| ITC Limited | ||||||
| Ratings reaffirmed at 'CRISIL AAA/Stable/CRISIL A1+' | ||||||
| Rating Action | ||||||
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| Note: None of the Directors on CRISIL Ratings Limited’s Board are members of rating committee and thus do not participate in discussion or assignment of any ratings. The Board of Directors also does not discuss any ratings at its meetings. | ||||||
| 1 crore = 10 million | ||||||
| Refer to Annexure for Details of Instruments & Bank Facilities |
Detailed Rationale CRISIL Ratings has reaffirmed its 'CRISIL AAA/Stable/CRISIL A1+' ratings on the bank facilities of ITC Limited (ITC).
Operating income grew by 17% in fiscal 2023 driven by strong growth in cigarette, FMCG and hotel segment. Operating margins improved by over 200 bps supported by sustenance of healthy margins in cigarette segment and improvement in profitability across FMCG, hotels, agri commodity and paperboard segment. Financial risk profile remained strong supported by nil debt and healthy debt protection metrics.
CRISIL Ratings has also taken note of the scheme of arrangement (the scheme) announced by ITC wherein its hotel business shall be demerged into a new entity. ITC will hold 40% shareholding in the new entity and balance 60% will be held by the company’s shareholders in proportion to their shareholding in ITC. The scheme was approved by board of directors of ITC on August 14, 2023, and is subject to approval from its shareholders, stock exchanges and other regulatory approvals as required. There will be no impact of the demerger on the credit risk profile of the company as the contribution of hotel business to overall revenue and profitability is minimal at below 5%.
The ratings continue to reflect the company’s excellent business risk profile due to its presence in diverse businesses, a dominant position in the Indian cigarette market and strong sustainable profitability. The ratings also factor in ITC’s exceptionally strong financial risk profile. These rating strengths are partially offset by exposure to risks inherent in the various businesses. |
Analytical Approach CRISIL Ratings has combined the business and financial risk profiles of ITC and its subsidiaries, step-down subsidiaries, associates and joint ventures (JVs) because of significant business and financial linkages.
Please refer Annexure - List of Entities Consolidated, which captures the list of entities considered and their analytical treatment of consolidation. |
Key Rating Drivers & Detailed Description Strengths: Healthy revenue diversity ITC has evolved from a pure tobacco company into a well-diversified business conglomerate, with a strong presence in paperboards, printing and packaging, agricultural commodities, hotels, branded packaged foods, personal care products, stationery, safety matches, agarbatti (incense sticks) and other fast-moving consumer goods (FMCGs). It has also added chocolates, ghee (clarified butter), dairy and frozen food products to its branded packaged foods segment. The company’s revenue from cigarette business has declined over the last decade with the contribution of non-cigarette business increasing to 59% of gross sales in fiscal 2023 compared to 38% in 2016-17.
Leadership position in the Indian cigarette industry A strong brand, wide product portfolio, established distribution network and robust research and development capability have enabled the company to consolidate its position as the leader in the Indian cigarettes market. The strong brand loyalty of cigarette smokers is reflected in sustained market share and profitability over the years, notwithstanding the increase in duties. ITC’s cigarettes are also exported to the Middle East.
Strong financial risk profile Healthy internal cash accrual, low debt and robust liquidity contribute to the strong financial risk profile. For fiscal 2023, the consolidated operating margin was 36.3% (34.1% in fiscal 2022) leading to strong net cash accrual of over Rs 5800 crore. ITC has zero external debt against large tangible net worth of over Rs 66,000 crore as on March 31, 2023. Liquidity was exceptionally strong because of cash and liquid investments (bonds, debentures, mutual funds and bank deposits) of over Rs 33,000 crore as on March 31, 2023.
Weakness: Exposure to regulatory risk in the cigarette business and vulnerability of other business segments to economic cycles Regulatory risks in the cigarette business include increase in taxes, and there are competitive pressures in the FMCG segment. These risks are partially offset by the company’s focus on building cost efficiency and strong backward integration in the cigarette business through the leaf tobacco and packaging businesses, and in the agricultural commodity and packaged food business through a robust supply chain and agri-farm network. |
Liquidity: Superior Liquidity is driven by cash accrual of over Rs 5,800 crore for fiscal 2023, after payment of Rs 15,417 crore of dividend, and superior cash and liquid investments of over Rs 33,000 as on March 31, 2023. Company does not have any Long-term debt. Cash accrual should be sufficient to finance capex and working capital requirement over the medium term.
ESG profile CRISIL Ratings believes the environment, social and governance (ESG) profile of ITC supports its already strong credit risk profile.
The tobacco sector has a high environmental impact because of its raw material sourcing strategies and waste-intensive processes. It also has a high social impact owing to health hazards associated with the use of tobacco, including smoking addiction and underage consumption, as well as risk of government intervention by way of restriction on sales, regulation of marketing practices and higher tax.
The company’s strong focus on addressing some of these ESG risks supports its already strong credit risk profile.
Key ESG highlights: - ITC aims for 30% reduction in Specific Energy Consumption by 2030 vs FY 2018-19. - ITC aims to have 50% of Total Energy from Renewable Sources by 2030 - ITC aims to support sustainable livelihoods for 1 crore people by 2030. Till date, over 60 lakh people have benefited - Its governance structure is characterised by half of its Board comprising independent directors, presence of non-executive chairman, and extensive disclosures.
There is growing importance of ESG among investors and lenders. CRISIL Ratings believes the company’s continuous commitment to embed sustainability principles across the organisation and its value chain will partly offset the inherent impact of the tobacco sector on environment and social aspects. |
Outlook: Stable CRISIL Ratings believes ITC will maintain its robust financial risk profile and strong market position in the various segments in which it operates, over the medium term. |
Rating Sensitivity factors Downward factors
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About the Company ITC operates in a variety of business segments, including cigarettes, paperboards, printing and packaging, agricultural commodities, hotels, branded packaged foods, personal care products, stationery, safety matches, agarbatti and other FMCGs. However, cigarette manufacturing and sales remain its largest economic activity in terms of revenue. |
Key Financial Indicators (Consolidated)
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Any other information: Not applicable |
Note on complexity levels of the rated instrument: |
Annexure - Details of Instrument(s)
*Interchangeable between cash credit limit, working capital demand loan, export packing credit (rupee and foreign currency), inland bill discounting, short-term line of credit, packaging credit, and forwarding credit. |
Annexure – List of entities consolidated
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| Annexure - Rating History for last 3 Years | ||||||||||||||||||||||||||||||||||||||||||||||||||||
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| All amounts are in Rs.Cr. | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Annexure - Details of Bank Lenders & Facilities | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Criteria Details
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