Sunday, January 7, 2007

ITC: Not just Cigarettes

As part of my MBA, I was asked to do a presentation on the BCG Matrix for a company of my choice. I chose ITC and made this presentation. It's been ages since I reviewed a stock which is part of the Sensex. So here it goes.....

Recently, ITC has won the National Award for Excellence in Corporate Governance 2006 from the Institute of Company Secretaries of India. ITC received the award for its commendable performance along the “triple bottom line”, its strong corporate governance model and its visionary leadership.

ITC is one of India's foremost private sector companies with a market capitalisation of over Rs 620,625 million and total revenues crossing Rs 100,000 million in 2006. Rated among the World's Best Big Companies, Asia's 'Fab 50' and the World's Most Reputable Companies by Forbes magazine, among India's Most Respected Companies by BusinessWorld and among India's Most Valuable Companies by Business Today, ITC ranks third in pre-tax profit among India's private sector corporations.

ITC has a diversified presence in Cigarettes, Hotels, Paperboards & Specialty Papers, Packaging, Agri-Business, Packaged Foods & Confectionery, Information Technology, Branded Apparel, Greeting Cards, Safety Matches and other FMCG products.

While ITC is an outstanding market leader in its traditional businesses of Cigarettes, Hotels, Paperboards, Packaging and Agri-Exports, it is rapidly gaining market share even in its nascent businesses of Packaged Foods & Confectionery, Branded Apparel and Greeting Cards.

ITC commands around 70% of India's Rs 130 bn domestic cigarette market (value terms). Out of the top 10 cigarette brands in India, 6 belong to ITC.

ITC's paperboard unit at Bhadrachalam is the largest and most contemporary paperboards manufacturing facility in the country and accounts for over 80% of the company's total installed paperboard capacity of 325,000 tonnes.

ITC has emerged as the second largest player in the hospitality industry in India, behind Indian Hotels (The Taj Group). This division continues to benefit from capacity expansion as well as the upturn in the industry's occupancy rate. This division displayed a staggering CAGR growth of over 48% between FY02 and FY06

An important weapon in the company's arsenal, E-choupal's potential is unimaginable. E-choupal is a web-based initiative of ITC's International Business Division, that offers the farmers of India all information, products and services they need to enhance farm productivity, improve farm-gate price realisation and cut transaction costs. E-choupal also facilitates supply of high quality farm inputs as well as purchase of commodities at their doorstep.

However before you rush to buy the ITC scrip, ponder over these observations: The domestic cigarettes industry has been facing pressures in the spheres of taxation, and regulation of consumption and communication. Also, there are more chances of excise duty on cigarettes rising than falling, as is the case internationally. Hence, to that extent, the backbone of the company is under pressure.

Moreover, while ITC is moving in the right direction by de-risking its business model and entering new areas, the company's food business continues to eat into its profits currently.

Globally, tobacco companies are in the eye on storm over health related issues and have been on the receiving end of penal action for damage claims. Though Indian consumers are not active on the libel side currently, this is likely to change as consumer activism is on the rise.
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