Sum of Parts Valuation – Wisdom of Crowds

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ITC is one of India’s foremost private sector companies with a market capitalization of US $ 50 billion and Gross Sales Value of US $ 10 billion. ITC has a diversified presence in FMCG, Hotels, Packaging, Paperboards & Specialty Papers and Agri-Business. I decided to value ITC using a discounted cash flow model. The only problem is ITC has too many businesses. Hence, I decided to value each business separately. Lets look at the business verticals and how much they contribute:

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ITC Business Verticals (2020 Annual Report)

So, lets look at each business separately.

Cigarettes Business: This is the business because of which ITC still has value in the market. With a return on invested capital of over 400% and operating margin of 70%, this is a jewel. I predicted a growth of 8% in the business for the next 15 years considering India’s per capita cigarette consumption is still ranked 160th in the world. I predicted a decline in its net profit margin as the government decides to keep increasing taxes and brought the return on invested capital to 200% by the end of 15th year. This is how I valued the cigarette business:

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Cigarettes Business

I estimate the value of operating assets at 195008.49. This is a huge chunk of my value for ITC even though it contributes less than 10% of ITC’s assets.

FMCG Business

With a return on invested capital of 5.09% and operating margin of around 3%, the FMCG business has significantly underwhelmed even though it has grown. This is a space where even mediocre FMCG companies are able to sustain margins of above 10% with the likes of HUL, Bajaj Consumer Care, Marico etc. managing above 20%. I predict a recovery in this business in the next 15 years with a growth rate of 8% and net profit margin as well as ROIC increasing to 15% and 25% respectively. My valuation for the business is as follows:

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FMCG Business

Hotels Business: If it was up-to me, I would sell the hotels business and this was even before the covid crisis. With a return on invested capital of 2.15%, there is a long way to go before the business can even earn its cost of capital. This is only partially down to ITC. Very few players in this space are able to earn their cost of capital given the high capital expenditure and increasing competition. I predict an optimistic picture where the firm can eventually earn its cost of capital while growing slowly due to the covid crisis. Even then I could estimate the total value of assets at just around 500 crores.

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Hotels Business

Agri Business: The business has a high sales to invested capital ratio which indicates sustainable economies of scale and good distribution. However the net profit margin has space for improvement. I predict an improvement and good growth in this segment for the next 15 years. However i expect pain in the next 2 years because of the current pandemic.

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Agri Business

Paper boards, paper and packaging business: The business has done well and has a high operating margin consistently which indicates sustainable branding power. It has grown consistently at 8% CAGR. I estimate this growth to continue for the next 15 years adjusting for covid.

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Paper Business

Infotech: This business is new and has a lot of scope for growth all be it under significant competition. I apply the trend in all of my valuations above and paint an optimistic picture. The valuation sheet is given below:

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ITC Infotech valuation

Corporate expenses and Other Assets:

The corporate expenses and interest income from other assets haven’t been included till now and stand at 1059 crores and 2729 crores respectively. I estimate a value for them both using the terminal value equation as shown below:

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All values are in crores

Final Value:

I add up all my operating assets net of corporate expenses, add back cash and subtract the debt to arrive at my value of equity for ITC.

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Final Output


The stock price is currently trading at 205 and the value of equity that I get considering a reasonably optimistic picture is 212. Is it time to sell? Maybe, maybe not. But ITC can’t be considered an undervalued stock anymore. Bulk of its value still comes from its cigarettes business. While there is some potential in the agri and the paper business it does seem that the company has diversified into too many areas. The FMCG business has seen good growth but the margins indicate that customers aren’t still willing to pay a premium for a majority of its products. The other significant worry is the “other investments”. These other investments contribute to more than 50% of the book value of assets and equity. The return on equity on these investments stands at 5% which is significantly below the cost of equity. How long can the tobacco business save the Indian Tobacco Company?

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Himanshu Sinha

Himanshu Sinha

Himanshu is hugely into Value Investing, Complex Adaptive Systems, Business Analysis, Behavioral Finance, and Spotting Market inefficiency.
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