Saturday, October 20, 2012

ITC: It's time to sell

ITC reported very good set of numbers for the second quarter of Fy 2013 with profit rising 21% YoY and sales rising 18% YoY. The stock reacted positively and touched all time high of 299.20 a tad below the psychological 300 mark. Everything seems to be going perfect for the company but the bigger question is should we buy the stock now? I think ITC is priced to perfection and it's time to sell if you have the stock or avoid if you don't have the stock in your portfolio. 

It's not that I am bearish on the stock, but being a contra investor I think the company is very near to its major long term top and the risk reward ratio is not in favor of investment at this level. Consider the following points:

1. ITC has 80% market share in cigarettes business which is almost at the top and cannot be increased further. So volume growth in this segment will be difficult to attain.

2. Significant price increases in past couple of years due to duty increases on tobacco products has made the transition from bidi's to cigarettes slow and is thus putting pressure on volumes further.

3. 80% of ITC's EBIT comes from cigarettes business which makes the stock vulnerable to any shock from regulatory side. Tobacco industry in general is witnessing series of negative news flows.

4. The company is operating at a margin of 36% which leaves little headroom for improvement from current levels.

5. The stock is highly over owned by FIIs and DIIs and could see significant selling pressure in case of any macro or micro shock.

6. ITC's stock price has appreciated almost 50% in last one year and has added almost 80,000 crores of market cap during this period.

7. Company is planning to invest heavily in low return and high investment Hotel segment and is planning to add almost 5000 rooms in next 5 years which will require significant capital investment.

8. 99% of the investing community is bullish on the stock which leaves very little margin of safety.

9. The stock is valued at 31 times current year earnings which is by far one of the most expensive large stock listed on Indian bourses.

So all in all it doesn't make sense to enter or stay invested in a stock which is priced to perfection and leaves little headroom for fresh investors.


  1. Whats the future of Unity Infra from here?

  2. ITC has come down to 278 from the price of 297 at which the sell call was given in a matter of 1 week.

  3. Great analysis...Liked it !


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