Notes based on AR 2022, my thoughts and Net Outcome
- Cigarette revenue up by 5.9% YoY to INR 1,559 crs. Strives to grow volume and market share by innovation and market expansion. From a single brand, Charms, the company has started to create additional brands, viz. Total, which has become hugely successful in a short span of time.
- Aims to achieve 100% national footprint. Have made significant progress; from 60% coverage in FY15, they have ~80%+ footprint in FY22
- Intends to enhance distribution, infra and increase investments including in salesforce digitization. Taking long strides in digitizing Trade Marketing & Distribution, with all sales related data being captured real time, generating actionable insights and driving market efficiencies.
- Successful establishment of footprint in a new market keeps giving returns over a decade or more, with depth of portfolio deployment. This will continue to be a key focus in future.
- Increased investments in strengthening its trademarks supported by customer-facing activities, integrated digital ecosystem, & relevant technical up-gradations
- Statistics:
- 5-Yr CAGR Revenue: 3.1%
- 5-Yr CAGR Profit: 15.2% (Net Profit Margins have tripled over the last 5 years to 21% in FY2022)
- 5-Yr CAGR Cigarette volumes: 3.1% (6% since last year)
- 5-Yr CAGR Dividends: 15.9%
- 5-Yr CAGR Market Cap: 3.1%
- ROCE (FY22): 40.7%
- NIL Debt since FY 2005
- Industry outlook is positive: India is the world’s 2nd-largest tobacco producer and 3rd-largest tobacco exporter. The Indian tobacco sector was valued at INR 1,269.9 billion in 2020 and is expected to grow at a CAGR of 12.5% between 2020-25. The cigarette category is expected to register a strong value growth during this period.
- Changing legislation and taxation remain the key challenges for the tobacco industry. Illegal non-duty paid cigarettes continue to benefit from large price gap (>70% vs. tax paid cigarettes) and remain a threat for legal players.
My thoughts:
- Company’s market cap growth has been declining. While Mkt Cap grew by ~18% YoY since FY2008 (15-Year) until July 11, 2022; last 10-Year and 5-Year CAGR growth, however, has declined to ~9% p.a. and ~3% respectively.
- While earnings have grown by 15% YoY since the last 5 years; however, it has not translated to market cap (‘MC’) growing in the same proportion. In fact, MC has followed revenue growth’s trajectory (~3% p.a.)
- There needs to be a strong trigger for the revenue growth to take off. Difficult to envisage this! Organic product development leading to revenue enhancement (apart from the existing brands, viz, Charms & Total) takes a long time since taste take long time to develop!! However, once developed, it doesn’t go away easily – I haven’t seen smokers trying new brands every now and then. Have been a passive smoker since a long time to observe this!
- Balance sheet has ~ INR 900 crs deployed in money market/liquid MFs (~ INR 700 crs) and Govt secs (~INR 200 crs.). While this gives inherent strength, however, it also earns paltry 4% return, while the ROCE in the business provides ~40% return. While it is good to be conservative especially with respect to balance sheet, however, this conservatism seems to be hurting shareholders from a return perspective!!
- Dividends have increased ~15% YoY since the last 5 years, available at dividend yield of 4.2%, however, you as a shareholder are being taxed at your Income-Tax bracket, which does not make it very attractive.
NET OUTCOME?
- While we have been invested first at ~INR 3,300 a share, i.e., at market cap of INR 5,100 crs around in November 2021 and multiple times thereafter at lower prices as well; the company is available at the same price today, i.e., July 11, 2022.
- We believe there is some margin of safety at this price, considering that the average trailing PE multiple of the stock has been ~20x. The stock is available at 16x FY2022 trailing earnings. Any Stock price decline should be taken as opportunity to buy!!
- There will NOT be huge money to be made in this investment, perhaps ~12% YoY on the outer side provided management stays its course and deepens its execution. You, however, will not lose sleep over your investment in all likelihood. Return of Your Capital seems to be reasonably assured; however, desired Return on your Investment may be illusive!!
- Just for ease of calculation, return of 12% CAGR p.a. for the next 10 years would result in your capital growing by 3.1x of its original investment!!
Please note that these are my thoughts and shouldn’t be construed as a recommendation. I may have bias considering we are already invested. Please do your own diligence while investing