itc: Why Chakri Lokapriya still isn’t impressed with ITC

“In the case of the capital goods sector, this quarter is going to be very low key when they report earnings. Valuations are undemanding and they are unlikely to see a significant correction,” says Chakri LokapriyaDSI and MD, TCG AMC


What’s your take on the title everyone loves to hate – ITC? He saw this movement begin. How do you see the performance of individual businesses in the company? What do you expect from shareholders?
There’s nothing steamy about ITC right now. Its hotel activity will resume due to the release. Its FMCG activity is constantly growing. And its cigarette volumes are doing very well and the cigarette industry gross margins are around 80%. We therefore know all the levers of the company in terms of where the additional growth surprise will come from, fundamentally for the company. It probably comes from the hotel industry. Now the hotel business is not large enough in the overall ITC coin valuation sum scheme, to increase it significantly now, unless there is some sort of operation of business within each of these divisions. Other than that, it’s one of the stocks that will do its thing but I don’t see it fundamentally exciting.

Would you say the semiconductor issue is getting a bit more serious than previously thought?
Yes, it looks like that because the conflict between Ukraine and Russia has added an extra ray in the workings of the supply chain. Supply chain costs continue to be a problem and the freight cost of various components has also increased and the waiting time is longer as a result.

Over the last three or four years, volumes have remained stable for car manufacturers. So where will the volume growth come from? There is a waiting time even if there is some revival of demand. So we won’t see volume growth and, due to strong input cost pressures, margins shouldn’t increase. Finally, there’s the EV boost. But until these things calm down, it’s unlikely to see a big increase. We need to see some sort of regulatory announcements on charging infrastructure, standardization, etc. that will accelerate rollout and enable higher growth estimates for the EV segment. There are pockets inside – maybe Greaves Cotton, maybe a TVS Motors – that have a bigger advantage because of the EV, but outside of that consumer auto volumes will be in large part stable.

What are the expectations for the capital goods industry in terms of earnings, execution, order pipelines as well as future growth?
Growth has remained muted for very logical reasons since the release of containment. There’s a labor shortage, supply chain issues, and they’re trying to see if there’s some kind of cost stabilization.

Now some of their contracts are fixed price contracts and whatever was built in L1 for some of those contracts is actually not as viable or probably barely viable in terms of margins. This means that margin expansion is unlikely. So this quarter will probably be a very quiet quarter when they report earnings, valuations are not demanding. They are unlikely to see a significant correction. And so, unless we see a recovery in execution, there is unlikely to be margin expansion in any case. Improving revenue is the key to some kind of long-term growth recovery for these companies.

What about the electricity sector or the defense sector? The electricity sector is currently facing many headwinds in terms of supply issues. But in the case of defence, finally the order entries arrive?
It is clearly very well placed whether it is Bharat Electronics or Bharat Earthmovers or HAL. All of these companies’ order books look very strong. Valuations are never demanding and they also enter into new aspects of the business which will yield higher margin related to IT in technology, in product offering and which will also increase their margins and improve their ROE. All the names look very attractive and this quarter they are also likely to post good numbers.

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