18 July 2017
Update
| Sector:
Consumer
ITC
BSE SENSEX
31,711
S&P CNX
9,827
CMP: INR285
TP: INR 280 (-2%)
Downgrade to Neutral
New GST rates a huge dampener
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Stock Info
Bloomberg
Equity Shares (m)
52-Week Range (INR)
1,6,12 Rel. Perf. (%)
M.Cap. (INR b)
M.Cap. (USD b)
Avg Val, INRm
Free float (%)
ITC IN
12,147.4
353 / 222
-9/-3/0
3,960.1
60.6
3038
100.0
Financials Snapshot (INR b)
Y/E March
2017 2018E 2019E
Sales
396.4 436.8 483.3
EBITDA
145.8 158.1 176.5
Adj. PAT
102.0 112.6 125.5
Adj. EPS (INR)
8.4
9.3
10.3
EPS Gr. (%)
9.4 10.4
11.4
BV/Sh.(INR)
37.2 37.6
41.1
RoE (%)
23.5 24.8
26.3
RoCE (%)
22.6 23.8
25.3
Payout (%)
66.2 70.2
70.2
Valuations
P/E (x)
33.9 30.7
27.5
P/BV (x)
7.7
7.6
6.9
EV/EBITDA (x)
22.3 20.5
18.2
Div. Yield (%)
2.0
2.3
2.5
Shareholding pattern (%)
As On
Mar-17 Dec-16 Mar-16
Promoter
0.0
0.0
0.0
DII
35.7
35.3
35.2
FII
20.3
20.4
20.7
Others
44.0
44.2
44.2
FII Includes depository receipts
On 17 July 2017, the Indian government announced the new GST rates
applicable on cigarettes. The tone of the GST Council’s press release
appeared to indicate a reversal to neutral GST levels, from the earlier
indication of beneficial rates for ITC after the abolishment of additional
excise duty (as per the 1 July announcement). However, a closer look at the
latest press release indicates that the revised GST rates are higher than the
erstwhile indirect tax rates, and also much higher than the assumed GST
rates after the announcement on 1 July 2017.
Post new rates, there is (also refer Exhibits 1-4):
7% increase in tax incidence in the sub 65mm segment over the pre-
GST levels (+14% over earlier assumed GST levels).
5% increase in tax incidence in the 65-70mm segment over the pre-
GST levels (+15% over earlier assumed GST levels).
6% increase in tax incidence in the 70-75mm segment over the pre-
GST levels (+13% over earlier assumed GST levels).
11% increase in tax incidence in the >75mm segment over the pre-GST
levels (+17% over earlier assumed GST levels).
Assigning weights to each segment based on percentage of sales (refer
Exhibit 5), we get a weighted average increase of 6.2% on tax incidence for
ITC over pre-GST levels and a 15% increase compared to the earlier
assumed GST rates.
What does it all mean for ITC?
Until now, we were expecting price reduction and volume growth;
however, post the revised GST rates, we expect ITC to take a price
increase to pass on the impact of the higher effective rates. We have
reduced FY18/FY19 cigarette volume growth forecasts from 6%/7% to
3%/4%.
Cigarette EBIT growth assumption for FY18/FY19 reduces from
14%/20% earlier to relatively moderate 10%/12% levels now. EPS
growth for FY18/FY19 has also been revised to 10.4%/11.4% from
14.9%/20.4%.
Valuation and view:
In our view, if the government had earlier clearly
indicated that the effective increase over pre-GST levels will be only 6%, the
street probably would have taken it positively. However, since there has
been a major deviation from (i) initial government commentary of neutral
GST rates for cigarette companies and (ii) subsequent indication of
beneficial rates, the new high rates announced yesterday have turned out
to be a massive dampener for earnings expectations and even more for
investor sentiment. This, in turn, will affect valuation multiples assigned to
the stock. We reduce our EPS forecasts by 4%/11% for FY18/FY19, and also
cut our target multiples to 26x June 2019E EPS (10% discount to three-year
average) from 31x earlier. This results in revised TP of INR280 (INR380
earlier) and rating downgrade to
Neutral.
Investors are advised to refer through important disclosures made at the last page of the Research Report.
Motilal Oswal research is available on www.motilaloswal.com/Institutional-Equities, Bloomberg, Thomson Reuters, Factset and S&P Capital.
Krishnan Sambamoorthy
(Krishnan.Sambamoorthy@MotilalOswal.com); +91 22 6129 1545
Vishal Punmiya
(Vishal.Punmiya@MotilalOswal.com); +91 22 6129 1547

