7 December 2015
Update
| Sector:
Consumer
ITC
BSE SENSEX
25,530
S&P CNX
7,765
CMP: INR314
TP: INR350 (+12%)
Neutral
New challenges on the horizon?
CEA recommends 40% GST rate for tobacco; uncertainty continues
Stock Info
Bloomberg
Equity Shares (m)
52-Week Range (INR)
1, 6, 12 Rel. Per (%)
M.Cap. (INR b) / (USD b)
12M Avg Val ( INRm)
Free float (%)
CEA proposes 40% GST rate for tobacco.
ITC IN
8,015.5
410/295
-4/8/-10
2,516/37.7
2,831
100.0
ITC currently pays ~25% weighted average VAT. If the central GST subsumes the
existing central excise duty, the impact will be minimal.
Earnings downgrade risk; maintain NEUTRAL.
Financials Snapshot (INR b)
Y/E Mar
2015 2016E
Sales
360.8 368.3
EBITDA
134.9 143.5
Adj. PAT
96.1 103.2
Adj. EPS (INR)
12.0
12.9
EPS Gr. (%)
8.5
7.4
BV/Sh.(INR)
38.3
42.9
RoE (%)
33.7
31.7
RoCE (%)
41.8
39.1
Payout (%)
52.1
55.0
Valuations
P/E (x)
26.2
24.4
P/BV (x)
8.2
7.3
EV/EBITDA
17.5
16.3
Div. Yield (%)
2.0
2.3
Shareholding pattern (%)
As On
Promoter
DII
FII
Others
Sep-15 Jun-15
0.0
21.0
35.1
43.9
0.0
20.9
35.0
44.1
FII Includes depository receipts
Stock Performance (1-year)
CEA recommends 40% GST rate for tobacco:
In a report, submitted to the
government of India, the Chief Economic Advisor has recommended a
punitive 40% GST rate for demerit goods (tobacco, luxury cars, pan masala,
aerated drinks). Though it is just a proposal, we believe the probability of its
acceptance are strong—given the governments’ hostile stance toward the
2017E
cigarette industry (four consecutive years of 15%+ excise duty hike and
398.0
several other measures to curb cigarette consumption).
157.5
ITC’s weighted average VAT rate ~25%:
ITC currently pays central excise duty
114.1
14.2
(specific in nature) and VAT to state governments. As per our estimates, ITC’s
10.6
current weighted average VAT stands at 24.5%. Thus, if GST of 40% were to
48.0
replace the existing VAT, it will be a significant negative for cigarette volume
31.3
as ITC will look to pass on the impact of higher taxation. Sharp increase in
38.9
excise duty over last four years has impacted the industry volume growth (ITC
55.0
reported three consecutive quarters of double-digit decline in cigarette
volume)
22.1
6.5
Cigarettes will continue to attract central excise duty:
Amongst the categories
14.7
of goods for which punitive GST rate is recommended, central excise duty will
2.5
continue to be levied only on cigarettes; for the rest, GST will subsume excise
duty. Our discussions with industry experts suggest a possibility (no discussion
or concrete decision has taken place) of central GST subsuming the extant
Sep-14
central excise duty levied on cigarettes; tin that event, the impact of higher
0.0
GST rate will be minimal.
20.5
Silver lining?
Our discussions with industry experts also suggest the
possibility of government taking stringent actions to bring illegal duty-evaded
34.8
cigarettes under the tax net, which now form ~20% of the industry v/s 9-10%
44.6
in 2009. This could benefit ITC in the medium/long term if the illegal
segment’s salience comes down.
Maintain NEUTRAL:
ITC’s sluggish performance owing to sustained pressure in
cigarettes will continue even as 2HFY16 provides a benign cigarette volume
base, in our view. We believe the uncertainty around GST and the impending
Union Budget will constrict near-term stock outperformance. While valuations
remain inexpensive at 22x FY17E EPS, continued legislative risks pertaining to
Cigarette industry and government’s hostile stance will prevent re-rating, we
believe. There is a possibility of earnings downside risk if 40% GST rate
recommendation is accepted. Thus, we maintain NEUTRAL despite inexpensive
valuations.
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 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.

