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British American Tobacco: The Hidden Value Of ITC Limited

Felix Fung profile picture
Felix Fung


  • British American Tobacco's massive stake in ITC Limited is an often overlooked catalyst that has the potential to significantly increase shareholder value.
  • ITC Limited has been performing really well and its cigarette business has been thriving amid the ban on e-cigarettes and the relatively loose regulations of tobacco.
  • A potential divestment could substantially increase financial flexibility and provide more dry powder for debt repayments or share buybacks.
  • The latest update came in much better than feared, as the company reaffirmed its revenue and EPS guidance for FY23.

Young woman holding burning cigarette in hand

Altayb/iStock via Getty Images

Investment Thesis

After publishing my recent article on British American Tobacco (NYSE:BTI), I noticed that many investors seem interested in knowing more about ITC Limited. For those who are unaware, the company currently has a significant

This article was written by

Felix Fung profile picture
Individual investor with four-year experience. I focus on long-term investing opportunities around companies with high-quality fundamentals or compelling turnaround potential. Currently studying business and economics at the University of New South Wales. Appreciate any feedback and comments.

Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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Comments (116)

Felix Fung profile picture
Felix Fung
Article Update 12 Jun. 2023
A really good read on ITC's business www.washingtonpost.com/...
BM Cashflow Detective profile picture
@Felix Fung
Great item. Thanks very much.

The analyst consensus assumes that the ITC Ltd. will grow at a rate of 13.44% CAGR over the next five years.

Slowness seems to have a different meaning in India.

Together with the dividend yield of 2.91%, this results in a total return potential of 16.35% CAGR.



You don't have to increase speed or cultivate slowness, just find the right investment rhythm.
Compounding Dollar Bills profile picture
@BM Cashflow Detective Isn´t it a little off to think about CAGR this way? I mean adding the growth on top of the dividend. Because that would assume constant valuation. At almost 30x PE, you would have some valuation risk I think that could work against you..
BM Cashflow Detective profile picture
@Compounding Dollar Bills
Adding dividends to growth is the usual and required way of determining the prospective investor's reward potential.

But you are right that valuation is important and of course it always is.

LTC Ltd is still good value based on its 5y PEGY of 1.86 and could be viewed as a moderate buy thereafter.

Yes, a certain valuation risk could work to a certain disadvantage, but the appropriate valuation is always in the eye of the beholder.

It clearly depends on the annualized rate at which the company will continue to grow in the future.

There is no question that value investors and GARP investors and momentum investors would assess this differently in principle.

I personally tend to a special variant between a risk-conscious value and GARP investing.
Why is Glo doing poorly?
Felix Fung profile picture
British American Tobacco just reported its half-year earnings. Revenue from RRP grew 26% and non-combustible products now account for 16.6% of total revenue, up 180 basis points. As expected, the strong pricing from combustibles was more than enough to offset the decline in volume. The operating margin also expanded by 40 basis points thanks to the improvements in RRP's profitability. The company continues to pay down its debt, which was down 2.3% YoY. The overall report looks very solid and the company continues to move in the right direction.
bk25 profile picture
@Felix Fung Thanks for the summary...what's not to like. RRP's up 26%....their strategy is working. Big T is disrupting itself and having success...if BTI were a tech firm the stock up be up 500% this morning.
autofocus111 profile picture
@Felix Fung Global combustibles biz decent, but US combustibles reported a -12.4% yoy volume vs industry -8.4%. Attributed to premium-skewed mix. BTI management is clearly pissed off by the rise in US 'illicit' disposable flavoured vapes. Meanwhile the FDA still has not approved the Vuse Alto PMTA. US vape market is like the wild west these days thanks to the FDA incompetence.
@autofocus111 , I would not talk about the FDA incompetence. There are probably hidden interests that we don't know.
Nevertheless, the FDA should clearly explain their position, because it seems crystal clear that non-combustible products are far more healthy than the traditional smoked tobacco.
ITC is a nice component of BTI.
It’s interesting that vaping products are banned in India.
Average age 28.
They smoke at very high rates.

User1117913587020187 profile picture

@Dividend Ambassador @BM Cashflow Detective This post points to erosion of fundamentals (EPS). How would you respond to this?
autofocus111 profile picture
@User1117913587020187 I don't know about the others, but I would respond by saying look to sources other than 'Simply Wall St' for your information.
Felix Fung profile picture
@User1117913587020187 They are cherry-picking data to fit their narrative. EPS temporarily spiked for two quarters due to non-operational impacts and they are using the spike as their starting point to calculate the EPS CAGR. If you look at the data EPS is actually roughly flat from FY15 to FY22.

