The Current Lapse of ITC: Understanding the Market Performance and Future Prospects

India Tobacco Company (ITC) has historically been a prominent player in the Indian market, known for its diversified business portfolio that includes tobacco, fast-moving consumer goods (FMCG), and agriculture. However, recent market dynamics, particularly due to regulatory challenges and environmental, social, and governance (ESG) concerns, have brought about a significant lull in its stock performance. This article aims to dissect the current situation of ITC, the reasons behind the market's tepid response, and the potential future trajectory.

Historical Context of ITC

ITC was trading at a premium of Rs.2000 per share at one point in time. It was later subjected to a share split, bringing the share price down to Rs.200. The price fluctuated further, and currently, it is trading at around Rs.210. Despite this price movement, there are indications from market experts, such as Sanjeev Bhasin from IIFL Securities Ltd, who recommend that the stock could appreciate to Rs.235-250 in the near term (Bhasin, 2023).

Current Market Performance

The recent performance of ITC has been somewhat disappointing, especially due to the ongoing pandemic and negative regulations against tobacco companies. These factors have contributed significantly to the lull in its stock price. However, for short-term or intraday traders, the current low price presents an opportunity to buy and book profits as the market trends upward. For long-term investors, maintaining a portion of their portfolio in ITC is advisable, with a strategy of holding 5-10 percent capital and waiting for a potential upswing.

ESG Concerns and Their Impact

One of the key factors affecting ITC's performance is the increasing emphasis on ESG (Environmental, Social, and Governance) by institutional investors. Despite ITC's consistent and better-than-average returns compared to other FMCG companies like Hindustan Unilever (HUL), Nestlé, and Britannia, there is a notable lack of participation from foreign institutional investors (FIIs). This could be attributed to growing ESG concerns, leading to reduced FII participation to the extent they could previously have.

Even the top management of ITC is perplexed by the current situation. Neither market nor economic conditions align with their strategic goals and expectations. Despite selling such a significant portion of their holdings recently (approximately 700 cr), the company's leadership is still grappling with the underperformance. This reflects the broader challenges faced by the tobacco industry, which operates in a highly regulated and often scrutinized sector.

Industry Specific Challenges

The tobacco industry, in which ITC is a major player, is facing significant headwinds. Hotels, which are significant customers for ITC's menthol cigarette sales, have been affected by the pandemic, leading to a decline in both business and revenue. The general trend towards a healthier lifestyle and the government's stringent measures to curb tobacco consumption are also contributing factors. For ITC, the challenge is compounded by the negative perception of the tobacco sector, which has led to a decrease in consumer demand and investor interest.

However, despite these challenges, ITC continues to sell in Systematic Investment Plans (SIPs). This reflects the company's confidence in its long-term prospects and its commitment to buffering against short-term volatility. Moving forward, ITC plans to focus on diversification, innovation, and sustainable practices to mitigate these risks and capitalize on emerging opportunities in the FMCG and agriculture sectors.

Conclusion: The current lull in ITC's stock performance is not reflective of the company's core strengths and strategic capabilities. While the tobacco sector faces specific challenges, ITC's diversified business portfolio and adaptability to changing market dynamics present significant opportunities for growth. For short-term traders, buying at the current low price offers a strategic advantage. For long-term investors, positioning a portion of their portfolio in ITC through SIPs can provide a hedge against market volatility and a path to potential recovery.

References

Bhasin, S. (2023). Market Report: ITC Tipped for Growth in the Near Term. IIFL Securities Ltd.