ITC @ 400: A story of patience, payback, and a puff of relief

Also Read: ITC tops Rs 400, analysts see 10% upside while investors eye Rs 500

It has posted gains of 48 percent over the past year – making it the top performer in the Nifty 50 pack.

Once the proverbial under-achiever, ITC is today clearly marching to the beat of a different drum, comfortably outperforming not just its domestic peers but also its global counterparts on the MSCI ACWI Tobacco Index.

With more and more investors beginning to filter their stock picks through the prism of corporate governance following the Adani Group crisis, ITC has emerged as a clear beneficiary of this “flight to quality”.

Just that this flight has come after an interminable wait on the runway.

Patience

A joke doing the rounds in traders’ WhatsApp groups during 2021 was that the government was contemplating demonetising the Rs 200 banknote and replacing it with the ITC stock.

Like most good quips, it amused some and infuriated the rest – chiefly the ITC shareholders.

Not without reason.

The stock had first touched the Rs 200 mark in early 2013, and like a recalcitrant tenant, refused to budge from that range for the next almost 10 years (barring a few freak sessions in 2017 and 2018 when it crossed Rs 300).

This, even as the rest of the equity universe was churning out one multi-bagger after another in a steady stream of bull-market exuberance.

In a moment dripping with cosmic irony, 2013 was the year when ITC adorned its logo with a new tagline – ‘Enduring Value’. Since then, the investors had largely endured the stock’s underperformance.

The listless show had become a running gag on social media, polarising opinion in a way no stock had done in recent times.

Many ITC shareholders were spending more time doggedly defending the company on Twitter than doing their actual jobs.

Others simply gave up and quietly exited their positions, though retail ownership of the stock continued to remain elevated.

Maybe the ITC stock was more addictive than its cigarettes.

Investors may not have realized it then, but their company was displaying the inexplicable tendency of champions to flounder for an extended period of time despite their best efforts. Think GE, Wal-Mart and Proctor & Gamble in the 1990s. Or Sachin Tendulkar in the early 2000s. Or Aamir Khan currently.

A host of reasons were conjured up in an effort to explain the stock’s sluggishness – outsized reliance on cigarettes, susceptibility to increased taxation on ‘sin goods’, misallocation of capital, the cash-guzzling hospitality business, rising competition in the FMCG space and even the management’s allegedly indifferent attitude towards the capital market community.

The last one was perhaps a tad unfair.

The company leadership had repeatedly highlighted ITC’s strong business performance, a runway for further growth and a debt-free status, though the arguments imploded with painful predictability on Dalal Street.

Addressing shareholders at its AGM in 2021, the company’s chairman Sanjiv Puri said the board was concerned about the share price not appreciating despite its operational performance and over Rs 50,000 crore of dividends payout in the past five years.

Dividends, in fact, were one area where ITC consistently outshined its compatriots.

Some analysts had even labelled ITC a pure dividend play, notwithstanding all the narrative about post-tobacco diversification.

Not to be outdone, a few Twitter prodigies classified the stock as a fixed deposit (and dividends as interest payments) because there was no capital appreciation whatsoever. This set-off yet another round of mockery and memes-fueled savagery online.

The naysayers were once again having all the fun, but it was the investors, who would have the last laugh.

Turnaround

Sometime in 2022, the gods of fate began smiling on ITC.

That, or the seemingly endless stretch of frothy valuations finally forced the algorithms to hunt for alternative avenues of capital deployment in the bluechip space.

Whatever the reason, ITC staged a phoenix-like turnaround, making its long-suffering investors almost airborne with delight.

Suddenly, the horde of detractors vanished in a puff of smoke and the online commentariat pivoted to hearty appreciation.

Analysts had always viewed the company favourably, but even they were taken aback when the stock started to return the affection.

Most brokerages, including JP Morgan, Nomura, Jefferies, Motilal Oswal and ICICI Securities, currently have a ‘buy’ rating on the stock, with target prices in the range of Rs 450-Rs 475.

While analysts and market watchers are tripping over themselves trying to explain the stock’s recent breakout, the fact is that most of these rationales – cigarette volumes growth, robust FMCG sales, margin expansion etc – were true even during the previous years without any corresponding up move in the share price.

True, the post-Covid pent-up demand is providing additional tailwinds to ITC’s businesses but that may hardly be enough to shake off a decade-long lethargy.

Markets may also be salivating at the prospect of the company finally hiving off its hotels and IT verticals – something the management has repeatedly hinted at without giving any concrete timeline.

Purely from a business perspective, investors can expect the good times to continue.

The company accounts for three out of every four cigarettes sold legally in the country, but the legal market itself is just 8 percent of the tobacco consumed in India.

On the FMCG front, it is seeking to straddle two strong and divergent trends driving consumption – premiumisation and downtrading (where consumers shift to lower price packs).

In an interview with CNBC-TV18 in September 2022, Sanjiv Puri said the company has six brands in the Rs 1,000-crore club and intends to scale these further.

The hotel industry is also seeing never-before demand and ITC is looking to capture a slice of the overseas pie as well.

Clearly, the company has considerable leeway for growth.

But as its investors know so well, the correlation between business performance and stock appreciation can be thinner than the delectable rice vermicelli served in ITC Maurya.

This means that while the stock may be having its well-deserved moment in the sun right now, another period of prolonged consolidation cannot be ruled out.

So what should investors do in that case?

Maybe just sit tight, count the dividends, and enjoy the memes on Twitter.