● ITC’s share price correction has brought its P/E in-line with its
3-year average. However, valuations are above its 15-year
average P/E of ~20x, which we believe is deserved given the
significant improvement in FCF, return ratios and business mix.
● ITC’s 15-year average P/E is depressed due to the sharp fall in
valuation during 2001–05. That period saw a de-rating of tobacco
companies globally due to a series of lawsuits which led to very
large penalties on companies in the US. ITC’s diversification into
FMCG and pending excise related cases were also drags.
● ITC’s FCF conversion has sharply improved over FY07–13, going
up from sub-20% to ~80%. ROE has moved up from 26% to 36%.
The share of non-consumer businesses, which rose to a peak of
24% in FY07, is now down to 16% in FY13. Qualitative factors like
competitive risks from Marlboro have also dissipated.
● ITC is largely unaffected by the rupee depreciation, having very
minimal dollar linked costs and some exports. We expect the
company to continue to deliver 18–20% earnings growth. ITC
continues to be our top pick in the FMCG sector.
3-year average. However, valuations are above its 15-year
average P/E of ~20x, which we believe is deserved given the
significant improvement in FCF, return ratios and business mix.
● ITC’s 15-year average P/E is depressed due to the sharp fall in
valuation during 2001–05. That period saw a de-rating of tobacco
companies globally due to a series of lawsuits which led to very
large penalties on companies in the US. ITC’s diversification into
FMCG and pending excise related cases were also drags.
● ITC’s FCF conversion has sharply improved over FY07–13, going
up from sub-20% to ~80%. ROE has moved up from 26% to 36%.
The share of non-consumer businesses, which rose to a peak of
24% in FY07, is now down to 16% in FY13. Qualitative factors like
competitive risks from Marlboro have also dissipated.
● ITC is largely unaffected by the rupee depreciation, having very
minimal dollar linked costs and some exports. We expect the
company to continue to deliver 18–20% earnings growth. ITC
continues to be our top pick in the FMCG sector.