For ITC, consistency at the top pays

ITC’s stock and financial performance in the last two decades under the single longest serving chairman, YC Deveshwar, only shows that stability of tenure of people at the top pays in the long term.

ITC’s stock price has multiplied by around 50 times over the last two decades (till date) since Deveshwar took chairmanship of the company on January 1, 1996. The stock price of its closest competitor (though strictly not comparable), Hindustan Unilever, which has seen relatively more changes at the helm, has grown 13 times. In the same period, the Nifty FMCG index has grown 21 times.

ITC’s stock outperformance is based on its strong financial performance. Its revenues and net profit have grown at a compounded annual growth rate of 15 per cent and 20 per cent, respectively, during FY1996-2016. In comparison, HUL’s sales and profit have grown at CAGRs of about 8.4 per cent and 12 per cent, respectively.

ITC’s robust financial performance is despite government’s strict regulatory measures in terms of regular tax increases on cigarettes, which formed over 40 per cent of its sales but 85 per cent of profit before tax, in FY16.

This is because the company has been scaling up its non-cigarette FMCG business in the last one decade and that too, profitably. It has been entering newer segments, such as dairy, in order to expand its portfolio.

“ITC is one of the few companies which have seen the least attrition at the top management. Partly it is because the company has diluted its equity by 4 per cent in the last four-five years and given stock options to its top management,” said Sameer Deshmukh, analyst at Reliance Securities. He is bullish on ITC’s cigarette business for the next one year.

In the backdrop of the stock price hitting 52-week high of ₹259.75 on July 1, regulatory risks in cigarettes business, and Deveshwar retiring in February 2017, the question arises is, will ITC’s outperformance continue? The answer is yes, say analysts.

“Leadership is not a serious issue for companies such as L&T, Infosys and ITC, which have decades of experience,” said G Chokkalingam, of Equinomics Research and Advisory.

Deveshwar will continue as non-executive chairman of ITC till 2020. Sanjiv Puri, who is currently the executive director, is most probably going to take the baton from Deveshwar. “The current valuation of 23 times FY18 estimated earnings is at a steep discount of 20-40 per cent vis-à-vis large-cap consumer goods stocks (such as HUL, GSK Consumer and Asian Paints). ITC is also trading at a discount to its long-term average multiples. Thus, we retain our buy recommendation with a target of ₹280,” said Chokkalingam.

Manish Poddar and Premal Kamdar, of Religare Institutional Research expect a better FY17 with more benign excise hike and ITC’s enhanced focus on volumes and limited price increases.

Besides, the company’s hotel, paper and agriculture businesses are also expected to do well with recovery in room rates (occupancy rates already at five-year high), better economic growth and good monsoons, respectively.

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