Why is ITC Ltd Stock Falling?

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Updated: ITC Ltd Q3FY21 Results Analysis


Why is ITC Ltd. Stock Falling? ITC has presented its Q3FY21 results. The results shows Net Profit has declined by 11.6% YoY to ₹3,663 crore in December Quarter due to dampened sales across Cigarettes, Hotels and Paper and Packaging business verticals. Lets discuss the Q3FY21 results analysis of ITC in detail.

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ITC Ltd Stock Analysis

Company Profile

  • ITC Limited is one of India’s foremost private sector companies incorporated in August 1910. It is an Indian multinational conglomerate company having headquarter in Kolkata, West Bengal.
  • ITC has a diversified presence in FMCG, Hotels, Agri-Business, Papers, Packaging, and Paperboards etc.
  • Thus the 5 key business verticals of ITC Ltd are :
    1. Cigarettes Business
    2. FMCG – Others
    3. Hotels
    4. Agri Business
    5. Paperboards, Paper and Packaging
Business verticals of ITC Ltd
Business Verticals of ITC Ltd

ITC Ltd Q3FY21 Results Analysis

Lets see the Q3FY21 Financial Highlights of ITC Ltd.

ITC Q3FY21 Results
ITC Ltd Q3FY21 results highlights
  • Revenue from operations during the quarter rose by 4.7% year-on-year to Rs.12,580 Cr in Q3 FY21 from Rs.12,013 Cr last year. Sequentially Revenue from Operations has increased by 5%.
    • Since, Last Quarter was very good for the company, and growth of 5% QoQ indicates positive sign for the company.
    • ITC has recovered well from its Q1FY21 results and have presented a good report in last 2 quarters.
  • Operating Expenses in Q3FY21 increased by 12% YoY to Rs.8,299 Cr from Rs.7,400 Cr in Q3 FY20. The rise in operating expenses is higher as compared to the increase in Revenue.
    • It has directly impacted the Operating profit (EBITDA) and EBITDA Margins of the company.
    • The EBITDA fall is very high compared to the Revenue fall. Because, the Operating Expenses remained almost same due to the higher fixed cost.
    • Company is yet to fully utilize its operating leverage which will lead to further expansion in margins.
  • Operating profit (EBITDA) of ITC decreased by almost 7.2% YoY in Q3 FY21. Sequentially it has increased by 5.4% from Q2FY21
    • EBITDA margins have also taken a hit and contracted by 7.2% YoY with the fall in EBITDA.
  • Profit before Tax (PBT) also declined by 35% YoY and 30.7% QoQ in Q1 FY21. Since, the company is virtually debt-free, there is no interest payment cost incurred.
  • Net Profit (PAT)
    • In line with the decline in Operating Profit and PBT, the Net Profit of ITC also declined by almost 11.6% YoY to Rs.3,663 Cr from Rs.4,142 Cr in Q3 FY20.
    • The QoQ rise in Net Profit is almost 13.3% from Rs.3232 Cr in Q2 FY21. But here we should take into account the Tax Rates also. In Q2 FY21 & Q3 FY21, tax rate was 24%.
    • The corporate tax rate cut is the positive thing in FY20 for ITC Ltd also. Last year, ITC Ltd paid taxes at the rate 34% in Q1FY21. While after the corporate tax rate cut, the effective taxation for ITC has come down to 16% in Q4FY20 and at 25% in Q1FY21.
    • This move was very encouraging for the shareholders, since the tax rate cut directly resulted into the improved profitability of the company.

