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ITC remains a dividend play with FMCG bounce and INR 20,000 crore cash

Wednesday, July 1, 2020, 11:09 Hrs  [IST]
HBI Staff | Hyderabad

According to ETRetail, ITC is one stock that hasn’t failed to disappoint the bulls as well as bears on the Street during the current pandemic — and its fourth quarter performance is unexceptional. While it missed the Street estimates due to decline in revenues across all segments, the performance of its FMCG segment has kindled hopes of an improved show in the latter part of the year.

Among the last of the FMCG firms to announce its March quarter results, ITC posted a 6 per cent decline in sales with all segments posting a drop in revenues. The cigarettes business was badly hit. It lost volumes due to increase in taxation and the lockdown, which impacted sales and distribution. Cigarette volume is estimated to drop by 10-12 per cent – higher than what analysts had pencilled in.
ITC remains a dividend play with FMCG bounce and INR 20,000 crore cash
In the current quarter, ITC has been aggressive in its FMCG business – launching sanitisers and hand washes, leveraging its extensive distribution network and acquiring a key regional spice brand. However, it has lost around 40 days of cigarette sales due to the lockdown. Its hotels and paper segments, too, are likely to be impacted due to the loss of business.

At a time when cash is the most valued asset in India Inc, ITC has nil debt and a cash pile of over INR 20,000 crore. For FY20, it generated free cash flows of INR 11,693 crore – 30 per cent higher than the year-ago level and by far the highest in the FMCG industry. ITC can use such cash flows to pay handsome dividends, make strategic acquisitions, announce a buyback or declare a bonus issue. It paid out 80 per cent of its net profit as dividend in FY20. Little wonder then that ITC is likely to be a dividend stock for now – with a possibility of FMCG propelling its performance.

Even as the FMCG holds a promise of better prospects, the challenges to the cigarette business, its cash cow, are urgent in the form of increased regulations and taxation and concerns of the ESG-conscious investors. And that’s the quandary for investors – for some the immediate challenges are bigger to surmount and for others the promise of growth is more appealing.

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