ITC
Revised rates in each slab, and their comparison with pre-GST levels and assumed GST levels
Exhibit 1: Not exceeding 65mm
Source: Company, MOSL
Exhibit 2: Exceeding 65mm but not 70mm
Source: Company, MOSL
18 July 2017
2

ITC
Exhibit 3: Exceeding 70mm but not 75mm
Source: Company, MOSL
Exhibit 4: For others
Source: Company, MOSL
Exhibit 5: Weights assumed for weighted average calculation
Slabs
<65mm
>65mm but not 70mm
>70mm but not 75mm
>75mm
Assumed Weights
20%
60%
10%
10%
Source: Company, MOSL
18 July 2017
3

ITC
Exhibit 6: Changes to the model have resulted in 4%/11% reduction in FY18/FY19 EPS
New
Sales
EBITDA
PAT
FY18E
436,790
158,084
112,607
FY19E
483,320
176,507
125,489
FY18E
442,316
164,894
117,169
Old
FY19E
514,039
199,778
141,080
FY18E
-1%
-4%
-4%
Change
FY19E
-6%
-12%
-11%
Source: Company, MOSL
Exhibit 7: ITC P/E (x)
11.0
8.0
5.0
2.0
6.7
PB (x)
Peak(x)
Avg(x)
10.1
Min(x)
8.4
Exhibit 8: ITC P/E v/s Sensex
450
300
150
0
2.8
-150
158.0
204.7
ITC PB Relative to Sensex PB (%)
LPA (%)
Source: Company, MOSL
Source: Company, MOSL
Exhibit 9: Valuation matrix
Company
Consumer
Asian Paints
Britannia Inds.
Colgate-Palm.
Dabur India
Emami
Godrej Cons.
Hind. Unilever
ITC
Jyothy Lab.
Marico
Nestle India
P & G Hygiene
Page Industries
Pidilite Inds.
United Spirits
Retail
Jubilant Food.
Titan Company
Sell
1,326
850
545
-36
3
84
473
1.3
7.3
-32.1
18.5
48.0
13.8
40.0
18.2
132.5
58.4
89.5
51.4
64.0
43.4
8.2
20.6
0.2
0.5
Neutral 528
Neutral 1,146
Buy
Buy
Buy
3,743
1,073
1,060
5,429
1,158
1,240
4,450
1,335
315
1,265
930
4,500
1,260
280
405
360
5,990
9,082
240
835
850
2,415
8
19
24
5
19
-3
-17
9
-2
10
9
-13
13
14
2
2
4
-12
1,080
443
291
533
243
658
231
2,494
3,957
66
421
662
261
189
20
414
217
400
16.8
6.9
4.5
8.3
3.8
10.2
3.6
38.8
61.5
1.0
6.6
10.3
4.1
2.9
0.3
6.4
3.4
6.2
8.7
7.3
-5.7
1.9
4.5
12.4
0.9
1.9
9.4
175.7
12.1
-1.6
11.5
15.0
-46.4
6.7
-23.0
87.1
10.0
16.0
20.8
6.7
6.6
15.4
6.5
16.1
10.4
-20.4
10.5
0.6
7.5
32.8
106.4
10.2
11.6
39.7
18.6
23.3
21.1
18.3
20.0
14.6
9.3
18.4
11.4
22.4
21.1
17.6
16.6
26.2
64.7
14.8
51.9
38.7
54.5
50.8
50.5
41.5
40.0
50.6
34.8
59.0
33.9
32.9
52.3
58.2
55.3
70.5
65.3
48.7
94.4
102.2
49.6
43.8
41.8
38.9
37.5
43.8
32.6
50.8
30.7
41.3
47.4
57.8
51.4
53.1
31.7
44.2
84.6
73.1
41.8
35.5
34.5
32.9
31.3
38.3
29.8
42.9
27.5
33.7
39.1
49.2
44.1
42.1
19.2
38.5
55.7
52.7
28.5
36.9
50.4
28.4
35.8
24.6
22.2
65.6
23.5
21.1
36.7
39.0
45.3
40.0
5.9
28.2
10.4
21.3
1.0
0.6
0.9
0.8
0.8
0.6
1.0
1.5
2.0
1.6
0.9
0.9
4.5
0.5
0.0
0.6
0.1
0.0
Reco
CMP
(INR)
Target
Price
Mkt. Cap
USD B
EPS Growth YoY (%)
FY17
FY18E
FY19E FY17
P/E (x)
FY18E
FY19E
RoE
(%)
FY17
Div.
(%)
FY17
(INR) Upside (%) INR B
Neutral 301
Neutral 956
Buy
GlaxoSmith C H L Sell
Neutral 285
Neutral 369
Neutral 329
Sell
Buy
Buy
6,862
8,010
16,825 19,125
Parag Milk Foods Neutral 235
Neutral 815
Neutral 2,731
United Breweries Neutral 821
Source: Company, MOSL
18 July 2017
4

