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At first glance, it seemed like ITC Ltd made all the right noises in its 110th annual general meeting (AGM) on Wednesday. Here is a sample of the post-AGM news headlines: ‘ITC to launch super app this year’, ‘ITC to explore inorganic opportunities’ and ‘ITC may demerge hotels business, list IT arm’. Talk of any one of these three—a super app, acquisition-led growth or value unlocking—would have sent any ordinary stock to the moon.

But the ITC stock is cut from a different cloth. The impressive statements at the AGM only produced a dead cat bounce in the stock on Thursday. ITC shares rose 2.6% at open on the NSE, but quickly gave up the gains and retreated back to pre-AGM levels of 209.

Not a cakewalk

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Not a cakewalk

At closer look, it turns out some of the statements were not very impressive, after all. On the demerger and value unlocking possibility, the management was non-committal and reiterated that these measures are regularly evaluated and will be done at the right time. Analysts were quick to point out that while rumours of value unlocking and demerger have risen in the past, there is no concrete news for investors to get excited about. In any case, even at the AGM, the statements related to demerger of non-cigarette businesses arose as a result of shareholder queries. It clearly looks like shareholders are more keen on the demerger than the firm itself.

What about the announcement regarding the super app, which will help create a ‘phygital’ ecosystem to deliver customized solutions to farmers? “Every firm wants to launch a super app, so it is not a big game-changer,” said a consumer analyst with a multinational broking firm, requesting anonymity.

ITC also said it is exploring inorganic growth opportunities in its fast-moving consumer goods business. Again, analysts said since there is nothing concrete to hold on to, none of the announcements are likely to contribute meaningfully to revenue growth.

Moreover, there is little in the AGM announcements that suggest improved growth outlook for ITC’s mainstay cigarette business. “ITC can keep adding more revenue streams, but unless their contribution to profits increases, it is challenging for ITC’s shares to re-rate,” said an analyst with a domestic broking firm, also requesting anonymity.

Analysts from Motilal Oswal Financial Services Ltd said in a report on 25 July: “Profit before tax growth over FY20-23E (6.9% CAGR) is likely to remain similar to growth in the preceding five years (6.6% CAGR).” CAGR is compound annual growth rate.

“With the cigarettes business likely to contribute over 82% to ITC’s overall Ebit even in FY23E (from 85% in FY20), there is no material reduction in the dependence on this segment, which is beset by concerns of a) weak Ebit growth for several years now, b) the overhang of a possible GST increase, and c) ESG-related issues over tobacco, leading to a reduction in valuation multiples,” the broker added. ESG is environmental, social and governance; and Ebit is earnings before interest and tax.

Clearly, the sooner ITC’s non-cigarette businesses are demerged, the better for investors as the ESG drag on valuations will be lifted from these businesses. In the past, business groups such as Tata Sons and Larsen and Toubro Ltd benefited by demerging or listing their IT subsidiaries. In ITC’s case, the ESG impact on valuations makes it an even more compelling case to demerge or list its non-cigarette businesses

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