13 March 2015
Update | Sector: Consumer
ITC
BSE Sensex
29,135
S&P CNX
8,641
CMP: INR346
TP: INR375 (+8%)
Neutral
Downtrading on the anvil?
Ten key takeaways from interaction with cigarette channel partners
Stock Info
Bloomberg
Equity Shares (m)
52-Week Range (INR)
1, 6, 12 Rel. Per (%)
M.Cap. (INR b)
M.Cap. (USD b)
Avg Val. INRm/Vol‘000
Free float (%)
ITC IN
7953.2
410/312
-8/-9/-31
2,751.2
45.8
2849/8019
100.0
We met with several cigarette channel partners and ITC’s peers. Below are our
TEN key takeaways from our meetings.
Volume growth
for the industry may remain subdued in 4QFY15, with
various cigarette companies witnessing 8-10% volume decline. To an extent,
the industry may benefit from inventory building ahead of price hikes but
trade inventory pumping is limited this time and is unlikely to meaningfully
change the volume trends.
2.
4QFY15 performance
may also be impacted by high base, as 3QFY15 saw
inventory building ahead of price hikes. We note that ITC had reported an
estimated 3% volume decline in 4QFY14.
3.
Price hikes
may be rolled out from April. We gather from our interactions
that ITC has initiated 15% price hike in
Classic, Gold Flake Premium
(69mm)
and
Gold Flake Kings,
and 13% hike in
Navy Cut.
Prices are being increased
from INR68 to INR78 for
Gold Flake Premium,
from INR69 to INR78 for
Navy
Cut,
and from INR190 to INR218 for
Classic
and
Gold Flake Kings.
4.
Once ITC hikes prices, competitors generally follow suit.
5.
Downtrading:
There is a possibility of downtrading in FY16 from 69mm
cigarettes to 64mm cigarettes, given the quantum of price hikes in a
compressed timeframe. Performance of the 64mm segment can be resilient
in FY16. However, one more year of 25% hike in excise duty for this
segment may shift the price point towards INR4.5/5 and impact the
perception of price-value equation in the consumer’s mind.
6.
ITC launched Gold Flake Compact (offering in 74mm segment)
at
INR8.5/stick in certain markets a month ago. It has not yet been extended
nationally.
7.
Market share:
While ITC’s value market share have been stable, contraband
/illegal/duty-evaded segment has gained ~100bp market share in two years.
8.
The
Marlboro
brand is growing at a healthy rate of 20-25% on a small base
(Marlboro has less than 1% market share).
9.
Implementation of pictorial warnings
will begin from April 1, 2015 – 85% of
the space covered by warnings (60% pictorial, 25% textual) as against
existing 40%. This may be a long-term negative, though the short-term
impact could be limited, given that lose sticks account for 70% of cigarette
sales in India.
10.
The industry could shift to smaller pack sizes to mitigate the impact of ban
on loose sticks (as and when it comes). However, implementation of this
norm may be very difficult.
1.
Financial Snapshot (INR b)
Y/E March
2015E 2016E 2017E
Net Sales
365.0 402.4 446.3
EBITDA
137.7 149.9 168.0
Adj PAT
EPS (INR)
Gr. (%)
BV/Sh (INR)
RoE (%)
RoCE (%)
P/E (x)
P/BV (x)
98.0 107.9 123.9
12.3
11.5
36.7
35.3
44.0
28.1
9.4
13.6
10.1
40.7
35.0
43.4
25.5
8.5
15.6
14.9
45.4
36.2
44.1
22.2
7.6
Shareholding pattern (%)
As on
Dec-14 Sep-14 Dec-13
Promoter
0.0
0.0
0.0
DII
34.8
34.8
34.3
FII
21.0
20.5
19.5
Others
44.2
44.6 46.1d
Note: FII Includes depository receipts
Stock Performance (1-year)
ITC
480
430
380
330
280
Sensex - Rebased
Gautam Duggad
(Gautam.Duggad@MotilalOswal.com); +91 22 3982 5404
Manish Poddar
(Manish.Poddar@MotilalOswal.com); +91 22 3027 8029

ITC
Valuation and view:
In the past, buying into the weakness after excise duty
increase has been rewarding. However, with the change in regime, we believe
the operating environment for the industry has changed meaningfully. Regular
increase in excise duties apart, the government is contemplating several other
punitive measures. News flow around this may act as an overhang for the stock.
