Hello👋This week we covered- Market snapshot, Will the apparent value unlocking opportunity in ITC, unlock the value; followed by interesting visuals & curated reads.

1. Market snapshot

Last week, IT was the only sector which gained and this might be possibly due to outstanding results by US IT company- Accenture and its positive guidance on overall demand in cloud transformation industry.

Real Estate, Financials & Energy/Oil Gas which lost the most i.e. down by 7.3%, 5.3% & 4.9% respectively.

Last week, stocks in all the categories were down. Interestingly, in the last one year, Microcaps have outperformed comparatively, whereas, it has given almost negligible returns in the last 3 years. 

2. Will the apparent value unlocking opportunity in ITC, really unlock value? 

“Patience is one of the most valuable attributes in Investing” and well, ITC investors have been needing a lot more of this! 

ITC has been one of the most talked about stocks in the last 1 year, usually due to its static share price. This time it is because of its 1st ever investor call (summary here) which went all day long but had no time to include what existing shareholders actually wanted to hear- concrete demerger plans. 

Before jumping to the debate of demerger creating value or not for existing shareholders, have a glimpse on segment wise contribution in total revenue & EBIT: 

Key observations:

1. Cigarette sales have been consistently declining since the last 5-6 years.
2. Revenue contribution of ex-cigarette segments like hotels, agri etc. is significant but the EBIT profit contribution from the same is negligible. 

Recently, the management has announced that it is planning to demerge and list- Hotel, FMCG-others & Infotech businesses so that there is a high concentrated focus on each business, the profits generated by these segments will  seem material in a separate entity & for simplicity for the shareholders so that they can choose which business to invest in. 

This demerger is being conceived as a value unlocking opportunity for existing shareholders because of the notion that if other FMCG, IT & hotel businesses get listed, the valuation multiple given by the market will be way higher than what ITC is getting now. 

But will there be any difference in the overall market capitalization of ITC ltd even after these businesses are valued individually at higher valuations? Let’s check out:  

Assumptions: 

1. 25% tax considered for simplicity purposes.
2. Segmental P/E considered is the average P/E multiple of the existing companies in that particular industry.

(For e.g. in cigarettes P/E referred is of global companies such as Philip Morris & British American Tobacco and for Hotels, companies like Indian hotels are considered for reference & the normalised revenue of FY19 is taken).

So definitely, for the new investors, there might be a great potential in new demerged entities based on the industry’s & company’s potential but there seems no such very attractive value unlocking opportunity (even in the best case scenario upside is ~19%) for the current shareholders of ITC even if there’s a multiple expansion in individual segments, given that entire profit pool is because of cig business. 

And as they say, don’t fight the base..! 

3. Visuals of the week:

3.1 Correlation of BSE metal & WPI Inflation

 Source- Ahmed Madha on twitter

WPI in november is at 14.2% which is at highest levels since 1991 compared to CPI at decent levels i.e. 4.9% which clearly indicates the inability to pass on the costs to consumers.

Look at the above chart, how the BSE Metal index & WPI are highly correlated. This means till the time metal prices don’t normalise, WPI is unlikely to decline. 

3.2 Bits outperforming the Atoms significantly!

Source- Motilal Oswal 

4. Good reads of the week:

4.1 GST rates on Ethanol has been reduced to 5% from 18%. We covered why the government of India is pushing Ethanol and which industries it will impact. You can read the same here.

4.2 Great interview of Rakesh Jhunjhunwala by firstpost where he shared his experience & key learnings of his investing journey. 

4.3 Excellent write-up on “Lessons from quality shareholders”. You can read it here.

4.4 A thread on why there is a great potential in the Natural gas ecosystem including CNG.

5. Multipie interactions of the week:

There are many interesting insights shared & questions answered by the community on investing, personal finance, market & company updates exclusively on Multipie platform.

You can read a few posts here:  

1. Kumar Saurabh shared the list of companies which have seen the highest increase in retail shareholding in the last 1.5 years. You can check out the list here.

2. Mayank shared many personal finance insights like the ways to increase the take home salary & Why booking losses is not a very bad thing. One can follow Mayank by clicking here for further interesting insights. 

3. A good discussion on why Infibeam’s CCAvenue is off the radar by Sidharth Mishra. 

4. We have started sharing selected concall snippets of the companies which had something interesting in their concalls. For eg. we shared on Affle India & Castrol India Ltd. 

And not just this! One can Take charge of their own investing journey by sharing their own investing plan and get feedback from experts & a vibrant community, like Namita & Manasi did on our platform. To know more about it click here. 

Hop on and download the app by clicking here if you haven’t yet!

That’s all for this week. Please share with your peers if you found this helpful and subscribe to start receiving the weekly digest in your mail! Happy weekend!