Last Friday ITC reported its financial results for 2016 and yesterday we had seen market giving thumbs up to its performance and price of its stock jumped up by 5%. This is how we look and compare its results.

  Compare to last year 2015 Our view
Revenues Up by 2% poor
EBIDTA Up by 7% at Rs 23,110.27 crore good
Net Profits Up by 3% poor
ROE 31% for the 2016 great
Incremental return on equity 13% poor
Estimated cash profits ITC generated from the Balance sheet Rs 6,219.57 Below reported profits (poor)


Let us shut down the stock market and analyse the reports. Imagine you own this business, your revenues had jumped up by 2% compare to last year. You might be not happy with that performance, it is far below even the inflation in the country. The only good part to take from the above results is that they are still operating at high return on equity and their margins got improved.

Between last year and this year end (2016) they retained Rs 2,228.92 crore profits back in to the business. Well, if I am the owner of this business and my manager who runs this business want to retain some profits, my expectations is that they will invest or utilise this money and give me the similar returns on that extra fund what they have generated overall from this business (ROE). But in this situation, they managed to generate only 13% returns.

How bizarre is that return! We did took very important clues from this results when they announced Rs 2 as special dividend for the last year (2016). It means they do not want to retain a big chunk of profits back in the business as they cannot generate sufficient returns on those incremental capital.

So, what is all about the upbeat in the market? Market is upbeat about its future earnings expectations. Have a look at the table below.

  2017 2018
Consensus earnings expectation Rs 13.81 per share Rs 15.59 per share
Incremental ROE expected 42% 29%


Market is expecting 13% growth in its earnings for the next two years and the incremental returns around same level to its overall return on equity. If you are the investor in this business then your research should be focused on to find the drivers of its earnings growth.

Coming to the valuations part, for the business with book value per share of Rs 42 per share and EPS of Rs 12.35 of which they have distributed Rs 8.50 per share as dividend and return on equity of 31%, we calculated its intrinsic value for the 2016 to be Rs 125.

In two years’ time the book value of ITC will be Rs 52 and today it is trading approximately 7 times to its forecasted book value. As per our calculations ITC is trading at premium price by almost 40% to our estimated fair value and possess higher risk of reporting low incremental returns on capital.

Aziz Dodhiya is the chief investment officer for the Valueoperations funds which operates in the Indian market as an FPI (Foreign Portfolio Investor). We do not offer any personal advice to buy or sell any stocks and the views that are shared by Aziz might not incline to your personal investment strategy and this is the reason we advise you to take professional advice before going ahead with our views.