Over five per cent dividend yield (better than fixed deposits). Nearly zero debt. About Rs 25,000 crore in cash. Price to earnings multiple of 14. ITC Ltd, the cigarattes-to-hotels-to-FMCG behemoth, has all these good financial parameters, but the company’s stock performance has been disappointing in the last five years, to say the least.

If the Sensex has moved up 6% in the last one year, ITC stock is down 33%. In half a decade if the Sensex has given a CAGR of above 8%, ITC has lost about 6%, a stark contrast to it being called a defensive counter that is almost as safe as a bank deposit. This is rank under-performance by any yardstick. Investors who have invested in this conglomerate find themselves in a soup. And, their patience is running thin despite consistent generous dividends.

The consumer goods company has its feet in every interesting business but the stock refuses to budge. Right from professional fund managers to investment bloggers (and Twitter analysts) have expressed their disappointment in ITC, which is part of Sensex and Nifty. The frustration has gone that bad that the cigarette manufacturer has even become the butt of jokes and memes, which though provide comic relief to hapless investors do not really add to investor alpha.

Mutual funds, which pride themselves on being long term stewards of investor wealth, obviously have a lot of money riding on ITC. If ITC’s market value is Rs 2 lakh crore, about Rs 21,000 crore is with mutual funds, and by extension, with starry-eyed retail investors who hope to win big from patiently-done regular investments.

What really ails ITC

One of the country’s private sector companies, ITC has a diversified presence in FMCG, Hotels, Packaging, Paperboards & Specialty Papers, and Agri-Business. The cigarette business is the cash-cow while it is the food business that has the potential to re-rate the company’s valuation. Due to the COVID situation, the economic slowdown has struck consumer discretionary spending-related businesses such as hotels.

The factors that have affected investor sentiment around ITC is three-fold. Firstly, there is persistent global ESG concerns on cigarettes (which accounts for over 80% of ITC EBIT in FY20). Two, there remains an overhang of a further GST increase on cigarettes. Thirdly, ITC has so far displayed a continued weak earnings trajectory (6.6% PBT CAGR over the last five years).

Today, the stock is trading at about 13.5 times FY22 earnings per share based on current forecasts. Its investments in agri, hotels etc. are promising, but they do not move the needle much when it comes to generating the extent of profits that the cigarette division brings in.

Mutual funds play

Over 320 schemes hold a piece of ITC. Cumulatively, they hold 120.98 crore shares as on September 2020 end, a tad lower than the 121.23 crore shares held in August end. But dont be nervous about this. If you look at numbers for May, June, and July, there is no massive change in how mutual funds as a whole perceive the stock. In fact, the trend in terms of MF holding is upwards.

MF exposure

Here are some interesting trends.

* Big funds – The largest funds (AUM in excess of Rs 10,000 cr) holding ITC shares have about 3-5% exposure individually. Examples are SBI ETF Nifty 50 3.09%, HDFC Balanced Advantage Fund 4.31%, SBI ETF Sensex 3.61%, HDFC Equity Fund 4.62%, SBI Bluechip Fund 3.56%, HDFC Top 100 Fund 4.72%. Notable exceptions to this are ICICI Prudential Balanced Advantage Fund 1.28%, Aditya Birla Sun Life Frontline Equity Fund 1.47%,

* Top weight – Sectoral and thematic funds will have ITC as top weights. That’s natural for the likes of ICICI Prudential FMCG Fund 23.98% in ITC, BHARAT 22 ETF13.57%, Nippon India ETF Consumption 9.80%, UTI Dividend Yield 5.80% etc. But, what is unique about some funds is that ITC, despite being the favourite whipping-boy of investors, continues to be among the top-held stocks in many other schemes. Examples are Parag Parikh Tax Saver Fund 8%, Parag Parikh Long Term Equity Fund 7.99%, Principal Retirement Savings Fund Moderate Plan 8.69%, Motilal Oswal Dynamic Fund 6.57% etc.

* Stake fall – We also take a look at big funds that have hiked or pared exposure to ITC in recent months. HDFC Balanced Advantage Fund, which holds the 2nd biggest chunk of ITC stock among all, in September cut ITC shares to 8.7 crore from 8.99 crore in August. In July, the Prashant Jain led fund had held 9.39 crore shares. Similarly, Jain managed HDFC Top 100 Fund also cut its ITC exposure to 4.33 crore shares in September from 4.7 crore in August. SBI Equity Hybrid Fund, managed by R Srinivasan, in September cut its ITC holding by 70 lakh shares to 3 crore from 3.7 crore in August.

Importantly, many funds with moderate to high percentage exposure to ITC continue to hold their level in the stock, despite the fact that the company’s share has lost 15% in last three months alone. Big value-oriented funds like Mrinal Singh managed ICICI Prudential Value Discovery Fund or Venugopal Manghat managed L&T India Value Fund or Vetri Subramaniam managed UTI Value Opp. Fund seem to have made no change to their respective ITC holdings for many months now. But we did see SBI Contra Fund build a position in ITC in July, from virtually zero holdings previously.

* Categories – Largecap equity funds seem to hold the most amount of ITC shares (about Rs 9,400 crore worth stock). If the stock continues to under-perform, largecap funds with high ITC exposure will be affected. Multicap funds, aggressive hybrid funds, and dynamic asset allocation funds, as a category, each hold about Rs 2,000 crore worth ITC shares. This could be due to the predominantly largecap stock bias in many schemes. Naturally, any unfavourable stock movement in ITC would be a further drag while any upside from here will help such categories mark a turnaround.

Kumar Shankar Roy

Kumar Shankar Roy is contributing editor with RupeeIQ. Kumar is a financial journalist, with a functional experience of 15 years. He tracks mutual funds, insurance, pension, PMS, fixed income/debt and alternative investments markets closely. He has worked for The Times of India, The Hindu Business Line, Deccan Chronicle Group, DNA, and Value Research, among others, across different cities in India. He is deeply interested in marrying data insights with actionable opinion. He can be contacted at [email protected]

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