ITC Limited – Is it Worth Buying?

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Last 5 years ITC to shareholders

ITC Limited is India’s one of the widespread diversified conglomerate. In the current scenario, people look at ITC stock as the evilest thing in the market like some fictional villain character in a movie.

For people, ITC is Dr. Evil.

All people are questioning is its market condition.

So let’s take grab some conclusions on ITC’s position in this blog.

Some Worrisome factors:

  • ITC an Under-Performer.
  • Government gonna sell.
  • Salary without Performance to management.

Criticism Around ITC Limited

ITC has not gone up in the last 5 years. If you are not going up in price; traders/Investors consider your stock as a terrible performer.

Adding to that, Unit Trust of India is a big holder of ITC.

This is a government body. There is frightening gossip that government will force UTI to sell its stake. Several objections are on its products like tobacco in concern of Environmental, Social, and Governance (ESG).

When the supply of shares is impending, it can depress the price further.

We can see ITC has not gone up for a while now, so traders are considering it as a terrible performer.

There is a criticism of bad capital allocation.

Read: Is ITC Limited a Curious Case of Capital Misallocation?

Senior management persons are getting fatty salaries & benefits but shareholders are getting nothing. Also, cigarettes have high taxation so volume growth of cigarette business for the is the company is not to be seen.

Other businesses of ITC Limited are either in not so good condition or at infant stage to make a promising outlook.

Overall ITC ‘s lagging bad performance in share price has overshadowed everything well. And everything bad is portrayed as “the wealth destroyer” image in the market.

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These were the points raised to the PPFAS Asset management team in their zoom conference with unit investors.

ITC Limited - Bad Image in the Market

Let’s take each point at its merit. The first one is:

Past Performance of ITC Limited

Past Performance of ITC Limited

Obviously in the last 5 years, Nifty(Redline) has gone up by 58 % !! Our poor ITC (Blue line),  negative 18 % Down. The gap happens to be [58%- (-18%)] = 76 %.

Your 1 lakh in the nifty year 2015, is now worth 1.58 lakh. While your 1 lakh in ITC year 201, is now worth just 82 thousand rupees.

Clearly, we can see ITC Limited is a terrible performer for the last 5 years. Period.

ITC Limited Stock Performance

Is there anything fundamentally wrong with ITC?

That is the core question one needs to ask at this juncture if you are investing fresh capital into ITC.

Assuming the worst, what probability do you see the following scenario to happen;

In the future, Nifty keeps growing and reaches a level of 1,00,000 BUT;
ITC will go down until the stock price reaches zero.

I don’t think so. If you think so, I would suggest you short futures, sell call options and buy puts in ITC as much as you can to gain from this “high probability belief”

Is there any Pattern that ITC might be following?

The answer is yes.

In the past similar to ITC’s present situation, stocks like Hindustan Unilever, Wipro have enacted the same pattern.

Past Underperformers

Hindustan Unilever Ltd.

HUL Past Performance

In the time period of 2002 to 2007 when the Indian stock market was at a vigorous bull run. The index was at its peak 263% up and our HUL stock is at negative 17% down.

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Despite any ESG or government pressure, there was such a massive gap in price movements. 

In simple words, 1 lakh in Nifty gone up to 3.63 lakh. While 1 lakh in HUL went down to 87 thousand.       

Underperfomance was at the extent of [263% – (-17%)] = 280% .

Let’s look at one more example.


Wipro Past Performance 

The same time frame for Wipro and underperformance is also at the three-digit extent!!

It was a financially growing period for Wipro but its stock was at a negative 67%.  

1 lakh in Wipro directly slip out to 33 thousand!!

Post-2007 Period 

Stock Performance After 2007

Stock Performance After 2007

Post-2007 was a period when all real estate, infrastructure, all leveraged companies were heroes and at the financial crisis.

But you can see the performance of HUL and Wipro in that five year period.

HUL outperformed the index by a huge margin of 113%.

HUL was up 105% and Index was down by 8%. Also, Wipro was up 37% and the index was down by 2%.

Watch: PPFAS Fund Manager Mr. Rajeev Thakkar Response to Investors Queries on ITC

What do you learn?

It pains a lot to buy an underperforming stock. It feels scared that this stock will keep going down.

But past underperformance is not a guarantee of future underperformance.

Of course one cannot blindly buy stocks. Do the basic hygiene check, analysis on leverage, governance or it should not be a company where there is a fraud.    

Keep in mind that something which is gone down significantly may offer opportunities.

There are people who are either momentum traders or investors who look at one-year price movements. Buying stocks at 52 week low typically is not such a great idea but if a stock has underperformed for 3-5 years, actually buying that stock is a good idea.

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That is the time when many times mean-reversion comes in because of a long period of underperformance.

ITC Limited has not gone down just in the last twelve months.

It has been underperforming for a long period of time. 

So let’s spark a thought for a minute that we have looked at HUL and Wipro fiver year performance across two different time frames!

Source: PPFAS Annual Unitholder’s Unit 2020

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Money Dhan

Money Dhan

Sujith comes with 15 years of experience in the derivatives market along with Long term Wealth creation via Large-cap companies. His theory is: If risk-free Bank FD generates 100% in X years, the Stock market should provide that return in half the time.
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