The Phenomenon of Conglomerates – A Case Study of ITC

Chetan Shah
/ Categories: Knowledge, Fundamental
The Phenomenon of Conglomerates – A Case Study of ITC

Investing in Conglomerates is Tricky! Learn to Tackle the Challenge

ITC Limited has nearly doubled since February 2022 and now it is trading at its all-time high of Rs.443 (8th June 2023). Most brokerage houses have been issuing research reports that recommend it as a Buy or Add.


Now, as a thinking retail investor, how do you look at it? How do you decide if you will buy it now if you missed putting it in your portfolio or will you hold it if you are already sitting on some nice long-term capital appreciation?


This article is less about a buy or sell recommendation and more about how to reach that decision beyond the noise of research reports and expert opinions. So, I am going to discuss the method here and let you tell me what your decision is.


The first two things that come to mind about ITC are its high-quality management with a long track record and its highly diversified businesses around its core business of cigarettes.


Let us first understand the implications for a company being a conglomerate.


Sophisticated Investors and the Life Cycle of a Business

The investing value creation chain starts with venture capitals investing in start-ups through a series of funding rounds, then as the business becomes more established and commercialized, private equity investors enter it, followed by that business going the IPO route to institutions and retail investors or M&A buyers acquiring a significant majority in it.


All sophisticated investors such as VCs, PEs, and mutual funds allocate funds by identifying the investee company’s geography (India, emerging markets, developed markets, etc.), sector (technology, resources, consumer discretionary, etc.), market capitalization (large cap, midcap etc.) and their own ticket size (a $ million/ crore rupees amount, a % of the portfolio, etc.).


Most investors do not necessarily have an allocation for ‘conglomerate’ when it comes to the sector – especially, this is true for the pre-IPO stage. This phenomenon also leads to sector-specific stocks contributing to a majority of IPOs.   


I may argue that India has a fair share of large-scale wealth creation by conglomerates such as Adani Enterprises and Reliance, apart from ITC. But the truth is, it is really difficult to point to many genuine examples of 10, 20, or 100 baggers beyond these names, while you could make a long list of those when it comes to sector-specific stocks.


The Challenge of Managing and Analysing Conglomerates

Understanding and analyzing conglomerates, as you may have seen from the brokerage research, involves analyzing the financials, prospects, and challenges of each business segment separately. That means you have to treat each segment (sector presence) as a company and see how well each one is doing.


In the case of ITC, the company has a presence in many sectors: cigarettes, technology, agriculture (nicotine, leaf tobacco, milk, spices), paper, packaging and fibre products, hotels, personal care, snacks, food staples like atta, frozen roti, salt, and packaged milk, and even agarbatti.


While most analysts put these businesses under key six segments and value each segment by applying a P/E ratio or EV/EBITDA ratio, in reality, the company is present in many more sub-segments that have independent growth drivers and risks.


Most of these segments have no synergy with one-another, hence no genuine reason why they should co-exist under the same listed company. In the modern world, to imagine that one single board of directors supervising a single CEO who would be acting as portfolio manager of 8-10 businesses run by individual business heads is not a greatly comforting idea.


The Challenge of Having No Real Peer Group

When you invest in a sector-specific company such as consumer, web retail, banking, and finance, or food and beverage, you can find a reasonable number of peers listed in the market. A review of these companies helps you to understand the sector growth, the market sentiment for the sector, and other parameters on which you can compare the stocks.


In the case of conglomerates, it may be impossible to find a peer. It is important to understand that all companies described as ‘conglomerate’ or ‘diversified’ do not necessarily become peers. Thus ITC, Reliance, and Adani are diversified in completely different sectors and business segments, hence they are not peers even though they are all diversified.


Not having peers means the company is not given to a quick and easy analysis by looking at a screener or a database of companies. Analyzing such companies will, therefore, be quite complex for retail investors.


The Big Picture of ITC

The cigarette business is ITC’s most profitable business with roughly 75% PBIT margin. The rest of the businesses have relatively low PBIT margins, ranging from 7% to 25% of sales.


In rupee terms, nearly 76% of total PBIT of the company (i.e. approximately Rs.20,000 crore out of Rs.26,500 crore PBIT estimated for FY 2024) will come from cigarettes.


The predominance of cigarette business in the company’s sales and profits has remained so in the past few years and it is expected to continue in the foreseeable future.


In summary, despite the optics of a diversified company, the bottom line suggests that ITC is still predominantly a cigarette company, trying hard to diversify. Unfortunately, it has not yet found other businesses that can be as profitable as cigarettes.


On the bright side, ITC has a long track record of profitability and good management, except COVID related losses in the hotel business in FY 2021 and 2022.



As mentioned in the beginning, the purpose of this article is not to provide a Buy/Sell recommendation or to engage in a detailed analysis of ITC’s financials, valuation ratios, or future prospects. Its purpose is to bring you closer to the underlying businesses of the stock you are exposed to or you may be in the future.


There have been talks of a spin-off of ITC’s hotel business or even a demerger into a number of companies segment-wise including the IPO of its IT business. Such expectation is likely reflected in its current valuation, and the sentiment seems to be favoring even a further upside if the demerger and or the IT company listing materializes.


It is the right time for investors to check if the sentiment reflects the underlying value or otherwise. One right way to do that is to apply specific sector (cigarette, hotel, etc.) valuation parameters such as PE ratios, and EV/EBITDA ratios to the profit/EBITDA of each segment of ITC. Then aggregate these segment valuations to arrive at the recommended market capitalization for the whole company, and decide if ITC is undervalued or overvalued compared to segment peers.




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