The market fancy for FMCG stocks could be gauged from the manner in which ITC has come into focus, with rising demand. Analysts claim that ITC is emerging from a period of slow growth and will report faster growth rates as compared to the rest of the cigarette industry, and even compared to its own recent performance.According to these analysts, ITC's volume growth has picked up substantially in the last one quarter, leading to an interest in the stock. This interest becomes sharper given that there is a general belief that there is little room for improvement in the selling prices of cigarettes, which are already considered high.
The ITC stock had felt the brunt of selling pressure in earlier months. The prime reason was the slowing growth in volumes, partly a result of restrictions on the cigarettes sale, fears over increased restrictions emerging from global practices and disappointing earnings growth in the earlier two quarters.
But more than these reasons is the dillilusionment over the company's commitment towards the hotels business. ITC has committed itself to bailing out its beleaguered hotel subsidiary, ITC Hotels, besides taking on all future expansions in this business, on its own books.
ITC's cigarette business generates huge quantities of free cash, which amounted to Rs 650 crore last year. But the company has failed miserably in deploying this free cash flow into the various unrelated diversifications, be it financial services, paper, commodities trading or hotels.
The best option before a company that generates so much cash, but has very few reinvestment options besides financial assets, is to return a large part of it to shareholders, something the company has failed to do so far.
Instead, it has sought investment opportunities elsewhere, which have not been able to give it a return on networth (RoNW) that could match the return from its cigarettes business. Even the hotels business that once offered a high rate of return no longer does so and any expansion into this area in its own balance sheet will drag down returns further from the current level of 31 per cent.
But despite these concerns - which analysts say are not being addressed adequately - the stock was available cheap and only needed a trigger in the form of a rally in commodity stocks to ignite a recovery in the stock price. The stock had declined from a high of Rs 1,145 in the second week of May 1999 to Rs 603 in mid-December, before initiating the present recovery.
Copyright © 1999 Indian Express Newspapers (Bombay) Ltd.