Large Cap Safe Stock To Buy - ITC

ITC is one of the most diversified companies and it is a classic defensive stock to buy which investors should be investing in.

Reason behind recommending ITC as large cap safe stock to buy is the company's dominant business of cigarettes. Over the years it has diversified into non-tobacco businesses such as, FMCG, hotels, paper & paperboards and agri-products . ITC offers investors an interesting contra opportunity. True to its defensive nature, the companys stock has been under performing the markets since February last year. However, this should not disappoint the investors, as investment in the companys stock remains protected irrespective of where the market is headed.

The companys cigarette business, its most important segment, is fraught by increasing taxes and prohibitory regulations. The company, on realising the limited growth prospects of this business, has followed the strategy of de-risking its business model.

ITCs cigarette business, which contributes around 45% to the companys topline and 85% to its bottomline, has been growing at about 9-10 % y-o-y . It is witnessing healthy volume growth despite an increase in VAT in few states, imposition of a ban on smoking and a presence of low-priced tax-evading illegal cigarettes. The companys FMCG business, although still loss making, has been witnessing steady increase in volumes. Strong performance in packaged foods and personal care products has been the major growth driver. Price hikes, changes in the product mix to include high margin products, portfolio extension and cost control measures (especially in retailing) have facilitated growth. The company intends to reduce losses of the division by 20% in the coming fiscal.

ITCs hotel business, which suffered the most during recession, has started showing signs of improvement. With occupancy rates inching up to nearly 60% and average room rates rising 15-20 %, revenues from this segment have started showing sequential improvement. The Commonwealth Games this year and Cricket World Cup in 2011 are likely to augur well for the hotel segment.

In its paper business, ITC commands a premium in all its products of paper, paperboards and packaging materials. The company has been making increased investments in this division. Doubling pulp capacity, increased capacity utilisation and valueadded product-mix has enabled the company to be cost competitive and consolidate its market standing. The companys agri-business provides good sourcing support to the cigarette segment and has been witnessing a steady improvement in earnings. Strong performance of leaf tobacco products has enabled this segment to register strong growth this fiscal.

The company's net sales have grown at a compounded annual growth rate (CAGR) of 19% over the last five fiscal years to reach close to Rs 16,500 crore in FY09. The net profits have grown at a CAGR of 16% during the same period to Rs 3,300 crore at the end of FY09. At a 3-year average payout ratio of 45%, the companys dividends have grown at 23%, much higher than the CAGR at which companys net profits grew.

The company's stock is currently trading at a priceto-earnings ratio of 25. But its market cap is at a little over six times its net sales much higher than that of any other FMCG company. It comes on the back of promising growth prospects of the company in diversified segments. As the company continues to achieve strong growth in non-cigarette businesses, it will reduce its dependence on the tobacco business for growth. While this transition seems to be happening at a slow pace, long-term investors are likely to benefit from the companys promising growth story.

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