ITC Ltd : Stock Analysis Reasons of Underperformance | FMCG or Tobacco?

ITC stock has broadly under-performed the BSE FMCG Index in last 5 years





















Even if you consider a 1 year horizon, ITC has been left behind by leaps and bounds











Nestle, Tata Consumer Products ( earlier known as Tata Global Beverages) and Nestle have performed super well

Yes ITC has a rich portfolio of FMCG brands, that can make it rub shoulders with an HUL and Dabur








But look at the valuations. Its commands a PE of just 12.26 as on 17th March 2020 as compared to 50+ for typical FMCG giants like HUL and Dabur






But would it be more appropriate to consider ITC as a Tobacco company or an FMCG company

Look at the financials of ITC in the recent past. Its primarily a tobacco company – with 83% of profits derived from Tobacco














This despite having a presence in the non-tobacco businesses for more than 20 years none of the businesses have achieved the scale matching the tobacco business

Declining FII Holdings – Concerns over ESG (environmental, social and governance) 





From 20% at the end of June 2017, the FII holding in ITC declined to 15% at the end of December 2019

Several pension funds, sovereign wealth funds and insurers have removed tobacco stocks from their portfolio in recent years because of ESG (environmental, social and governance) concerns. Unsurprisingly, in the past one year, the BAT stock has declined 27 per cent, Philip Morris is down 17 per cent and Altria 16 per cent.

Declining Volumes

TAX BURDEN AND SMOKING CURBS TO WEIGH ON CIGARETTE BUSINESS. Global tobacco firms are facing headwinds such as decline in rates of smoking and increased demands by the Food and Drug Administration to reduce nicotine levels in cigarettes amid rising industry debt and high dividend payouts. Besides, heavy investments made by industry leaders in e-cigarettes and vaping devices are yet to bear fruit.

Sin tax

In India, the government increased taxes on cigarettes in the previous two budgets. It imposed a National Calamity Contingent Duty of Rs 5 per 1,000 cigarette sticks in July 2019; and raised the overall excise duty to Rs 200-250 for every 1,000 sticks without filter and Rs 440-735 on cigarettes with filter, depending on the length.


  • VST Industries Ltd.—maker of Charminar cigarettes—is ramping up its 69-millimetre business
  • Four Square-maker Godfrey Phillips India Ltd. is scaling up presence in the sub 64-mm segment























Illegal cigarette trade comprising international smuggled and locally manufactured tax-evaded cigarettes accounts for a fourth of the industry.


  • ITC would probably be the most diversified company listed on the Indian bourses.
  • Presence in diverse and unrelated businesses like soaps, confectionary, safety matches, stationery, food staples, snacks, apparels, hotels, retail, paperboard and packaging, agri products and information technology

If we derive the applicable PE Ratio for ITC on the basis of its Segment Wise Revenues and Segment wise results, (considering companies in Column B as a proxy) the PE can range from 26.2 (if based on Revenues) and 16.3 (if based on profits). The latter seems to be more logical since profits are a proxy for cash generated by the business. If we take the average of the two, its 21.25.










Currently the stock trades at 12.26. So there is upside but its range-bound.  It might not be wise to feel that ITC will command a PE of 50+ like its FMCG peers.

Pls also watch

ITC Ltd : Stock Analysis Reasons of Underperformance | FMCG or Tobacco?