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ITC stock undervalued

Despite a good ESG (environment, social and governance) rating, stock prices are languishing
ITC has been ranked No. 1 globally among its peers and No. 3 overall on ESG performance in the food products industry by Sustainalytics, a global ESG rating company

Sambit Saha   |   Calcutta   |   Published 05.09.20, 01:36 AM

The growing global trend of investing in a stock by measuring sustainability and the social impact of the investment is hurting the stock performance of ITC Ltd despite a stellar show by its businesses, the management of the company acknowledged on Friday.

The theme of ESG (environment, social and governance) investment is weighing down tobacco stocks globally and also impacted ITC, despite the company having a “pretty good” rating, Sanjiv Puri, chairman and managing director of ITC, noted.

Responding to shareholders’ questions and suggestions on the  ITC stock, Puri pointed out that the earning per share — a measure of profitability and cue to stock price — has gone up by 40 per cent in the last three years.

“However, that (EPS growth) is not reflected in the share price. It is concerning to all of you (shareholders) and the employees because there is performance behind it which is not getting recognised,” Puri told shareholders at the AGM.

He went on to explain, “The focus on ESG investing, which has created headwinds for tobacco stocks globally, has also impacted us. This is despite the fact that we have a pretty good ESG rating, which is the highest among global tobacco (companies) and compare favourably (among) many consumer goods companies domestically and globally,” Puri said.

While all shareholders lauded the performance of ITC and the decision to pay a hefty dividend, some complained that stock prices are languishing. They suggested that ITC use its cash pile for share buyback or list some of its profitable subsidiaries/segments to unlock value for shareholders. The stock has underperformed over the last three years, going down 34 per cent in that period. It closed at Rs 186.70 on Friday.

ITC has been ranked No. 1 globally among its peers and No. 3 overall on ESG performance in the food products industry by Sustainalytics, a global ESG rating company. It has also been rated “AA” by MSCI-ESG — the highest among global tobacco companies.

“We have the right positioning there and, therefore, it is painful that particular factor is not being recognised,” Puri added.

The CMD pointed out that ITC in the past had apprehended headwinds before tobacco companies and consequently pursued to create multiple drivers of growth such as FMCG, which commands impressive price earning multiples. The non-tobacco segment contributes 60 per cent of the segment revenue in 2019-20 but 77 per cent of segment profit.

‘Alternative structure’

The management said it would examine the “optimal way” to structure ITC to ensure maximum value for shareholders. It did not explain if such ways would include spinning out matured businesses and listing them separately on the bourses.

Referring to shareholders queries on what creates more value — separateness or integration — Puri explained how institutional strength and financial resources of traditional business is leveraged to diversify a company. 

Lockdown blues

During the chairman’s address, Puri said the current spate of localised lockdowns was impacting the recovery momentum and the near-term outlook remains uncertain in the backdrop of the unfolding impact of the pandemic and the shape of the economic recovery. 

The company saw progressive normalisation in most of the segments it operates by the end of the first quarter, except hotel, education and stationery products. Food and personal care delivered robust growth during the lockdown period. 

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