ITCBusiness

Long Term Investing Ideas: Complete Analysis for ITC Limited. (Part 2)

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Analyzing the past performance of the company is essential as it gives us a clear idea of the achievements in the past. Having wholly understood the business of ITC let’s move forward to Fundamental Analysis of ITC

Here’s the link to the previous article: Complete Analysis of ITC for Long Term Investing Ideas (Part-1)

Key Indicator’s

1. Market Capitalization: Market Capitalization or simply Market Cap is the value of publicly traded outstanding shares of the company.  Since exceptional stocks are actively traded on Stock exchanges, the Market cap is an essential indicator for determining stock value.

ITC is a large-cap corporation with a market cap of 241,673.20 crores Rupees.

2. Book Value: Book Value is the value of the Asset. This is the price that any shareholder will receive if in case the company undergoes liquidation. 

ITC has a Book Value of 52.07rs.

As Book Value alone cannot be used as an indicator, we usually consider Current Market Price/ Book Value as an indicator. Price/ Book (P/B) indicator helps us to judge if a stock is overvalued or undervalued.

The p/B ratio of ITC stands at 3.77.  Considering its business, this clearly shows that the stock is undervalued.

3. Earning per share (EPS): Earnings per share (EPS) is the monetary value of earnings per outstanding share of common stock for a company. EPS is a measure that looks at how much cash flow the company has generated during the financial year. EPS shows how much cash the business is making in a year. EPS not only includes money received by the market for the products sold or services provided, but it also consists of any upfront payments, such as cash advance secured by the business.

ITC’s EPS has seen a growth of 9.7% CAGR, while in 2012, the company’s EPS was Rs. 8.52 per share, in 2016, its EPS was Rs. 13.52 per share.  Currently, ITC has an EPS value of 11.63, which is after the market crash on March 20. Overall, its EPS value is suggesting that the corporation is making profits YoY basis.

4.Price/Earnings:  The price-earnings ratio, also known as the P/E ratio, is the ratio of a company’s share (stock) price to the company’s earnings per share. The rate is used for valuing companies and for finding out whether they are overvalued or undervalued.

ITC has a P/E ratio of 16.9, which is higher than the average P/E ratio of all other FMCG companies.

A quick view at some more Indicators:

NameRatioRemarksDescription
Current ratioratio (x)1.89> 2 is Good,
< 2 is Not Good
A liquidity ratio that measures a company’s ability to pay short-term obligations. The higher the current rate, the more capable the company is of paying its debts.
Quick ratio (x)1.24> 1 is Good,
< 1 is Not Good
The quick ratio measures a company’s ability to meet its short-term obligations with its most liquid assets. For this reason, the rate excludes inventories from current assets
Dividend Yield (%)2.37> 1.5 is Good,
< 1.5 is Not Good
A financial rate that shows how much a company pays out in dividends each year relative to its share price. The dividend yield is calculated as annual dividends per share divided by market price per share.
Interest Coverage Ratio (x)453.11> 2 is Good,
< 2 is Not Good

It is used to determine how easily a company can pay interest on outstanding debt. It is calculated by dividing a company’s EBIT by the interest expenses.
Debt Equity Ratio (x)0.00< 2 is Good,
> 2 is Not Good

A measure of a company’s financial leverage calculated by dividing its total liabilities by stockholder’s equity. The debt/equity ratio also depends on the industry in which the company operates.
Return on Asset (%)30.66> 5% is Good,
< 5% is Not Good
An indicator of how efficient management is at using its assets to generate earnings. Calculated by dividing a company’s annual earnings by its total assets
Return on equity (%)22.03> 18% is Good,
< 18% is Not Good
Also called Return on NetWorth, it measures a company’s profitability by revealing how much profit a company generates with the money shareholders have invested, it is calculated by dividing the net profit after tax by shareholder’s fund for high growth companies you should expect a higher ROE.

Dividends:

If any company is sharing Dividends, it means that the company is making profits. ITC is sharing Dividends regularly, which makes it an excellent indicator.

Get a glimpse into the dividend history-payout amount of ITC, interim dividend, and the latest dividend announcements by ITC in the last five years.

#Announcement DateAmountInterim/Final
126-June-202010.15Final
213-May-20195.75Final
316-May-20185.15Final
430-May-20174.75Final
520-May-20168.50Final
622-May-20156.25Final
723-May-20146.00Final
817-May-20135.25Final
925-May-20124.50Final
1020-May-20114.45Final

 

Also Read: Investing Ideas: Dividend Capture

Debt/Equity:

The debt to equity ratio tells us how much of the total financing of the company comes from creditors (those who lend money at an interest) and investors (those who invest in the shares of a company). Higher debt to equity ratios is an indication that the majority of the company is financed by loans and other debt (such as debentures and bonds).

ITC has been a zero-debt company, which means the company is either financed by its internal sources or by shareholders. A zero-debt company is a good investment as it does not have to pay any interest and can keep all its profits or can distribute to its shareholders as dividends.

What makes ITC a good investment:

  • Here are some fundamentals that make ITC a good investment for the long term.
  • The company is more than 100-year-old, started business by making and selling cigarettes.
  • The company has been consistently performing well for the past many years.
  • The company has High ROCE and zero debt and strong free cash flows.
  • The company is a market leader in the cigarette industry with 80% market share. The major part of the company’s revenue comes from the cigarettes business.
  • The company diversified in FMCG and foods segment, with a wide variety of products to offer, the company has recently crossed 10,000 crore revenue milestones and targets 100,000 crore revenue from the FMCG segment by 2030.
  • The company has also acquired two big brands from Johnson and Johnson that is Savlon and Shower Shower, by which the company wishes to expand in the healthcare and hygiene niche.
  • The company owns the largest chain of hotels in India and aims to become a market leader in the segment.
  • The company is expanding its business to multi-specialty hospitals, taking advantage of medical tourism and affordable health care provided by the country.
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