Das Capital Management and Advisors

Das Capital is a research boutique with an aim to continuously map and plan the investment needs of investors focused on India. We have a six member research team with a combined experience of over 40 years as a part of our investment wing. Our team assisted in the setup of Premji Investments, which was one of India’s first family offices focused to managing Mr.Azim Premji personal wealth. We also serve as a research team to two Indian private equity energy funds “Small is Beautiful” and “KSK Emerging India Energy Fund”.

Equity Bottom-Up

<a href="https://www.smartkarma.com/entities/327" target="_blank" data-smartkarma-citation="entities:327:1">ITC Ltd (ITC IN)</a> is one of the leading conglomerates in India with interests in the Cigarette, FMCG, Paper, Hotel, and agriculture sectors. The company is a near monopoly in the cigarette space with 80% market share. To diversify from tobacco, the company entered the consumer business space in 2002 and today it is one of the leading FMCG companies in India catering to both food and personal care products. It is also a market leader in Paper and Paper packaging. The company has no promoter holding &amp; it is controlled by institutional investors with British American Tobacco (24.7% stake) and Life Insurance Corporation of India (14.4% stake) as key shareholders. Tobacco business- the cash cow <ul class=""><li>The company has witnessed muted growth in the Cigarette segment in the last 5 years due to high taxation and stringent regulations.</li><li>However, the company has managed to maintain its operating margins as it is able to pass on the taxes to consumers due to its monopoly.</li><li>Cigarettes contribute near 85% of the company’s profitability and operating cash flows as of FY17.</li><li>We expect cash flow from cigarettes to fund all future CapEx especially FMCG that has been the fastest growing segment since its inception in 2002.</li></ul>Consumer segment to be the key growth driver.The company has targeted to reach Rs. 1000 bn (USD 15.6 bn) by FY30 in its FMCG segment, a CAGR of 18% from FY16. We believe that this is achievable given the company’s extensive distribution and marketing strength and the underlying purchasing power of a young population. A high-growth consumer business will also help in improving the blended margin for the company going forward.ValuationGiven the fact that the business segments of the company operate in unrelated sectors we have valued the company using Sum of the Parts Valuation(SOTP) method. Based on our SOTP estimates the company is currently trading at a small premium of 8% to our intrinsic value of Rs.305/ share.  However, on a relative basis ITC trades at a PE of 39x FY17, 35x FY18e and 33x FY19e and an EV/EBITDA of 23x FY17, 21x FY18e and 19x FY19e on consolidated numbers which is undervalued in comparison with peers.

ITC Ltd (ITC IN) is one of the leading conglomerates in India with interests in the Cigarette, FMCG, Paper, Hotel, and agriculture sectors. The company is a near monopoly in the cigarette space with 80% market share. To diversify from tobacco, the company entered the consumer business space in 2002 and today it is one of the leading FMCG companies in India catering to both food and personal care products. It is also a market leader in Paper and Paper packaging. The company has no promoter holding &amp; it is controlled by institutional investors with British American Tobacco (24.7% stake) and Life Insurance Corporation of India (14.4% stake) as key shareholders.  Tobacco business- the cash cow The company has witnessed muted growth in the Cigarette segment in the last 5 years due to high taxation and stringent regulations.However, the company has managed to maintain its operating margins as it is able to pass on the taxes to consumers due to its monopoly.Cigarettes contribute near 85% of the company’s profitability and operating cash flows as of FY17.We expect cash flow from cigarettes to fund all future CapEx especially FMCG that has been the fastest growing segment since its inception in 2002.Consumer segment to be the key growth driver.The company has targeted to reach Rs. 1000 bn (USD 15.6 bn) by FY30 in its FMCG segment, a CAGR of 18% from FY16. We believe that this is achievable given the company’s extensive distribution and marketing strength and the underlying purchasing power of a young population. A high-growth consumer business will also help in improving the blended margin for the company going forward.ValuationGiven the fact that the business segments of the company operate in unrelated sectors we have valued the company using Sum of the Parts Valuation(SOTP) method. Based on our SOTP estimates the company is currently trading at a small premium of 8% to our intrinsic value of Rs.305/ share.  However, on a relative basis ITC trades at a PE of 39x FY17, 35x FY18e and 33x FY19e and an EV/EBITDA of 23x FY17, 21x FY18e and 19x FY19e on consolidated numbers which is undervalued in comparison with peers. 

ITC Ltd.- It's Lots More than a Mere Puff