ITC
Financials and Valuation
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
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
2016E
368,315
3,818
372,133
1.9
228,670
143,463
6.3
39.0
10,571
389
18,124
150,626
7.6
40.9
43,682
3,766
31.5
103,179
7.4
28.0
103,179
(INR Million)
2017E
398,045
4,199
402,245
8.1
244,696
157,549
9.8
39.6
11,956
350
21,299
166,542
10.6
41.8
48,297
4,164
31.5
114,081
10.6
28.7
114,081
(INR Million)
2017E
8,016
376,795
384,810
143
7,730
392,684
259,908
94,663
165,245
25,155
126,004
96,460
29,544
215,180
85,431
21,811
79,609
28,329
138,900
60,634
15,521
62,745
76,280
392,684
2010
3,818
136,826
140,644
160
7,850
148,654
119,679
38,255
81,424
10,090
57,269
46,982
10,287
81,279
45,491
8,581
11,263
15,945
81,408
34,449
8,777
38,182
-129
148,654
2011
7,738
151,795
159,533
343
8,019
167,894
127,658
44,208
83,451
13,334
55,547
42,189
13,358
97,901
52,692
8,851
22,432
13,926
82,338
39,685
8,219
34,435
15,563
167,894
2012
7,818
180,101
187,919
119
8,727
196,765
138,033
48,197
89,837
23,923
63,166
43,633
19,533
112,957
56,378
9,824
28,189
18,565
93,117
46,989
10,945
35,183
19,840
196,765
2013
7,902
214,977
222,879
113
12,037
235,029
165,884
54,698
111,186
15,786
70,603
50,594
20,009
142,600
66,002
11,633
36,150
28,815
105,146
50,571
13,091
41,485
37,454
235,029
2014
7,953
254,667
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
8,016
299,341
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
2016E
8,016
336,125
344,140
143
12,238
356,521
234,908
82,707
152,201
25,155
105,689
78,831
26,858
199,555
79,404
20,182
73,663
26,306
126,078
55,269
14,060
56,749
73,477
356,522
7 December 2015
2

ITC
Financials and Valuation
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
Free Cash Flow
Pur of Investments
CF from Invest.
Issue of shares
Incr in Debt
Interest Income
Interest Paid
Dividend Paid
Exceptional Income
Others
CF from Fin. Activity
Incr of Cash
Add: Opening Balance
Closing Balance
E: MOSL Estimates
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
2015
12.0
13.2
38.3
6.3
52.1
2016E
12.9
14.2
42.9
7.1
55.0
2017E
14.2
15.7
48.0
7.8
55.0
29.5
28.5
13.5
38.7
8.5
3.2
48.7
43.1
11.5
32.9
15.2
1.4
39.8
35.8
9.8
27.4
13.1
1.4
33.4
30.2
8.1
22.6
11.1
1.7
28.4
25.8
7.3
19.2
9.5
1.9
26.2
23.8
6.5
17.5
8.2
2.0
24.4
22.1
6.3
16.3
7.3
2.3
22.1
20.0
5.8
14.7
6.5
2.5
29.3
38.6
33.2
42.7
35.5
44.8
36.1
45.6
36.2
45.3
33.7
41.8
31.7
39.1
31.3
38.9
15
1.2
15
1.3
14
1.3
13
1.3
18
1.2
20
1.1
19
1.0
19
1.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
(INR Million)
2017E
166,542
21,299
11,956
350
52,461
-3,143
0
108,232
0
25,000
83,232
20,315
-45,315
0
0
21,299
350
56,749
0
-21,170
-56,970
5,946
73,663
79,609
2010
60,153
3,756
6,087
820
19,464
-35,642
700
80,183
0
12,041
68,142
28,891
-40,933
7,207
-1,616
3,756
820
13,965
0
-32,860
-38,298
953
10,310
11,263
2011
72,682
5,798
6,560
679
22,806
4,522
607
47,402
0
11,224
36,178
-1,722
-9,502
5,220
183
5,798
679
38,182
0
929
-26,731
11,170
11,263
22,432
2012
88,975
8,253
6,985
980
27,352
-1,480
2,996
65,811
1
20,964
44,847
7,619
-28,582
7,650
-224
8,253
980
34,435
0
-11,737
-31,472
5,757
22,432
28,189
2013
106,842
9,387
7,956
1,059
32,658
9,654
1,454
65,612
2
19,714
45,898
7,437
-27,149
9,223
-6
9,387
1,059
35,183
0
-12,864
-30,502
7,961
28,189
36,150
2014
126,591
11,071
8,999
236
38,739
10,228
1,428
77,217
3
23,684
53,532
17,631
-41,313
6,911
43
11,071
236
41,485
0
-15,464
-39,160
-3,256
36,150
32,894
2015
139,975
15,431
9,617
785
43,898
-10,583
-250
101,381
0
29,709
71,673
-4,180
-25,529
9,788
-12
15,431
785
47,719
0
-9,563
-32,859
42,993
32,894
75,887
2016E
150,626
18,124
10,571
389
47,447
-1,135
0
97,151
0
25,000
72,151
21,634
-46,634
0
0
18,124
389
50,097
0
-20,377
-52,740
-2,223
75,886
73,663
7 December 2015
3

CONSUMER GALLERY
COMPANIES
COMPANIES
SECTOR UPDATES

ITC
NOTES
7 December 2015
5

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Kadambari Balachandran
Email : kadambari.balachandran@motilaloswal.com
Contact : (+65) 68189233 / 65249115
Office Address : 21 (Suite 31),16 Collyer Quay,Singapore 04931
Motilal Oswal Tower, Level 9, Sayani Road, Prabhadevi, Mumbai 400 025
Phone: +91 22 3982 5500 E-mail: reports@motilaloswal.com
Motilal Oswal Securities Ltd
7 December 2015
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