Value Wheels- Navigating Shareholders Success of ITC

 VALUE CREATION OF ITC

INDUSTRY ANALYSIS

Indian FMCG Market Overview: 

The Indian FMCG market was valued at US $ 185.94Bn. in 2023, and it is expected to reach US $ 1007.45 Bn. By 2029 with a CAGR of 27.9% during the forecast period. Growing youth population, changing lifestyles, and increasing brand awareness among the consumers are also contributed to the growth of India FMCG sector.The FMCG sector is a vital contributor to India’s GDP, being the fourth largest sector in the economy it creates employment for more than 3 Mn people. The phenomenal growth of the FMCG industry especially in the tier II and tire III cities in India is mostly due to the improvement in the standard of living of the people of such cities and the rise in the level of disposable income. 

Regulatory Body: FSSAI – Food Safety and Standards Authority of India.

The Food Safety and Standards Authority of India (FSSAI) is a statutory body under the administration of the Ministry of Health and Family Welfare, Government of India. It regulates the manufacture, storage, distribution, sale, and import of food articles, while also establishing standards to ensure food safety. 

Indian FMCG Market Key Players 

1. Hindustan Unilever Ltd. 

2. Nestle India 

3. Cadbury India 

4. ITC (Indian Tobacco Company) 

5. Asian Paints (India) 

6. Procter & Gamble Hygiene and Health Care 

7. AMUL 

8. Dabur India 

9. Britannia Industries 

10. Marico Industries 

Segmentation 

Major Segments: The market is broadly divided into two segments: urban and rural. The urban segment holds a larger share but rural areas are growing faster. 

Product Categories: Includes food and beverages, healthcare, personal care, and household care. Food products dominate the market. 

Consumer Trends and Preferences Health and Wellness: Growing consumer awareness about health and wellness is influencing product choices. 

Premiumization: Rising income levels are leading to a shift towards premium products. 

Convenience: Packaged foods and ready-to-eat meals are gaining popularity due to their convenience. 

Sales Channels 

Traditional Retail: Dominates sales, but modern trade channels are growing rapidly. 

E-Commerce: The rise of online shopping platforms has boosted the FMCG sector, especially during the COVID-19 pandemic.

Challenges 

Supply Chain Complexities: Managing an efficient supply chain in a vast and diverse market like India. 

Price Sensitivity: The majority of the Indian population is price-sensitive, making pricing strategies crucial.

COMPANY ANALYSIS

About ITC

ITC Limited is an Indian conglomerate company founded in the year 1910, headquartered in Kolkata. ITC has a diversified presence across industries such as FMCG, hotels, software, packaging, paperboards, specialty papers and agribusiness The company has 13 businesses in 5 segments. It exports its products in 90 countries. Its products are available in 6 million retail outlets.

ITC segments
 Fast moving consumer goods (FMCG)
 Hotels
 Tobacco
 Paperboards, Paper and Packaging,
 Agri Business. 

Some of ITCs brands include:
 Gold Flake Kings
 Wills Navy Cut
 Golds Flake Super Star
 India Kings
 Bingo
 Sunfeast
 Aashirvaad
 Yippee

Why ITC?

• ITC Ltd has implemented several value-based activities to enhance shareholder value. These include diversification into non-tobacco FMCG sectors, reducing dependence on its traditional tobacco business and spreading risk. 
• The company has also invested in sustainable and eco-friendly practices, notably in its paper and agriculture businesses, whichnot only reduce environmental impact but also appeal to socially conscious  investors.
• Additionally, ITC focus on digital transformation and innovation, especially in its FMCG and hospitality sectors, aims to boost operational efficiency and market competitiveness, further driving long-term shareholder value.

Financials:

• In the fiscal year 2022-2023, ITC Ltd achieved significant financial growth. 
• The company's gross revenue reached ₹69,480.89 crore, marking a substantial 17.6% increase from the previous year. Its EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) also saw a notable rise, increasing by 26.5% to ₹23,944.47 crore. 
• Furthermore, ITC Ltd.’s consolidated net profit grew by 25.45%, amounting to ₹19,427.68 crore, while its consolidated revenue from operations escalated by 17.34%, reaching ₹75,826.58 crore.