Business Verticals of ITC LtdRevenue & EBIT Mix

ITC Q3FY21 Revenue and EBIT Mix (%)
ITC Ltd Segment revenue and EBIT mix
  • All the segments except Hotels and Papers, Paper boards and Packaging reported positive sales growth on YoY basis in Q3 FY21.
  • Revenue Growth in Cigarettes Business is up by 3.5% and 7.4% YoY and QoQ respectively. Whereas, EBIT of Cigarette Business has gone up by 6.4% QoQ but has reported 8% YoY.
  • Its prime focused segment is FMCG business which has reported positive EBITDA (Earnings Before Interest ,Taxes, Depreciation and Amortization) growth of 27.3% but there is sequential fall of 11% due to rise in commodity prices. FMCG- Others revenue has increased by 7.5% YoY to ₹3,562 crore and has reported fall of 6.1% QoQ. Fall in revenue and EBITDA Margins of FMCG business was not expected and therefore affected the sentiments of the investor.
  • Hotels Business revenue is down by 57% YoY, but loss recovery can be observed in the financials.
  • Agri Business has reported the highest growth in Revenue among all the segments of 18.5% YoY from ₹2,095 crore in Q3FY20 to ₹2,482 crore in Q3FY21. Normally downtime is recorded in this quarter for Agri Business, hence there is fall of 8% in EBITDA Margin year-on-year and 23% QoQ.
  • Revenue from Paper, Paper boards & Packaging has decreased by 5% YoY and it has increased by 1.3% QoQ.
  • Company has vision of generating revenue of more than ₹1 lakh crore in coming 5-10 years from business of FMCG and Agri-Business. Currently these businesses contribute 50% revenue of the overall business.
  • Packaged food enjoyed pantry loading benefits and part of personal care also recovered. The company has good portfolio to capitalize on health and hygiene trend.
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Revenue Mix – Q3FY21 vs Q3FY20

ITC Q3FY21 vs Q3FY20 revenue mix
ITC Ltd Revenue Mix
  1. Cigarettes
    • This is major contributor in the business of ITC Ltd. The company earns majority of their revenue form this business vertical.
    • Its  contribution to the revenues is 41.5%. However, this business vertical’s contribution to EBIT is a whopping 84.8%.
    • With the ease of lock-down and increasing normalcy in metro cities and big towns, volumes and revenue in this segment are recovering.
    • Despite several curbs by the authorities, Smuggled Cigarettes available in large extent.
    • This is tell us how much ITC is dependent on their cigarettes business. ITC is trying very hard to diversify their overall business, but they haven’t been much successful in doing that.
  2. FMCG – Others
    • FMCG-Others have increased its contribution in revenue mix by 1.1% from 25.8% in Q3FY20 to 26.9% in Q3FY21.
    • FMCG – Others business verticals contribution to revenue is pretty healthy. The company has launched over 100+ products across Hygiene, Health and wellness, Natural categories between April 2020-December 2020 with respect to increasing demand for staple and packaged food products.
    • Health & Hygiene products have sustained growth trajectory. Hygiene products like Savlon, Disinfectant Sprays contributes 5% of the FMCG revenue and their sales have doubled year on year via e-commerce channels.
  3. Hotels
    • The Hotel segment of company continues to be a loss making segment in this quarter too. Their contribution to revenue has fallen from 4.3% in Q3FY20 to 1.8% in Q3FY21.
    • Despite this there is strong recovery on sequential basis, Hotel Business performance is below pre-Covid-19 level by 50%. But, there is increase in revenue in hotel segment due to increasing mobility, tourism,etc.  by 3 times in comparison with last quarter.
  4. Agri Business
    • Contributions of Agri-Business towards Revenue Mix is the highest in this quarter. Its contribution to revenue has increased by 2.4% in this quarter from 16.3% in Q3FY20 to 18.7% in Q3FY21.
    • In total revenue (%) of Agri-Business of 18.7%, the major portion i.e., 18.5 driven by wheat supplies for Ashirwad Atta and & trading opportunities tapped for Rice, Soya, & Wheat.
    • Wheat is also exported to Bangladesh, Sri Lanka, Malaysia and UAE.
  5. Paperboard, Papers & Packaging
    • This business vertical of the company has reported fall in their contribution to revenue mix by 0.9% YoY.
    • It has seen recovery in their volumes and increase in exports in this quarter. Subdued demand in domestic markets have greatly affected the revenue growth of this business segment.

