29 July 2014
1QFY15 Results Update | Sector:
Consumer
ITC
BSE SENSEX
25,991
Bloomberg
Equity Shares (m)
52-Week Range (INR)
1, 6, 12 Rel. Per (%)
S&P CNX
7,749
ITC IN
7,818.4
387/285
8/-17/-35
CMP: INR357
TP: INR400
Buy
M.Cap. (INR b)/(USD b) 2,789/46.4
Financials & Valuation (INR Billion)
Y/E MAR
Sales
EBITDA
Adj. PAT
Adj. EPS (INR)
EPS Gr. (%)
BV/Sh.(INR)
RoE (%)
RoCE (%)
P/E (x)
P/BV (x)
2015E 2016E 2017E
374.1 429.1 489.5
141.2 162.9 187.0
100.7 116.8 134.5
12.9
16.3
31.7
40.6
57.0
27.7
11.2
14.9
16.1
34.4
43.4
61.2
23.9
10.4
17.2
15.1
37.5
45.8
64.9
20.7
9.5
ITC’s 1QFY15 results were largely in-line though seasonality in Agri revenues
resulted in 9.5% beat on sales vs. our estimates. 1Q15 net sales, EBITDA and PAT
came in at INR92.5b (est. INR84.5b), INR32.8b (est. INR31.9b) and INR21.9b (est.
INR 22b), up 24.9%, 17.4% and 15.6%, respectively.
Cig volumes declined 2.5% with net sales growth of 18.8% to INR42b while Cig
EBIT grew robust 21.4% and posted 140bp net EBIT margin expansion to 64.8%.
ITC has discontinued sharing gross sales figures from this quarter.
EBITDA grew 17.4% to INR 32.8b; margins contracted 220bps to 35.4 due to mix
deterioration post higher growth in Agri sales and EBIT losses in Hotels division
due to higher depreciation expenses on revision of useful life.
Non-Cig FMCG posted 10.9% sales growth (lowest since 1QFY10) with mid single
digit volume growth; impacted by weak macros with moderation in Biscuits and
Noodles category (high single digit growth vs. high teens earlier). Lifestyle and
matches business have also witnessed sharp moderation. The segment reported a
loss of INR156m.
Agri revenues grew 50.6% YoY to INR32.9b on account of higher trading in non-
leaf tobacco portfolio. Leaf tobacco sales were impacted due to change in order
pattern and margins contracted 300bp due to mix deterioration. Hotels
continued to suffer with lower occupancies (shift in IPL out of India in 2014) and
lower beverage sales during elections and posted 0.5% revenue decline with
sharp 840bps EBIT margin contraction. Paper revenues grew 10.8% YoY to
INR12.8b with 30bp margin contraction to 21.3%.
Continued robust Cig EBIT growth and margin expansion are the key highlights of
the quarter. Given the unprecedented third consecutive year of ~20% excise hike
in cigarettes, we expect delayed volume recovery in Cig. Reiterate
Buy
with a
Target Price of INR400 (27x FY16E).
Gautam Duggad
(Gautam.Duggad@MotilalOswal.com); +91 22 3982 5404
Manish Poddar
(Manish.Poddar@MotilalOswal.com); +91 22 3027 8029
Investors are advised to refer through disclosures made at the end of the Research Report.

