ITC in its latest acquisition of the pulp and paper business of Aditya Birla Real Estate is attempting to tap into the growing demand for sustainable, eco-friendly wrapping solutions from the e-commerce, QSR, FMCG and pharma industries, amongst others.
The above transaction at nearly Rs 3,500 crore has been done at about one times sales of the pulp and paper business of Aditya Birla Real Estate for the year ended 31 March 2024. Other leading companies in this segment like JK Paper also trade on a valuation multiple, enterprise value (EV) to sales of about one times FY 24 sales.
ITC in its paperboards and specialty business has an annual throughput of about one million tonnes and via the acquisition would gain access to an additional capacity of nearly 4.8 lakh tonnes.
Of particular concern to investors is the shrinking margins of this business – for ITC its standalone paperboards, paper and packaging business saw a near 590 basis points y-o-y shrinkage in segment operating margins to 11.4 % for the first nine months of FY 25. Weak operating margins of the above division of ITC is attributed to a jump in imports of paper and allied products into the country along with a surge in domestic wood prices.
The latest acquisition was announced on Monday and the stock has been broadly steady at Rs 409.6 during early Wednesday trade in contrast to the broad volatility witnessed on Dalal Street over the last few trading sessions.
Other businesses of ITC
The demerged hotel business of ITC, ITC Hotels got listed on Dalal Street in late January 2025. The ITC Hotel stock was trading at Rs 205 in early Wednesday trade and not too far from its 52-week high of Rs 213.25 that was reached on Tuesday. The broader hotel sector has seen strong investor interest given the strong growth in income and rapid expansion of hotels / properties by leading chains over the next few years.
And there were 144 operational hotels of ITC Hotels at the end of the December 2024 quarter and plans are underway to reach 191 hotels over the next four years with an emphasis on asset-light, managed hotel properties.
Investors are also keeping a close eye on signs of a pick-up in urban and rural demand in the fourth quarter of FY25 and its impact on the key businesses of ITC, cigarettes as well as the other FMCG business, which includes its packaged food business and personal care products, amongst others.
In ITC’s FMCG others segment for the first nine months of FY 25, standalone revenues grew 5.2 % on a y-o-y basis to Rs 16,486 crore while in its cigarettes business standalone revenues grew 6.9 % to Rs 24, 231 crore during this period.
Investors on Dalal Street
The ITC share price has declined nearly 4 % over the past one year in contrast to a 3.5% rise in the broader Sensex. The above under performance of ITC comes at a time when investors are closely monitoring any signs of a pick-up in urban and rural demand.
ITC trades with a P/E of about 24 times estimated standalone FY 25 earnings. Other leading FMCG players like Hindustan Unilever trades with a P/E of nearly 47 times estimated standalone FY 25 earnings.
And while ITC trades at much lower valuations vis-à-vis Hindustan Unilever, investors could wait to see if there are definite signs of revival in the FMCG sector before making any fresh investments in this sector.
Disclaimer
Amriteshwar Mathur is a financial journalist with over 20 years of experience.
Disclosure: The writer and his dependents do hold the stocks discussed in this article.
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