InvestorQ : Will the announcements at the latest ITC investor meet help them to narrow their valuation gap with Hindustan Unilever?
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Will the announcements at the latest ITC investor meet help them to narrow their valuation gap with Hindustan Unilever?

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Rashi Mehra answered.
5 months ago
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Actually, ITC disappointed on the investor meet from as there was just too much of generic rhetoric and too little of actual announcements, time lines or game plans. Just consider these numbers. As late as Mar-19, ITC had a market cap of Rs.3.65 trillion and HUVR market cap was Rs.3.64 trillion. There were almost at par with ITC always having a small edge. All that changed over the last 2 years.

Now, it needs no reiteration that the pandemic put a big focus on health and hygiene. Hindustan Unilever (HUVR) played that game a lot better. As a result, today HUVR has a market capitalization of Rs.5.30 trillion while ITC market cap is half of HUVR at Rs.2.66 trillion. What is more surprising is that annual profits of ITC are twice the profits of Hindustan Unilever and even the dividend yield of ITC is better.

The irony was that despite having such clear dichotomy in market cap performance, there was little in the ITC investor meet to really enthuse investors. In short, ITC lost an opportunity to reach out to investors. Ahead of the meet, there was a mountain of expectations. However, ITC did not divulge anything about specific challenges facing the company; not did it provide any plan of action, time line or strategy paper.

The first expectation was on restructuring of ITC. Analysts often tell us that ITC is a value buy, but that is lazy equity research. Markets expected clarity on the FMCG and hotels business being hived off. There was nothing on that front. Investors expected some more clarity on listing if its Infotech unit but ITC just said it was exploring the idea without any specifics. That was as the highest form of ambiguity and did not help investor sentiments.

What investors really wanted to know was how would ITC get out of its overhang of the cigarette business. Cigarettes drive 85% of its profits, so ITC cannot expect to be valued and treated like a FMCG company. Globally, cigarettes are dipping business and demand is falling drastically. Pandemic has highlighted respiratory risks and demand could fall further.

Every business has cash cows and growth areas. Even Reliance had. What ITC should have done in its investor meet is to chart out how it will use the cash flows from cigarettes to build its other businesses. It is not going to happen overnight but a timetable would have helped. Ironically, recently listed D-Mart is now more valuable than ITC. The investor meet was a classic example of an opportunity wasted.

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