ITC
Sales beat driven by Cig & Agri division: Cig volume decline 2.5%
1QFY15 revenues grew 24.8% to INR92.4b (est. INR84.5b), led by 18.8% and
50.6% growth in Cigarettes Agri division, respectively. Non-Cig FMCG and Paper
business sales grew 10.9% and 10.8% respectively while Hotels underperformed
with 0.5% YoY revenue decline.
Cigarette volumes declined 2.5% in our view but margins expanded 140bp to
64.8%.
Gross margins contracted by 430bp largely led by raw material inflation and mix
deterioration due to higher growth in Agri business.
EBITDA posted 17.4% YoY growth to INR32.8b (est. INR31.9b).
Adj. PAT posted 15.6% growth to INR21.9b (est. INR22.0b), slightly lower than
the 18.2% growth in PBT as tax rate expanded 150bps YoY to 33%.
Segmental Performance
1QFY13
Sales (INR m)
Cigarettes
FMCG - Others
Hotels
Agri business
Paper and packaging
Sales growth (YoY)
Cigarettes
FMCG - Others
Hotels
Agri business
Paper and packaging
Volume growth (YoY)
Cigarettes
EBIT (INR m)
Cigarettes
FMCG - Others
Hotels
Agri business
Paper and packaging
EBIT growth (YoY)
Cigarettes
FMCG - Others
Hotels
Agri business
Paper and packaging
EBIT Margin (%)
Cigarettes
FMCG - Others
Hotels
Agri business
Paper and packaging
33,042
14,731
2,324
16,914
10,587
15.0
23.0
0.8
-0.9
10.3
1.5
18,998
-388
262
1,714
2,647
20.5
-49.1
-48.9
9.1
16.6
57.5
-2.6
11.3
10.1
25.0
2QFY13
33,852
16,908
2,170
20,239
10,590
14.0
26.1
2.8
41.1
5.3
0.5
20,802
-303
153
2,597
2,825
20.3
-45.8
-64.8
8.8
-2.5
61.4
-1.8
7.1
12.8
26.7
3QFY13
36,574
17,827
3,095
16,310
10,616
13.1
30.1
11.0
43.1
8.5
1.5
22,335
-240
555
1,726
2,286
21.1
-48.8
-45.5
21.9
1.9
61.1
-1.3
17.9
10.6
21.5
4QFY13
36,232
20,362
3,155
18,545
10,575
11.5
26.0
10.4
31.1
7.9
2.5
21,124
119
406
1,275
1,881
20.2
-171.2
-51.0
20.8
-3.9
58.3
0.6
12.9
6.9
17.8
1QFY14
35,374
17,447
2,499
21,890
11,631
7.1
18.4
7.5
29.4
9.9
-2.0
22,417
-189
89
1,993
2,516
18.0
-51.3
-65.9
16.3
-5.0
63.4
-1.1
3.6
9.1
21.6
2QFY14
37,238
19,622
2,470
17,725
11,787
10.0
16.1
13.8
-12.4
11.3
-2.0
24,117
-127
87
2,846
2,208
15.9
-58.1
-43.0
9.6
-21.9
64.8
-0.6
3.5
16.1
18.7
3QFY14
41,161
20,778
3,154
17,864
12,574
12.5
16.6
1.9
9.5
18.5
-2.0
26,526
104
622
2,054
2,317
18.8
-143.2
12.1
19.0
1.4
4QFY14
40,788
23,145
3,205
20,042
12,612
12.6
13.7
1.6
8.1
19.3
-3.0
25,519
431
599
1,455
1,884
20.8
263.0
47.3
14.1
0.1
1QFY15
42,011
19,346
2,487
32,961
12,885
18.8
10.9
-0.5
50.6
10.8
-2.5
27,218
-156
-121
2,025
2,749
21.4
-17.6
-235.2
1.6
9.3
64.4
62.6
64.8
0.5
1.9
-0.8
19.7
18.7
-4.9
11.5
7.3
6.1
18.4
14.9
21.3
Source: Company, MOSL
Cigarette volumes decline ~2.5%; 140bp EBIT margin expansion
1QFY15 cigarette volumes declined 2.5%. Two consecutive years of sharp price
hikes in a weak macro backdrop is delaying the volume recovery, in our view.
We expect Cig volume growth to remain subdued in FY15 (estimate 3.3%
2
29 July 2014

ITC
volume decline for the year) as third consecutive year of steep excise increase
will result in fresh round of price hikes. Our channel checks indicate price hikes
to take effect in another fortnight.
While Cig volume decline has remained in 2.5-3% band for both 4Q14 and 1Q15,
net sales growth of the division has improved significantly from 12.6% in 4Q14
to 18.8% in 1Q15. We note that ITC has discontinued sharing gross sales figures
from this quarter.
Net EBIT Margin expanded 140bp to 64.8%
on the back of price increases and
cost containment. Thus, Cigarette EBIT posted robust 21.4% YoY growth for
1Q15.
EBIT growth remains robust
Cig EBIT growth (%)
Cig volumes declined 2.5%
8.0
2.5
Cig volume growth (%)
7.5
5.0 5.0
1.5
0.5
1.5
2.5
-0.5
-3.5
-2.0
-2.0
-2.0
-3.0-2.5
-4.0
Source: Company, MOSL
Source: Company, MOSL
FMCG – Others: Sales growth at 20 quarter low
FMCG others division posted 10.9% sales growth led by mid single digit volume
growth while segment reported a loss of INR156mn.
Sales growth was lowest since 1QFY10, impacted by overall consumption
slowdown with single digit growth in biscuits and noodles category vs. high
teens earlier. Lifestyle and matches business have also witnessed sharp
moderation. Atta and Notebooks segment outperformed.
Incremental EBIT margins stood at 1.8%.
Incremental EBIT margins at 1.8%
Incr Sales (INR m)
17.0
13.8
10.0
6.6
3.8
7.4
5.5
6.8 7.3
6.5
1.8
Incr EBIT Margin (%)
11.6
11.2
10.9% sales growth, lowest since 1Q10
Sales Growth (%)
Source: Company, MOSL
Source: Company, MOSL
29 July 2014
3