While ITC’s pricing power, brand strength and competitive position remains
unchallenged, the external environment for the industry is turning adverse and
may crimp valuation multiples. We maintain NEUTRAL, with a target price of
INR375 (24x FY17E EPS; 15% discount to its three-year average). Upside risks
include VAT reduction in key states, while SUUTI stake sale may be the key
near-term overhang.
Exhibit 1: Price movement of key ITC brands
in INR
Gold Flake Regular
Wills Navy Cut
Gold Flake Kings
Classic
Length
69
74
84
84
Apr-12
4.5
4.9
5.8
5.8
Apr-13
5.8
5.9
6.8
6.8
Oct-14
6.9
6.8
9.5
9.5
Likely
Price
MRP/stick
Change
after hike
(%)
7.8
13.0
7.8
14.7
10.9
14.7
10.9
14.7
Source: Industry, MOSL
Investors are advised to refer through disclosures made at the end of the Research Report.
13 March 2015
2
Motilal Oswal research is available on
www.motilaloswal.com/Institutional-Equities,
Bloomberg, Thomson Reuters, Factset and S&P Capital.

ITC
Summary of Cigarette financials
Exhibit 2: Weighted average 13% excise duty hike
Excise Rate (INR/1000
FY03 FY04 FY05 FY06 FY07 FY08 FY09
cigarettes)
Small Filter <65mm
-
-
-
-
-
-
-
Filter-Regular 66-70mm
670
670
683
740
780
819
819
Filter-Long 71-75mm
1,090 1,090 1,112 1,200 1,260 1,323 1,323
Filter-King 76-85mm
1,450 1,450 1,479 1,595 1,675 1,759 1,759
Filter-Extra Large 86-
1,780 1,780 1,816 1,960 2,060 2,163 2,163
100mm
Growth
Small Filter <65mm
Filter-Regular 66-70mm
0.0% 0.0%
1.9% 8.3% 5.4% 5.0%
0.0%
Filter-Long 71-75mm
0.0% 0.0%
2.0% 7.9% 5.0% 5.0%
0.0%
Filter-King 76-85mm
0.0% 0.0%
2.0% 7.8% 5.0% 5.0%
0.0%
Filter-Extra Large 86-
0.0% 0.0%
2.0% 7.9% 5.1% 5.0%
0.0%
100mm
Note: Reported excise duties in the table do not include education cess of 3%
FY10
-
819
1,323
1,759
2,163
FY11
669
969
1,473
1,959
2,363
FY12
669
969
1,473
1,959
2,363
0.0%
0.0%
0.0%
0.0%
0.0%
FY13
669
1,194
1,718
2,309
2,788
FY14
669
1,409
2,027
2,725
3,290
FY15
1,150
1,650
2,250
NA
3,290
FY16E
1,440
1,900
2,590
NA
3,790
0.0%
0.0%
0.0%
0.0%
18.3%
11.3%
11.4%
9.2%
0.0% 0.0% 71.9%
25.2%
23.2% 18.0% 17.9%
15.2%
16.6% 18.0% 11.0%
15.1%
17.9% 18.0%
NA
NA
18.0% 18.0%
0.0%
15.2%
Source: Company, MOSL
Exhibit 3: In the recent past, Cigarette EBIT growth has been resilient despite higher excise duty hike
Excise vs. EBIT growth
FY02 FY03 FY04 FY05 FY06 FY07
Excise increase in budget (%)
15
0
0
2
8
5.4
EBIT growth (%)
6.0
13.6
5.7
12.6
18.3
17.1
Note: FY08 - VAT on Cigarettes imposed; FY09- Excise on non-filter increased 3x-5x
FY08
5
14.6
FY09
0
15.1
FY10
0
18.0
FY11
9-18
16.8
FY12 FY13 FY14
0
18-23
18
19.8
20.5
18.4
Source: Company, MOSL
Exhibit 4: Cigarette per Stick Economics
Cigarette/stick economics
Volume (bn sticks)
Growth
Cig gross sales (INR bn)
Growth
Gross realization/stick (INR)
Growth
Total excise on cigarettes
(INR b)
Excise/stick (INR)
Growth
Net realization/stick (INR)
Growth
Cig EBIT (INR bn)
Growth
Cig EBIT/stick (INR)
