NEW DELHI: One of the biggest conglomerates in India is worried that its share price isn't going up. ITC (India Tobacco Company) stock has almost stagnated on the exchanges even as stocks of competing firms and benchmark indexes are enjoying a bull run.
For example, ITC shares are up by just 3.67% in the last one year while has BSE Sensex and NSE Nifty50 have grown by 43% and 45%, respectively. Other FMCG giants such as Unilever(8.88%), Dabur(15.87%), Godrej Consumer Products(39.66%) and Emami(71.10%) have seen their stocks growing at a much faster pace than ITC in the last one year. Even competing tobacco firm Godfrey Phillips India shares have given a better return of 6.25% in the last one year.
This has gotten the top management of the over 110-year-old company worried. ITC chairman Sanjiv Puri on Wednesday admitted the company’s board is concerned about the company's share price not appreciating despite payout of more than Rs 50,000 crore as dividend in the past five years.
So, what is holding back ITC Shares? Market experts attributed stagnant financial, ESG concern and exposure to Covid-19 businesses as primary reasons that has kept ITC share prices range bound.
ALSO READ: ITC chalks out USD 2 billion investment plan to fuel post-pandemic growth
"We can observe that the company’s sales have not been growing drastically but the company has seen the rise in the expenses which has impacted the bottom line as well as the margins for the company in the recent past. Total liabilities have also seen a rise despite of the stagnant sales and profit figures. The advantage that company has is its low debt," said Gaurav Garg, Head of Research at CapitalVia Global Research Limited. In the last 3 years, ITC's revenue has grown at a CAGR of just 4.7% while net profit grew by 5.3%, which according to experts are considered as "stagnant".
As more and more investors and funds focus on sustainable business model, experts attribute ITC's high exposure to ciggerate business a key reason for stagnant performance of its share price.
"The main contributor to profitability is still cigarettes. There are a number of funds across the globe who follow ESG (environmental, social and corporate governance) norms and avoid cigarette stocks as they are harmful for health of a human being," said Deepak Jasani, Head of Retail Research, HDFC Securities. He
added that investors may be interested in one or two out of the many businesses carried on by ITC; however they do not have a choice to participate in only those businesses, but have to take exposure to all the businesses.
"Its hotel business is capital intensive and has seen bad times lately because of the pandemic. This business also has the tendency to pull down the overall performance of the company. Its new FMCG business has grown to a reasonable size over time, but is yet to earn margins similar to those earned by its FMCG peers," said Jasani.
ITC chairman Sanjiv Puri recently said that the company is open to creating an alternative structure for the hotel business when the hospitality industry improves.
Experts welcomed this move and said that demerging few of its non-performing business could be a good option and that can help the stock prices. "ITC can look forward to demerge its businesses into 3 or 4 companies, though the cross subsidisation of one growing business by the other profitable business will halt by that action...On an overall basis, the demerger could lead to a better valuation," said Jasani.
As for investors, analysts have a different openion. Garg expect the stock in a range of 200-250 in the next few months. He added that investors can avoid the stock for the recent time until the company performance gets better and the company starts to increase its stagnant sales. Amarjeet Maurya, analyst at Angel Broking is positive on the stock. He expect healthy growth and profitability on the back of continuous improvement in demand across the segment, strong brand recall, wide distribution network and new product launches.