ITC Limited – Valuation of its Different Businesses

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Valuation of Business Verticals of ITC Limited

ITC Limited 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 Limited using a discounted cash flow model.

The only problem is ITC Limited has too many businesses. Hence, I decided to value each business separately.

Let’s look at the business verticals and how much they contribute:

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ITC Limited Business Verticals (2020 Annual Report)

So, let’s 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.

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This is how I valued the cigarette business of ITC Limited:

Cigarette Business Valuation
Cigarettes Business Valuation

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:

ITC Limited FMCG Business Valuation
FMCG Business Valuation

Hotels Business

If it was up to me, I would sell the hotel’s 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 Limited.

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.

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Even then I could estimate the total value of assets at just around 500 crores.

Valuation of ITC LImited Hotels Business
Hotels Business Valuation


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.

Valuation of Agri Business
Agri-Business Valuation

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 Valuation


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 of ITC Limited

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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Valuation of ITC Limited
Final Output

Why Kunj Bansal Won’t Invest in ITC Despite Mouth-Watering Valuations?


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 Limited can’t be considered an undervalued stock anymore. The bulk of its value still comes from its cigarette 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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