ITC
Financials and Valuations
Income Statement
Y/E March
Net Sales
Operational Income
Total Revenue
Change (%)
Total Expenditure
EBITDA
Change (%)
Margin (%)
Depreciation
Int. and Fin. Charges
Other Inc. - Recurring
Profit before Taxes
Change (%)
Margin (%)
Tax
Deferred Tax
Tax Rate (%)
Profit after Taxes
Change (%)
Margin (%)
Reported PAT
Balance Sheet
Y/E March
Share Capital
Reserves
Net Worth
Loans
Deferred Liability
Capital Employed
Gross Block
Less: Accum. Depn.
Net Fixed Assets
Capital WIP
Investments
Current
Non-current
Curr. Assets, L&A
Inventory
Account Receivables
Cash and Bank Balance
Others
Curr. Liab. and Prov.
Account Payables
Other Liabilities
Provisions
Net Current Assets
Application of Funds
E: MOSL Estimates
(INR Million)
2020E
542,242
5,947
548,189
12.2
347,751
200,438
13.6
37.0
13,507
230
25,670
212,371
13.4
39.2
63,711
6,371
33.0
142,289
13.4
26.2
142,289
(INR Million)
2020E
12,147
534,148
546,295
180
12,391
558,866
300,156
128,717
171,438
34,913
242,134
129,192
112,942
212,375
108,814
29,712
29,256
44,593
101,995
85,167
15,554
1,274
110,380
558,866
2014
328,826
3,560
332,386
11.2
207,631
124,755
17.2
37.9
8,999
236
11,071
126,591
18.5
38.5
37,911
828
30.6
87,852
18.4
26.7
87,852
2015
360,832
4,242
365,074
9.8
230,128
134,946
8.2
37.4
9,617
785
15,431
139,975
10.6
38.8
40,210
3,688
31.4
96,077
9.4
26.6
96,077
2016
362,206
3,621
365,827
0.2
228,681
137,146
1.6
37.9
10,007
491
17,693
144,341
3.1
39.9
48,961
2,096
35.4
93,284
-2.9
25.8
93,284
2017
396,419
4,468
400,887
9.6
255,106
145,780
6.3
36.8
10,380
230
19,859
155,030
7.4
39.1
52,857
164
34.2
102,009
9.4
25.7
102,009
2018E
436,790
4,914
441,704
10.2
283,620
158,084
8.4
36.2
11,707
230
21,923
168,070
8.4
38.5
50,421
5,042
33.0
112,607
10.4
25.8
112,607
2019E
483,320
5,406
488,726
10.6
312,219
176,507
11.7
36.5
12,607
230
23,626
187,297
11.4
38.8
56,189
5,619
33.0
125,489
11.4
26.0
125,489
2014
12,006
250,615
262,620
155
12,970
275,745
181,756
62,269
119,487
23,598
88,234
63,113
25,122
160,975
73,595
21,654
32,894
32,832
116,549
54,498
14,332
47,719
44,426
275,745
2015
12,100
295,257
307,357
143
16,316
323,816
209,908
72,136
137,771
25,155
84,055
59,638
24,416
194,976
78,368
17,224
75,886
23,498
118,140
53,817
14,226
50,097
76,835
323,816
2016
12,147
404,417
416,564
165
18,674
435,403
220,933
80,516
140,417
23,884
133,245
64,713
68,532
202,636
85,198
16,864
56,392
44,182
64,780
56,700
7,796
284
137,856
435,403
2017
12,147
439,352
451,500
180
18,717
470,397
240,156
90,896
149,259
34,913
185,723
100,868
84,855
170,354
78,640
22,075
27,473
42,166
69,853
59,024
9,818
1,011
100,501
470,397
2018E
12,147
444,350
456,497
180
18,801
475,478
260,156
102,603
157,552
34,913
190,030
102,690
87,341
178,341
89,149
23,934
28,115
37,143
85,359
71,496
12,855
1,008
92,982
475,478
2019E
12,147
486,746
498,893
180
19,191
518,264
280,156
115,210
164,945
34,913
218,866
116,192
102,675
192,074
97,786
26,483
27,353
40,452
92,535
77,271
14,140
1,124
99,539
518,264
18 July 2017
5