EBIT Mix – Q3FY21 vs Q3FY20

ITC Q3FY21 vs Q3FY20 EBIT Mix (%)
  1. Cigarettes
    • The EBIT Mix of Cigarettes have declined marginally by 1.3%  due to higher dependency on their cash cow business.
    • EBIT Margins have declined by 8% year-on-year.
  2. FMCG – Others
    • This business has reported the strong growth in EBITDA of 2.7% YoY.
    • Prime reason behind this strong growth in EBITDA of FMCG- Other business is due to sustained improved in profitability driven by operating leverage
    • Under this segment, ITC has launched over 100+ products in 9MFY21.
  3. Hotels
    • The Hotel segment of the business is the most affected business due to pandemic.
    • Business have taken an aggressive approach to cut cost and are able to bring down fixed cost by 44%
  4. Agri Business
    • There are no significant changes in EBIT Mix of Agri-Business. It is 4.8% at Q3FY21, improvement of 0.1% from last quarter.
    • Due do subdued demand for valued added portfolio, EBIT growth is -8% and this proved to be big blow for this quarter, despite 18.5% rise in revenue.
  5. Paperboard, Papers & Packaging
    • Fall of 0.4% in Q3FY21 in EBIT in this Paper business segment has been presented due to Negative Operating Leverage and less domestic demand
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Segment wise Margin Trend

ITC Q3FY21 Segment wise Margin trend
ITC Ltd Segment wise Margin Trend
  • Cigarettes:
    • Cigarettes Business which is a cash cow of ITC has also reported fall in margins from 70.7% in Q3FY20 to 62.8% in Q3FY21. It is primarily due to increase in raw material cost which led to fall in profitability.
  • FMCG-Others:
    • FMCG-Others has reported improvement in EBITDA Margins of 1.5% YOY, but QOQ it has fallen by 0.5%. Market responded heavily to this component.
  • Agri-Business:
    • Its Agri-Business is reporting continuous fall in the margins. YoY margins of Agri business have decreased from 10.2% in Q3FY20 to 7.9% in Q3FY21. There is fall in Margin of 0.7% on sequential basis.
  • Papers, Paper boards & Packaging:
    • Margins in this business have fallen from 21.5% in Q3FY20 to 19.3% in Q3FY21. Despite fall in the margins of this business, it can be considered as healthy number.
    • Fall in Margins especially in their focused business i.e., Agri-Business & FMCG-Other is the major concern of the investors or traders as of now. But Company has great potential and growth trajectory is also high, so there is not such big matter of concern.

FMCG Others – Sustained improvement in profitability

ITC FMCG segment
ITC Ltd FMCG segment
  • Margins of FMCG Others have grown consistently in the 3rd Quarter of every Financial year. It has gone up from 1.9% in Q3FY17 to 9.7% in Q2FY21. But there was slight downfall of 0.5%, which brings the Margin figure to 9.2% in Q3FY21.
  • ITC is having a great product portfolio under their FMCG-Others business. Till now, in this FY, they have launched more than 100+ products.
  • Once the revenue increases with increasing volumes, operating leverage comes into play with certain fixed cost and reducing variable cost.
  • ITC is also having a good supply chain efficiency and is working very efficiently to gain digital presence. Company is doing very well in their innovation segment.
  • All such factors are working well for this segment of the company, and the only factor to watch upon is improvement in their EBITDA margins.

Cigarettes Business of ITC Ltd

  • The Cigarette business has been a consistent revenue generator for ITC and it will remain the same in coming times as well.
  • The total consumers of all these tobacco products in India are 27 crore+. Out of these, 10 crore consumers are of cigarette and beedi. And out of these, 80% of the consumers are the users of beedi and the rest 20% use cigarettes. Beedi is an unorganized kind off market. This mean that, there is a lot of opportunity for the company to grow more in their cigarettes business.
  • ITC Ltd has a market share of more than 80%.

ESG Parameters for ITC

ITC Ltd - Analyzing on ESG Parameter
ITC Ltd – Analyzing on ESG Parameters

The ESG (ie. Environmental, Social and Governance) parameter for ITC Ltd is shown above.

Institutional Investors
  • Nowadays, the institutional investors give a lot of importance to ESG parameters. ESG stands for Environment, Social and Governance.
  • If there is any environment affecting activity/product of the company then that company is marked negatively. In the case of ITC, cigarettes are the reason.
  • In terms of social as well, cigarette smoking impacts other people as well.
  • From governance side, there is no problem. ITC is a very well-managed company.

