The Transformation
ITC is a company in transformation. It is rapidly building FMCG (Fast Moving Consumer Goods) brands and is market leader in many categories.
In the past 6 years, ITC's FMCG business revenue has grown by 60% whereas its profits have grown by 550%. This signifies "maturing" of its existing brands.
Cigarettes is the Cash cow.
Currently about 50% of the revenues and 85% of the profits of ITC come from the cigarettes business.
The company has over the years - used the profits is generates from the cigarettes business - to build businesses in other categories.
It has done this to ensure diversification.
Govt. regulations and un-certainty.
The cigarettes business of ITC is prone to heavy taxes by the Govt. (also called as "Sin Tax"). Govt. taxes smokers in order to discourage the consumption of cigarettes.
Therefore the company has decided to build businesses in newer segments - especially FMCG as these segments have no "sin tax".
Also these segments are seeing growth as consumption cycle in India is in a growth phase.
Stocks which generate good profits and have a growth business, besides having no debt on their books - are liked by the markets.
Let's hope ITC is able to build a "growth" and "profitable" business in the FMCG segment.
If that were to indeed happen the stock will "rerate".
(Disclaimer : This blog is for information purpose and not to provide any kind of advise. It is also not to solicit any business. Stock market investing is a with risk investing including risk of capital invested.)