Growth
Cig EBIT margin (%)
(on gross sales)
FY02
60.9
-8.4%
79.4
4.6%
1.30
14.2%
46.9
0.77
14.9%
0.53
13.3%
16.9
6.0%
0.28
15.8%
21.3%
FY03
63.4
4.2%
87.6
10.3%
1.38
5.9%
50.7
0.80
3.8%
0.58
8.8%
19.2
13.6%
0.30
9.0%
22.0%
FY04
65.4
3.1%
92.3
5.4%
1.41
2.2%
52.6
0.81
0.6%
0.61
4.5%
20.3
5.7%
0.31
2.5%
22.0%
FY05
70.0
7.1%
99.8
8.1%
1.43
1.0%
55.4
0.79
-1.7%
0.63
4.5%
22.9
12.6%
0.33
5.1%
22.9%
FY06
75.9
8.4%
113.2
13.4%
1.49
4.6%
62.2
0.82
3.6%
0.67
5.9%
27.1
18.3%
0.36
9.2%
23.9%
FY07
81.3
7.1%
128.2
13.3%
1.58
5.8%
68.7
0.84
3.0%
0.73
9.1%
31.7
17.1%
0.39
9.4%
24.7%
FY08
80.7
-0.7%
138.2
7.7%
1.71
8.5%
71.9
0.89
5.4%
0.82
11.9%
36.3
14.6%
0.45
15.3%
26.3%
FY09
78.4
-2.9%
151.0
9.3%
1.93
12.6%
75.6
0.96
8.3%
0.96
17.3%
41.8
15.1%
0.53
18.6%
27.7%
FY10
84.0
7.2%
172.8
14.4%
2.06
6.7%
79.6
0.95
-1.8%
1.11
15.2%
49.4
18.0%
0.59
10.1%
28.6%
FY11
81.7
-2.8%
198.2
14.7%
2.43
18.0%
92.5
1.13
19.5%
1.29
16.6%
57.7
16.8%
0.71
20.1%
29.1%
FY12
87.4
7.0%
222.5
12.2%
2.55
4.9%
99.3
1.14
0.3%
1.41
9.0%
69.1
19.8%
0.79
12.0%
31.0%
FY13
89.2
2.0%
FY14
86.7
-2.8%
259.9 290.8
16.8% 11.9%
2.95
3.35
16.0% 13.6%
122.6 136.2
1.38
1.57
21.1% 14.3%
1.58
1.78
11.9% 13.1%
83.3
98.6
20.5% 18.4%
0.93
1.14
18.2% 21.8%
32.0% 33.9%
Source: Company, MOSL
13 March 2015
3

ITC
Exhibit 5: Cigarette: growth in key parameters
Key Cig operating metrics
10 year
Cig Volumes
2.9%
Cig gross sales
12.2%
Gross realization/stick
9.0%
Total excise on cigarettes
10.0%
Excise/stick
6.9%
Net realization/stick
11.4%
Cig EBIT
17.1%
Cig EBIT/stick
13.8%
Note: Data as on FY14 for CAGR calculation
CAGR
5 year
3 year
2.0%
2.0%
14.0%
13.6%
11.7%
11.4%
12.5%
13.8%
10.3%
11.5%
13.1%
11.3%
18.7%
19.6%
16.3%
17.2%
Source: Company, MOSL
Exhibit 6: Cig excise contributes 8-9% of total excise revenues
Cig Excise (as % of total excise)
Source: Company, MOSL
Exhibit 7: Cig forms only 15% of Tobacco consumption
Cig as a % of total tobacoo consumption (value)
23
21
20
17
14
15
Exhibit 8: …but contributes 74% of tobacco taxation
Contribution to Tobacco consumption
Contribution to Tobacco taxation
85
74
15
26
FY72
FY82
FY92
FY03
FY10
FY12
Cig
Non-Cig
Exhibit 9: Cig volumes declined 13% in 3Q15
Volume growth (%)
3.3
-2.9
-2.8
-0.3
7.2
7.6
-2.5
-4.0
-13.0
Exhibit 10: Expect Sales CAGR of 10.6% over FY15-17E
Sales (INR b)
16.3
16.6
17.2
19.4
11.1
11.0
10.3
10.9
Sales growth (%)
182
212
248
296
329
365
402
446
Exhibit 11: EBITDA CAGR of 10.4% over FY15-17E
Gross Margin (%)
57.3
58.6
55.6
36.0
EBITDA Margin (%)
57.0
37.9
57.7
37.7
57.9
58.4
Exhibit 12: PAT CAGR of 12.5% over FY15-17E
PAT (INR b)
PAT Margin (%)
26.7
24.8
25.1
23.6
22.4
40.7
49.9
61.6
74.2
87.9
98.0
107.9
123.9
26.8
26.8
27.8
34.9
35.0
35.8
37.3
37.6
Source: Company, MOSL
Source: Company, MOSL
13 March 2015
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
2010
181,532
2,392
183,924
16.4
120,619
63,305
24.8
34.9
6,087
820
3,756
60,153
24.7