ITC
Financials and Valuations
Ratios
Y/E March
Basic (INR)
EPS
Cash EPS
BV/Share
DPS
Payout %
Valuation (x)
P/E
Cash P/E
EV/Sales
EV/EBITDA
P/BV
Dividend Yield (%)
Return Ratios (%)
RoE
RoCE
RoIC
Working Capital Ratios
Debtor (Days)
Asset Turnover (x)
Leverage Ratio
Debt/Equity (x)
Cash Flow Statement
Y/E March
OP/(loss) before Tax
Int./Div. Received
Depreciation and Amort.
Interest Paid
Direct Taxes Paid
Incr in WC
CF from Operations
Incr Decr in FA
Free Cash Flow
Pur of Investments
CF from Invest.
Issue of shares
Incr in Debt
Interest Income
Interest Paid
Dividend Paid
Others
CF from Fin. Activity
Incr of Cash
Add: Opening Balance
Closing Balance
E: MOSL Estimates
2014
7.3
8.1
21.9
4.7
63.5
38.9
35.3
10.1
26.7
13.0
1.6
36.2
34.5
66.0
18
1.2
0.0
2015
7.9
8.7
25.4
5.0
62.8
35.8
32.6
9.1
24.4
11.2
1.8
33.7
32.2
63.8
20
1.1
0.0
2016
7.7
8.5
34.3
6.8
88.3
37.1
33.5
9.0
23.8
8.3
2.4
25.8
24.7
45.6
17
0.8
0.0
2017
8.4
9.3
37.2
5.6
66.2
33.9
30.8
8.2
22.3
7.7
2.0
23.5
22.6
40.1
18
0.8
0.0
2018E
9.3
10.2
37.6
6.5
70.2
30.7
27.8
7.4
20.5
7.6
2.3
24.8
23.8
44.1
19
0.9
0.0
2019E
10.3
11.4
41.1
7.3
70.2
27.5
25.0
6.6
18.2
6.9
2.5
26.3
25.3
47.8
19
0.9
0.0
2020E
11.7
12.8
45.0
8.2
70.2
24.3
22.2
5.9
15.9
6.3
2.9
27.2
26.4
51.2
19
1.0
0.0
(INR Million)
2020E
212,371
25,670
13,507
230
70,082
8,937
121,418
20,000
101,418
23,267
-43,267
5,000
0
25,670
230
75,293
-31,394
-76,247
1,904
27,353
29,256
2014
126,591
11,071
8,999
236
38,739
10,228
77,217
23,684
53,532
17,631
-41,313
6,859
43
11,071
236
41,485
-15,413
-39,160
-3,256
36,150
32,894
2015
139,975
15,431
9,617
785
43,898
-10,583
101,381
29,709
71,673
-4,180
-25,529
9,726
-12
15,431
785
47,719
-9,501
-32,860
42,992
32,894
75,886
2016
144,341
17,693
10,007
491
51,057
80,515
7,202
9,755
-2,553
49,191
-58,945
5,285
21
17,693
491
50,097
59,839
32,250
-19,494
75,886
56,392
2017
155,030
19,859
10,380
230
53,021
-8,436
101,196
30,252
70,944
52,478
-82,729
5,000
15
19,859
230
68,401
-3,630
-47,386
-28,920
56,392
27,472
2018E
168,070
21,923
11,707
230
55,463
-8,161
110,782
20,000
90,782
4,308
-24,308
5,000
0
21,923
230
57,737
-54,788
-85,832
643
27,473
28,115
2019E
187,297
23,626
12,607
230
61,808
7,320
107,380
20,000
87,380
28,836
-48,836
5,000
0
23,626
230
67,564
-20,138
-59,306
-762
28,115
27,353
18 July 2017
6

ITC
NOTES
18 July 2017
7

Disclosures
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In respect of any matter arising from or in connection with the research you could contact the following representatives of Motilal Oswal Capital Markets Singapore Pte Limited:
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Motilal Oswal Securities Ltd
18 July 2017
Motilal Oswal Tower, Level 9, Sayani Road, Prabhadevi, Mumbai 400 025
Phone: +91 22 3982 5500 E-mail: reports@motilaloswal.com
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