ITC’s Best Days Are Behind It, Says Aswath Damodaran

ITC Ltd. has diversified its business and generates about half its sales from non-cigarette products. Still, according to valuation guru Aswath Damodaran, the tobacco company’s best days are behind it.

“You can dance around this as much as you want but if your central business is tobacco, no matter where you are in the world, you're looking at a future that is more downhill than uphill,” Damodaran, professor of finance at the NYU Stern School of Business, said during the NSE NYU Conference on Indian financial markets.

Shareholders have been pushing to spin off the tobacco business at the maker of Gold Flake. That, however, poses a risk of non-cigarette businesses turning unviable without support from the tobacco unit’s cash, BloombergQuint had explained in an earlier report.

Even though ITC has diversified into fast-moving consumer goods, hotels and paperboard segments, Damodaran said the attempt is futile as its primary source of cashflows is from sale of cigarettes. If the company “goes back to being a tobacco company,” he said it would give its share a higher value.

“I get lower growth, obviously. In fact, I put them in negative growth, but I get a higher value per share for ITC if it did absolutely nothing to grow.”

ITC's stock has been lagging. Shares of the maker of Aashirvaad atta and Sunfeast biscuits are up 12% so far this year. Its peers, however, have risen at least twice that pace during the period. The company has called an analyst and investor meet on Dec. 14.

Damodaran, explaining the lifecycle of a business, said the reincarnation of companies is more an "illusion than a reality". “Growth for the sake of growth is a horrifically bad objective. Survival for the sake of survival makes no sense."

His advice to "declining companies": don’t try for a reincarnation. “More money is wasted in businesses by companies refusing to act their age than by any other action."

He also reiterated his view that the notion of "sustainable companies" was absurd. “[If] India wants to map a path forward, they've got to let companies die.”

An ageing company will face more sector-driven or macro risks like interest rates and regulations than company-specific risks or micro uncertainty, he said.

For the NYU Stern professor, with young companies or startups, the narrative is central for growth. But for mature or ageing companies, the narrative gets narrower as their “histories, size and cultures start to become binding".

“For young companies, it’s the story that drives the valuation because there are no numbers to base it on,” he said. "As companies age, you can trust numbers more. If you take ITC, you can just take a financial model and it works because it's beyond mature.”

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