33.1
20,286
-822
32.4
40,689
24.7
22.4
40,689
2011
211,676
2,914
214,590
16.7
140,467
74,123
17.1
35.0
6,560
679
5,798
72,682
20.8
34.3
22,804
2
31.4
49,876
22.6
23.6
49,876
2012
247,984
3,490
251,475
17.2
162,788
88,687
19.6
35.8
6,985
980
8,253
88,975
22.4
35.9
26,777
574
30.7
61,624
23.6
24.8
61,624
2013
296,056
2,957
299,013
18.9
192,543
106,470
20.1
36.0
7,956
1,059
9,387
106,842
20.1
36.1
29,348
3,310
30.6
74,184
20.4
25.1
74,184
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
2015E
364,976
4,553
369,528
11.2
231,805
137,723
10.4
37.7
9,886
546
14,114
141,405
11.7
38.7
43,129
283
30.7
97,994
11.5
26.8
97,994
2016E
402,395
5,009
407,403
10.2
257,493
149,911
8.8
37.3
10,866
492
17,118
155,671
10.1
38.7
47,480
311
30.7
107,880
10.1
26.8
107,880
(INR Million)
2017E
446,280
5,761
452,041
11.0
284,046
167,995
12.1
37.6
11,846
442
20,580
176,286
13.2
39.5
52,004
353
29.7
123,929
14.9
27.8
123,929
(INR Million)
2017E
7,953
352,948
360,901
511
10,862
372,275
241,756
94,867
146,889
25,000
142,006
116,885
25,122
231,340
115,994
24,454
58,016
32,876
172,960
82,171
16,431
74,357
58,380
372,275
2010
3,818
136,826
140,644
1,077
7,850
149,571
119,679
38,255
81,424
10,090
57,269
46,982
10,287
81,279
45,491
8,581
11,263
15,945
80,491
34,449
7,860
38,182
788
149,571
2011
7,738
151,795
159,533
1,093
8,019
168,645
127,658
44,208
83,451
13,334
55,547
42,189
13,358
97,901
52,692
8,851
22,432
13,926
81,588
39,792
7,362
34,435
16,313
168,644
2012
7,818
180,101
187,919
791
8,727
197,437
138,033
48,197
89,837
23,923
63,166
43,633
19,533
112,957
56,378
9,824
28,189
18,565
92,445
46,989
10,273
35,183
20,512
197,437
2013
7,902
214,977
222,879
664
12,037
235,580
165,884
54,698
111,186
15,786
70,603
50,594
20,009
142,600
66,002
11,633
36,150
28,815
104,595
50,571
12,540
41,485
38,006
235,580
2014
7,953
254,667
262,620
511
12,970
276,101
181,756
62,269
119,487
23,598
88,234
63,113
25,122
160,975
73,595
21,654
32,894
32,832
116,193
54,498
13,976
47,719
44,782
276,101
2015E
7,953
283,869
291,822
511
12,335
304,668
201,756
72,155
129,601
25,000
97,552
72,430
25,122
187,668
95,169
21,999
41,972
28,528
135,152
63,229
13,128
58,796
52,515
304,668
2016E
7,953
316,017
323,971
511
11,637
336,119
221,756
83,021
138,735
25,000
114,151
89,029
25,122
209,604
104,679
22,049
52,311
30,565
151,370
72,192
14,449
64,728
58,234
336,120
13 March 2015
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
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
Diff in dep
CF from Operations
Extraordinary Items
Incr Decr in FA
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
2010
10.7
12.3
36.8
10.0
93.8
2011
6.4
7.3
20.6
4.5
69.0
2012
7.9
8.8
24.0
4.5
57.1
2013
9.4
10.4
28.2
5.3
55.9
2014
11.0
12.2
33.0
6.0
54.3
2015E
12.3
13.6
36.7
7.4
60.0
2016E
13.6
14.9
40.7
8.1
60.0
2017E
15.6
17.1
45.4
9.3
60.0
32.5
28.5
14.5
41.7
9.4
2.9
53.7
47.4
12.4
35.5
16.8
1.3
43.9
39.4
10.5
