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ITC — An Investor’s Dilemma (Part 4 - Management, Shareholding & Quantitative Analysis)

As we reach part 4 of our 5 part series on ITC - let's look at who runs ITC and the numbers behind our analysis. If you haven't read Part 1, Part 2 and Part 3 read those first.

ITC is a professionally run company, which means there are no active promoters with controlling stakes. For the most part, the upper management calls the shots. It is then perhaps a good question as to what incentives the management has to run the company well. Since there are no active promoters, remuneration and ESOPs to the upper management are the incentives. Both the major shareholding entities (you’ll know in a moment) have made sure that the management has the long term drive to run the business well.

Shareholding pattern

Shareholding Overview

As you can observe, two interest groups have significant shareholding by proxy of the companies they control — British American Tobacco PLC, a global cigarettes giant, holds roughly 29.5 percent stake, and the Government of India holds roughly 28.3 percent stake in the company. For obvious reasons, the GOI isn’t interested in taking control of ITC — they would like to sell their shareholding as soon as possible to raise funds instead, considering their fiscal position and divestment targets. Other than tightening the deficit, another reason GOI may want to sell their stake held by LIC is because of it’s upcoming IPO. They’ve previously refrained from selling their SUUTI stake in order to make sure ITC is not subject to a hostile takeover by British American Tobacco PLC. Update: Latest news suggests Government is trying to sell it's stake in ITC BAT has shown interest in acquiring a controlling stake, but the upper management don’t want them to. Therefore, there’s significant tussle between these parties which have their own interests at mind. It may be noted that currently the government doesn’t allow FDI in the cigarettes sector, but that may change anytime.

To make sure BAT isn’t able to increase it’s shareholding, the management will probably not issue buybacks anytime soon. Similarly, BAT has voted against ESOP policy so that their stake isn’t diluted further.

The dynamics can all change once the GOI makes a decision to sell it’s stake. If it does, you can expect BAT to accumulate as many shares as they can.

Alright, the management.

At the helm is Managing Director & Chairman Sanjiv Puri, who is a recent successor to Y.C Deveshwar. Mr Deveshwar were the brains behind ITC’s pivot, a Padma Bhushan Awardee, and were ranked as 7th best CEO in the world by a Harvard Business Review. He was an industry veteran well respected in the business community. Mr Sanjiv Puri certainly has big shoes to fill.

In the inner circles, it’s said that Sanjiv Puri was groomed for the job had there be a need for succesion, and he’s certainly a good fit at the current time considering he held the Presidential position in the FMCG (including Cigarettes) business before being promoted to Managing Director. Having followed him for a limited time, and reading his commentary, I’m of view that Mr Sanjiv Puri is an honest, able manager fit for the job. He’s been in the company since 1986, therefore I give him the benefit of the doubt for having long term intents to run the company. He’s an alumnus of IIT Kanpur and Wharton School. That’s reflective of Mr Deveshwar’s hiring philosophy of securing talents, primarily engineers from IITs & the likes.

The corporate governance practices of the company are said to be of high standards, but that’s eventually heresay to retail investors.

FWIW, it looks like ITC doesn’t have a proper succession plan to Sanjiv Puri’s position, although it’s too early to stress on.

Management Remunerations

Here’s the remunerations of board of director for FY19.

Note that a significant portion was remunerated to Y.C Deveshwar.

Total remunerations to board of director adds up to 36.75 crs, which is roughly 0.3 percent of PAT, well below the regulatory limits, and comparable to that of it’s peers. Remunerations are not an issue here.

Closing thoughts, I reiterate that I find the upper management to be honest and able to run the business. I trust Sanjiv Puri’s leadership as a consequence of being groomed by Mr Deveshwar, and his track record with the company. Due to ITC’s ambitions to pivot, it is significant that he held the top position in FMCG business prior to becoming the managing director. I see the tussle between the shareholders and the management as an issue, but not one that needs to be stressed on right now. If and when Govt of India chooses to sell their stakes, a revisit will be warranted to understand the situation.

Editors Note: With the Government planning a stake sale, may warrant a wait for prices to fall strategy.


While the topline growth in cigarettes business has taken a hit due to losing market share to illegal trade & peers, FMCG’s revenues have been commendable against peers. On a consolidated basis, revenue growth has been decent for a diversified business.

As discussed, the profitability of cigarettes business has to take up the responsibility of holding profit growth up it’s shoulders. Bottom-line growth from FMCG business will show up as net margins scale.

Operational, financial and profitability benchmarks

Return on capital for the cigarettes business has been exceptional as we talked about earlier. For FMCG, ROCE will expand as margins expand. Hotels business ROCE is very poor. As a consequence, over past few years ROCE has been on a downtrend. However, when gestation costs from FMCG business finishes, ROCE will go up. Overall on a consolidated basis, ROCE is still very respectable for a diversified business.

The return on invested capital ratio gives a sense of how efficiently a company is allocating its capital to generate returns. One downside of this metric is that it tells nothing about what segment of the business is generating value, so it’s not a sure-shot way to check for capital misallocation. Over the years, ROIC has been on a downtrend for the same reasons as ROCE’s. Again, overall they are still very respectable.

Same stuff for Return on Equity. ROE is considered a measure of how effectively management is using a company’s assets to create profits.

Retention rate is the percentage of earnings a company retains and reinvests in its business after dividend distribution. With the new Dividends Distribution policy, retained earnings will be lower.

Self Sustainable Growth Rate is the growth rate that a company could sustain without raising external capital. Simply put, it’s the inherent growth potential of a company. Calculated as (ROE x Retention Rate). A SSGR of 10% is respectable for a diversified business.

Despite profitability taking a hit due to FMCG & Hotels businesses, operational ability of the company deserves credit. A lot of covering up the mess has to do with 1) the huge profitability of the cigarettes business and 2) the help provided by the agriculture and paperboard businesses as proxies.

Inventory benchmarks

Inventory days is the average number of days a company holds its inventory before selling it. Simply put, it measures the number of days funds are tied up in inventory. It’s sub-par in my opinion.

Cash conversion cycle measures the time it takes for a company to convert its investments in inventory to cash. It measures how fast a company can convert cash on hand into even more cash on hand. Although it’s been increasing in the past few years, it’s not a red flag to me right now. Keep and eye out in the future.

Inventory Turnover Ratio measures how effectively inventory is managed by comparing cost of goods sold to average inventory for a period. This measures how many times average inventory is sold during a period.

Cash flow analysis (in INR crores)

Cumulative CFO is comparable to cumulative net profits for 5 years and 10 years both. This is a check for red flags. In the past, companies used to inflate earnings by accelerating revenue recognition or straight up making fraudulent claims. To check for that, one can observe whether profits are backed by cash flows.

Free cash flows is surplus cash available to the company after capital expenses. This cash can be used to incentivise shareholders by paying dividends or announcing buybacks, or for inorganic growth opportunities such as acquisitions, or could be used simply for non-core investments. Owing to cigarettes business, free cash available with ITC is massive.

Risk-related flags

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Disclaimer: This post originally appeared on the Medium account of Divyansh Agnani and has been reproduced here (with certain minor edits) with his kind permission. Do follow Divyansh's medium profile to see the excellent coverage of ITC


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