Broking and investment firm JM Financial maintains a positive outlook on ITC with a price target of Rs 275 as it foresees huge potential in the FMCG businesses of the company which will get unlocked in the years to come.
As per investment firm, ITC’s FMCG segment is possibly one of the most under-appreciated businesses in the Indian consumer space in recent times. JM Financial believes that the market may not have taken a holistic look yet because as per firm’s understanding of Indian consumer categories, ITC’s FMCG today addresses market opportunities that are Rs 2.1 lakh crore in size in aggregate.
JM Financial in a report said, even if one excludes a couple of nascent dairy products from the portfolio, the addressable opportunity for ITC is still Rs 1.7 lakh crore- larger than even HUL’s ‘size of markets’ and more than 3x that of Nestle India’s. In fact, ITC in FY30 could clock an FMCG EBITDA that is higher than the combined FY20 EBITDA of Nestle India, Britannia, Tata Consumer.
“Starting early 2000s, ITC has created a large FMCG business from scratch. From zero-base, the segment has since scaled to INR129 bn in FY20 with the business having grown at CAGR of 14-15% in the last ten years. Almost all of it is organic with acquisitions being very few and small in overall size.
ITC has created 25 mother-brands across different consumer categories largely organically & funded by with retained earnings, which either holds a no.1 or no.2 position in some of the important sub-segments in its operating categories.” JM Financial said in the report. The report also highlighted that ITC has created this business at sub-2x the price-to-sales ratio; An acquisition led strategy on the other hand would have cost 4-5x the sales at least; going by some of the recent deals in this space; assuming businesses are indeed available to buy.
The firm also believes that profit margin for ITC’s FMCG segment is still relatively low at present but is already witnessing a positive growth trajectory with EBITDA margins improving by 300 basis points in the last 2 years. The company, since inception of the business, worked with a mindset of creating a very large business for the future that will help offset the slower growth that its core cigarettes business would have to come to terms with sometime in the future.
As a result, ITC went on to build a backend and infrastructure that would support a much larger-scale business, without waiting to first achieve that size. The approach was the right one, in our view, but it resulted in huge business-incubation losses in the initial years. We reckon that with investment-stage now largely done (though incubation phase is ongoing for a few new categories, e.g. dairy, chocolates), profits and cash-generation will start to reflect better as the business gains even bigger scale over time.
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