29.5
14.4
1.3
36.9
33.3
8.8
24.4
12.3
1.5
31.3
28.4
7.9
20.7
10.5
1.7
28.1
25.5
7.0
18.6
9.4
2.1
25.5
23.2
6.3
16.9
8.5
2.4
22.2
20.3
5.6
14.9
7.6
2.7
29.3
38.5
33.2
42.5
35.5
44.6
36.1
45.5
36.2
45.2
35.3
44.0
35.0
43.4
36.2
44.1
15
1.2
15
1.3
14
1.3
13
1.3
18
1.2
22
1.2
20
1.2
19
1.2
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
(INR Million)
2017E
176,286
20,580
11,846
442
52,357
22,296
0
93,341
0
20,000
27,856
-47,856
0
0
20,580
442
64,728
4,810
-39,781
5,705
52,311
58,016
2010
60,153
3,756
6,087
820
19,464
-6,956
700
51,497
0
12,041
28,891
-40,933
7,207
-698
3,756
820
13,965
-5,091
-9,612
953
10,310
11,263
2011
72,682
5,798
6,560
679
22,806
-438
607
52,362
0
11,224
-1,722
-9,502
5,220
16
5,798
679
38,182
-3,864
-31,691
11,170
11,263
22,433
2012
88,975
8,253
6,985
980
27,352
-114
2,996
64,445
1
20,964
7,619
-28,582
7,650
-303
8,253
980
34,435
-10,292
-30,106
5,757
22,432
28,189
2013
106,842
9,387
7,956
1,059
32,658
16,494
1,454
58,771
2
19,714
7,437
-27,149
9,223
-127
9,387
1,059
35,183
-5,903
-23,662
7,961
28,189
36,150
2014
126,591
11,071
8,999
236
38,739
22,551
1,428
64,893
3
23,684
17,631
-41,313
6,911
-153
11,071
236
41,485
-2,946
-26,837
-3,257
36,150
32,893
2015E
141,405
14,114
9,886
546
43,411
7,972
0
86,340
0
21,402
9,318
-30,720
0
0
14,114
546
47,719
-12,390
-46,542
9,078
32,894
41,972
2016E
155,671
17,118
10,866
492
47,791
11,978
0
90,141
0
20,000
16,599
-36,599
0
0
17,118
492
58,796
-1,034
-43,203
10,339
41,972
52,311
13 March 2015
6

ITC
Corporate profile: ITC
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.
Exhibit 18: Sensex rebased
ITC
480
430
380
330
280
Mar-14
Jun-14
Sep-14
Dec-14
Mar-15
Sensex - Rebased
Shareholding pattern (%)
Dec-14
Promoter
DII
FII
Others
0.0
34.8
21.0
44.2
Sep-14
0.0
34.8
20.5
44.6
Dec-13
0.0
34.3
19.5
46.1
Top holders
Holder Name
Tobacco Manufacturers India Ltd
LIC of India
Specified Undertaking Of the Unit Trust Of India
Myddleton Investment Company Ltd
New India Assurance Company Ltd
% Holding
24.8
14.5
11.2
4.1
1.9
Note: FII Includes depository receipts
Top management
Name
Yogesh Chander Deveshwar
Biswa Behari Chatterjee
Designation
Chairman
Executive VP & CS
Directors
Name
Yogesh Chander Deveshwar
Anil Baijal*
S S H Rehman*
Meera Shankar*
Serajul Haq Khan*
Sunil Behari Mathur*
Angara Venkata Girija Kumar*
Pillappakkam Bahukutumbi
Ramanujam*
R E Lerwill*
Name
Kurush Noshir Grant
Krishnamoorthy Vaidyanath
Biswa Behari Chatterjee
Arun Duggal*
Nakul Anand
Pradeep Vasant Dhobale
S Banerjee*
S B Mainak
Kurush Noshir Grant
*Independent
Auditors
Name
Deloitte Haskins & Sells
P Raju Iyer
S Mahadevan & Co
Shome & Banerjee
Type
Statutory
Cost Auditor
Cost Auditor
Cost Auditor
MOSL forecast v/s consensus
EPS (INR)
FY15
FY16
FY17
MOSL forecast
12.3
13.6
15.6
Consensus
forecast
12.4
14.0
16.1
Variation (%)
-1.1
-2.7
-3.2
13 March 2015
7

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8