ITC
EBIT loss attributed to higher brand investments and low operating leverage
EBIT (INR m)
Source: MOSL, Company
Agri business: Boosted by non-Leaf tobacco trading
Agri revenues grew 50.6% YoY to INR32.9b on account of higher trading in
wheat and soya as leaf tobacco sales were impacted due to change in order
pattern. EBIT margin contracted by 300bp to 6.1% due to mix deterioration.
Agri contribution to revenue
Agri contri to ITC sales
16.1
11.5
7.3 6.1
28.7%
24.0%
28.3%
25.4%
29.8%
22.8%
21.9%
20.7%
36.0%
Agri margins down 300bp YoY due to mix deterioration
16.6
12.4
9.2
7.5
10.1
EBIT Margins (%)
12.8
10.6
6.9
9.1
20.6%
18.4%
22.7%
21.4%
Source: Company, MOSL
Source: Company, MOSL
Hotels: Revenues down marginally; material margin contraction
Hotels revenues declined marginally (down 0.5% YoY) impacted by lower
occupancies (shift in IPL out of India in 2014) and lower beverage sales during
elections.
Division reported EBIT loss of INR 121mn with INR143mn impact coming from
higher depreciation due to change in accounting standard. Additionally, it also
bore the start up costs of My Fortune property in Bengaluru during 1Q15.
The segment witnessed material EBIT margin contraction of 840bp.
29 July 2014
4

ITC
Hotel margins contract 840bp YoY
36.5
22.3 20.6
29.0
11.3
17.9
7.1
12.9
3.6 3.5
-4.9
19.7 18.7
EBIT Margins (%)
Hotel revenues declined marginally YoY
Sales (INR m)
EBIT (INR m)
Source: Company, MOSL
Source: Company, MOSL
Paper: capacity utilization improves; margins contract 30bp
Paper and Paperboard business sales were up 10.8% to INR12.8b driven by
volumes and product mix. As per management, capacity utilization improved
during the quarter
EBIT margins down 30bp YoY to 21.3% led by higher input costs while EBIT
posted 9.3% growth.
Paper segment sales grew at 10.8%
EBIT Margins (%)
20.9
9.4
11.5
6.9
10.3
5.3
8.5
7.9
9.9
11.3
Sales growth (%)
18.5
19.3
10.8
Source: MOSL, Company
Valuation and view: Reiterate Buy with TP of INR400
Continued robust Cig EBIT growth and margin expansion are the key highlights
of the quarter.
Within our overall cautious sector stance, we find ITC relatively better placed as
it offers the best earnings predictability driven by resilient Cig EBIT growth of
18-20%.
Given the unprecedented third consecutive year of ~20% excise hike in
cigarettes, we expect volume recovery in Cig to get delayed.
Maintain our top sector pick and reiterate
Buy
with a Target Price of INR400
(27x FY16E).
29 July 2014
5

ITC
ITC: an investment profile
Company description
ITC is an associate of BAT (British American Tobacco)
controls more than 2/3rd of the cigarette market in
India. ITC has emerged as a diversified conglomerate
with leading presence in Paperboards, Hotels and
Processed foods. E-Choupal, the agri rural initiative of
the company has been widely appreciated for its
foresight in harnessing the potential in the rural market.
Recent developments
ITC entered into Deodorants category with the
launch of its brand Engage.
It launched 3 offerings in 64mm segment
Valuation and view
Key investment arguments
The stock trades at 27.7x FY15 and 23.9x FY16
estimates. Maintain
Buy
with TP of INR400 (27x
FY16E EPS).
Strong pricing power due to dominant market share
in the cigarettes.
Offers best earnings visibility in the sector.
FMCG business improving profitability.
Sector view
Key investment risks
Taxation related risks though Excise and VAT hikes
for FY14 are announced.
Lower than expected Cig volume growth.
Sector stance remains cautious with preference for
companies with high earnings visibility and low
competitive intensity.
Lagged impact of GDP slowdown is reflecting in the
sector with moderation in volume growth.
Relatively we prefer ITC, Emami and Britannia.
Comparative valuations
P/E (x)
P/BV (x)
EV/Sales (x)
EV/EBITDA (x)
FY15E
FY16E
FY15E
FY16E
FY15E
FY16E
FY15E
FY16E
ITC
27.7
23.9
11.2
10.4
7.0
6.1
18.6
16.0
HLL
37.0
33.2
27.2
23.9
4.6
4.1
39.7
35.6
Nestle
40.3
34.1
23.4
20.1
4.9
4.3
19.5
17.8
EPS: MOSL forecast v/s consensus (INR)
MOSL
Forecast
FY15
FY16
12.9
14.9
Consensus
Forecast
12.9
15.2
Variation
(%)
0
-1.8
Target price and recommendation
Current
Price (INR)
357
Target
Price (INR)
400
Upside
(%)
12.0
Reco.
Buy
Shareholding pattern (%)
Jun-14
Promoter
DII
FII
Others
0.0
35.0
19.5
45.5
Mar-14
0.0
34.7
19.5
45.8
Jun-13
0.0
33.8
19.9
46.3
Stock performance (1-year)
Note: FII Includes depository receipts
29 July 2014
6

ITC
Financials and valuation
29 July 2014
7

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ITC
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ITC
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29 July 2014
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