From flame to fame: What best describes the on-going rally in ITC?
Which stock will touch Rs 300 first —ITC or Paytm? This WhatsApp forward caught our attention a few months ago, i.e., when the exodus of Foreign Portfolio Investors (FPIs) from Indian and other emerging markets began.
The aforesaid intriguing message highlights two crucial stock market traits:
- Ideal price and perfect valuations are a rare phenomena
- And whenever markets realize that they have moved too far away from what’s ideal, they can take corrective measures quite swiftly
Not long ago, investors thought the only risk associated with platform companies, such as Paytm, was not investing in them. On the other hand, many believed ITC didn’t offer any growth opportunity. But except egos, anything else rarely touches the skies and except misconceptions, anything else rarely makes us fall to an absolute zero.
It seems markets have been pushing both ITC and Paytm away from their extreme positions. The result is quite evident.
Over the last 6-7months, ITC has massively outperformed broader markets and has silently marched towards Rs 300 although it’s not there just yet.
Nonetheless, ITC’s relative outperformance appears to have puzzled even seasoned investors.
And to a large extent, their discomfort with ITC’s recent run up is understandable.
Here’s a quick recap of factors that bogged down ITC for years
- Poor capital allocation strategy as perceived by markets
- Unacceptably low profit margins in the FMCG Business
- Unimpressive record of strategic investments—for instance, investments in EIH and Hotel Leela Ventures
If these factors weren’t enough, growing popularity of the ESG (Environmental Social and Governance) theme over the past few years made ITC unpopular with investors since it sells sin goods—cigarettes.
As a result, despite clocking higher FMCG revenue as compared to that of Britannia, Nestle, Marico, Dabur and Emami, ITC found it difficult to shed its image of a cigarettes manufacturer.
And although it has rallied lately, ITC’s Trailing Twelve Month (TTM) Price-to-Earnings (P/E) ratio is just 22, while Nestle commands a TTM P/E multiple of 77 and VST Industries (manufacturer of Charms and Total cigarette brands) trades at a TTM P/E of 15.
So, is valuation gap the only reason for ITC’s relative outperformance in the recent past or has the company been warming up to turn the tables?
Our research analysts tracking ITC believe that the stock is poised for re-rating, pointing at consistent improvements in ESG scores of the company. Our research team is working on an exhaustive and comprehensive report on ITC. A teaser is already out.
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