ITC Ltd – Quantitative Analysis

  • Lets see the key performance parameters of ITC :
    1. Return on Capital Employed (ROCE) = 32.32%
      • Strong ROCE number gives the an idea about how efficiently ITC is generating profits from its capital employed across its diversified business segments.
    2. Return on Equity (ROE) = 25.9%
    3. Debt to Equity Ratio (D/E) = 0.00
      • The Company is virtually debt free. Amidst the current lock-down due to COVID-19 pandemic, the debt-free companies have an extra edge over its peers by the investors.
      • The concern of repaying the interest on the Loans amid dampened revenue and cash flows would not be the case for ITC.
    4. Dividend Yield = 5.20%
      • Stock is providing a good dividend yield of 4.6%. The company has declared dividend of Rs.10.15 per ordinary share for FY20.
      • Also, the company has been maintaining a healthy dividend payout of 55.94%.
    5. Heavy Weightage in Key Indices
      • ITC Ltd stock is having a strong weightage in key Indices ie. Sensex and Nifty 50
        • Sensex has ITC weightage of around 4.7%
        • Nifty 50 has a weightage of 3 % for ITC Ltd
      • A heavy weightage of ITC stock in India’s Key Indices infuse a great flows of passive funds. It would benefit ITC to build a huge valuation in the long-term.
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ITC Ltd – Valuation
  • The current Price to Earnings Ratio (PE) of ITC Ltd is around ~20x. Whereas, the historical Median PE Ratio is 30.
  • It shows the stock is currently Trading at a very Good Discount to its Historical Valuation.
  • Thus, we can say that there is very limited downside risk.

Is ITC Ltd a Value Buy for Long-term Investment?

  • Not all companies have the potential to give healthy returns to their investors over the long-term. Only companies that have strong corporate governance policies, have consistent financial performance, have fortified upper management and possess an economic moat reward their investors.
  • ITC Ltd which has come a long way in this regard, is one of India’s pioneers in the private sector.
  • The company has made an effort to reduce its dependence on cigarettes. It has been effectively able to channelize all its funds generated from the business of cigarettes. Thus, it is employing a decent capital into its FMCG (Non-Cigarettes business), Paperboard & Packaging business and Hotels chains.
  • Over last 15 years, the revenue contribution of Cigarettes/ Tobacco productions has come down from over 80% to half ie. ~40% as on Dec-2020. while, Other segments in FMCG like food, apparel, consumer goods and stationary witnessed a good sales growth.
  • This gives a clear indication that ITC stock in future is sure to rise  high, as the company continue diversifying its products.
  • This, in turn, will help the investors to derive benefits from ITC for a long term investment.
A Journey Towards a Market Leader across all Business Verticals
  • ITC has been achieving a leadership in all the business ventures it had explored in India.
    • It has occupied a front runner position in the tobacco and paper business of the country. The multinational conglomerate also sells about 81% cigarettes and bidi in the entire Asia.
    • Its hotel chain business has occupied a significant position among the top three players.
    • In the FMCG sector, ITC share price has been capturing the market in high clutter categories like noodles, biscuits, salty snacks and personal care products.
    • In the upcoming years, ITC has also planned to amplify its Dairy Products on a large scale.


  • It can be clearly understood that the
    cigarettes business has the lion’s share in the business of ITC Ltd.
  • The EBIT contributions of the various business
    verticals give clear image of the ITC has not yet been able to successfully
    diversify in their businesses.
  • From valuation perspective, the cigarette
    business of ITC still has lot of growth opportunities.
  • Overall, there has been no change in the
    business of ITC Ltd.
  • The company is rated negatively on 2
    parameters (environment & Social), because of which institutional investors
    may avoid this stock.

Notes: –

  • Information related to cigarettes has just been presented for investors’ knowledge. We don’t promote any smoking or tobacco consumption products.
  • The numbers that are used are approximate and have been rounded for presentation purposes.
  • We are not in any way saying that this is a bad company or that the stock of this company is bad.
  • We are also not suggesting anyone to immediately go and buy this stock or invest in the stock markets.
  • Only an analysis has been presented here. No judgments or final statements are being made here.

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