Key highlights:
 Revenue Growth (Year-on-Year): ITC Ltd.’s revenue increased by 4.99% compared to the same period last year, reaching ₹18,439.35 Crores in Q2 2023-2024.
 Quarterly Revenue Growth: On a quarter-to-quarter basis, there was a 3.09% increase in revenue since the last 3 months.
 Net Profit Growth (Year-on-Year): The net profit of ITC Ltd saw a rise of 6.02% compared to the same period last year, amounting to ₹4,898.07 Crores in Q2 2023-2024.

Sustainability and CSR Initiatives
 E-Choupal Initiative: Revolutionizing rural India by providing Internet access for
market information.
 Sustainability Practices: Strong focus on environmental sustainability, including
water stewardship and carbon management.
 Social Initiatives: Various CSR activities in education, rural development, and
environment.

Challenges and Opportunities
Regulatory Challenges: Particularly in the tobacco sector with stringent laws and high taxation.
Market Competition: Faces intense competition in FMCG and hospitality sectors.
Growth Opportunities: Potential in expanding its FMCG portfolio and leveraging digital
transformation.

ITC TIMELINE

DRIVERS OF VALUE BASED METRICS OF ITC:

1. Residual Income:

• We can observe an fluctuating in the Residual Income of ITC which is due to the fluctuations in the Net Profit of the company. 
• This fluctuation in Net Income from 2019 - 2023 could be a result of various causes such as:

1. Economic Conditions: The FMCG industry is highly sensitive to economic conditions. During economic downturns, consumers may cut back on non-essential spending, affecting the sales of FMCG products. Conversely, during economic upswings, consumer spending tends to increase.
2. Consumer Preferences: Rapid changes in consumer preferences and trends can impact the sales of FMCG products. Companies that can quickly adapt to changing consumer tastes are more likely to maintain stable or growing net incomes.
3. Competition: Intense competition within the FMCG sector can lead to price wars and increased marketing expenses, impacting profit margins. New entrants or aggressive marketing strategies by competitors can affect market share and profitability

2. Economic Value Added:

• Economic Value Added has also increased over the period of time 5 years. This growth is due to the increase in the NOPAT . And there is dip in the year 2021 and 2022 which is due to the increase in WACC
• Increase in EVA during the year 2023, is mainly due to decrease in WACC

3. Market Value Added:

• ITC only had equity shares and has not issued any bonds. So the Market Value Added is calculated as Market value of Equity - Book Value of Equity.
• The increase in the Market price of the equity shares of ITC. could be attributed to the expectations or rather confidence of the investors in the performance of the stock due to the opportunities present for ITC. This is also reflected in the high P/E ratio of ITC. 

4. Future Growth Value:

• We can notice that the Future Growth Value of ITC is negative. This is due to higher Current Value of Operations than the Market value indicating that the business has a lot of scope for growth in the future and the market has not been able to reach that limit.

5. Return on Invested capital:

• The ROIC of the company has been substantially good and indicates that the company has been able to make good investments that reaped positive returns for the company.
• We can also notice that the Market Value of the company is also growing indicating that investors have started to realize the potential of the company.

6. Total Shareholder’s Return:

• Although the Total Shareholder’s Return was negative in 2020, it soon became positive and also reached a greater return of 55% indicating that the business was going strong during 2023. 
• Also it showed steady increase over the period
• We could notice fluctuations in the market price during 2022 owing to the increasing inflation and the diversion of government funds towards health care and thus leading to a pause in construction work.

7. Wealth Added Index:

• The Wealth Added Index had also faced a situation similar to that of TSR. The negative WAI in 2022 indicates that ITC had destroyed shareholder wealth in 2022. 
• But considering that the company had been able to maintain and that too have such high values  means that the company is capable of rebuilding and creating strong shareholder’s wealth in the future.