Dabub profile picture
@User1117913587020187 EPS has not fallen, FX rate of the GBP to USD has. If you look at EPS in GBP, goes up every year. But if EPS goes up 5% and exchange rate drops 15%, this article counts that as a drop in EPS. In USD, that's correct, however, the company operates in GBP. It's poor journalism. If you are judging the fundamentals of a company, you do it in its operational currency taking exchange rate fluctuations out of the equation as much as possible.
Compounding Dollar Bills profile picture
Great article! This "hidden" asset really elevates an already compelling value-play with British American. ITC is dominant in India, although I think as a standalone investment it wouldn´t be as compelling given the rich PE ratio. I know the ticker isn´t covered on Seeking Alpha, but do you have an opinion on the company Godfrey Phillips India? Seems to be a very similar story to ITC growth-wise, yet the valuation is really cheap in comparison..
Thanks Felix this additional explanation adds even more conviction on buying BTI as I recently took a position on this gem. The price is well within the margin of safety and the dividend yield is to die for. Investors! You will need income if you plan on ever retiring especially if you want an early retirement option. This equity fits the bill.
bk25 profile picture
BTI seems very well positioned on the marijuana front (13 major investments I think). I have heard stories from law enforcement about seeing fentanyl in marijuana. If this is true the feds are going to have to come in and provide a solution...they will have to turn to big tobacco and regulate the ingredients and see that it's fentanyl free.

But then again knowing biden could care less about the fentanyl coming over our border this may not happen.
@bk25 are there marijuana investments buried in their annual report?
bk25 profile picture
@SummitWaldo56 not sure. I just remember that 13 number for some reason
gnwilliams profile picture
@bk25 You have no evidence that "Biden could care less about the fentanyl coming over our border." On the contrary:

Very nice analysis, Felix. Did you mention what the market value of the stake in the Indian company is?
I would never sell ITC, it's practically a sovereign wealth fund. While they may have made a lot of business decisions that are on par with Altria some of their established units outside of tobacco are starting to see some exceptional growth. So if you believe in India's rise (which I do) and you have the time (which I do) I think between growth, strengthening currency and either spinning things out or literally burning all that tobacco $$$ to diversify the ultimate growth of ITC I would guess ITC is just getting started VS something to sell.
Good analysis picked up 500 shares today as a deep value dividend investor this is a no brainer. Smoke the if you got um
Tudor Invest Holdings profile picture
@Felix Fung

Thanks for the article. I was unaware of this, so I learned something today.

Perhaps the best for BAT would be to sell the stake and like you stated plow the money into a reduction of debt and repurchase of shares
fun2roc! You mention that BAT earns money from Lucky Strike and Pall Mall - two very successful brands. But, your glaring omission is that BAT dominates the menthol category with its BEST SELLING Newport Cigarettes - which quadruples their sales in both Lucky Strike and Pall Mall. Newport is what makes BAT incredible in the USA and the rest of the world. That's why one can bet on BAT with confidence. NEWPORT is the best selling Menthol Cigarette in world history.
Menthol is popular.
So it’s under attack by nanny states.
Read California.
Now the Feds are in on it.
Quite a racist component to their reasoning too. Specifically calls out blacks, hispanics and asians.
I wonder how long it will take for those denied menthol cigarettes to start experimenting with a drop of essential oils on their cigarette filters?
With absolutely unknown consequences.
I am not sure about BTI! There is hardly any price appreciation! Maybe a dividend value trap
@vskatusa new technology to fuel an old addiction is my thesis.

and its on sale now!

I am building a double sized position on this one at these prices
@Overfished This is the same argument people made of VZ! Cheap and buy it and finally loose money. I hope you are right with BTI
@vskatusa BTI was trading north of $40 just a month or so ago. Buy it in low $30s or high $20s and hold for > $40 and collect dividends along the way
cuzin GJ profile picture
Most assuredly, now is the best time to ditch ITC at record high and reduce debt load. That action would pop the stock 10-20%.
BTI definitely a bargain in low $30 or high $20s range
fintax profile picture
"...the country established a law in September 2019 that completely banned the production, manufacture, import, export, transport, sale, and distribution of e-cigarettes (including heated tobacco) and their components."
Yeah, I know! The bastards confiscated my vaper while trying to board a flight back to Canada!!! WTF!!!
07 Jun. 2023
Important and not well covered topic. This is the thesis of a well known activist as well, ITC value not being reflected in market cap. Seems to be the case but selling the stake is way tougher than it seems. Buyer has to be Indian (per gvmt legislation), ITC overvalued and the company (BTI) claims severe tax implications from the sale.
A look into things to come...? I had no idea that BAT's revenue is so USA dependant...

June 6, 2023
"British American Tobacco said in an early update for the first six months of the year that sales of cigarettes in the U.S.--its most important market--are still "disappointing." The company has lost more market share overall and its business in California has shrunk by around 25% since the state banned menthol cigarette brands earlier this year."

"BAT, which still makes 83% of its revenue and the lion's share of profits in the U.S. from traditional smokes including Lucky Strike and Pall Mall. Its lower-risk smokeless products such as heated tobacco sticks and vapes are loss-making for now. BAT needs cash from cigarette sales to expand the new brands and make them profitable."

"The company's big debt pile also needs to be repaid faster as interest rates rise, which means there is less cash available for share buybacks. This may explain why BAT has been the worst-performing major cigarette stock over the past five years. Improving that patchy track record depends on America's cash-strapped smokers."
@fun2roc The only thing that continues to shrink in California is common sense. The size of California's illegal economy is now so large that the State of California can no longer estimate it with any degree of accuracy.
@Selective Stocker Tell me about it... I've spent 64 years here in California.
So....ITC is expensive and will not be sold. BTI is cheap even though ITC's price has grown to "expensive". What is hidden, and where? If ITC's price drops does that make BTI a better investment?
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