21 March 2016
Update
| Sector:
Consumer
ITC
Buy
BSE SENSEX
25,285
S&P CNX
7,704
CMP: INR330
TP: INR365 (+11%)
Price hikes in KSFT as expected; volume driven strategy at play
Reduced pictorial warnings on the anvil?
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 ( INR m)
Free float (%)
ITC IN
8,038.3
360/268
2/7/11
2,652.6
39.9
2,658
100.0
Financials Snapshot (INR b)
Y/E Mar
2016E 2017E 2018E
Net Sales
362.7 394.2 435.7
EBITDA
140.8 156.3 173.8
PAT
98.7 111.7 127.2
EPS (INR)
12.3
13.9
15.9
Gr. (%)
2.7
13.1
14.0
BV/Sh (INR)
42.7
47.7
53.4
RoE (%)
30.4
30.8
31.4
RoCE (%)
38.4
38.8
39.3
P/E (x)
24.0
21.2
18.6
P/BV (x)
6.9
6.2
5.5
Shareholding pattern (%)
As On
Promoter
DII
FII
Others
Dec-15 Sep-15 Dec-14
0.0
35.2
21.0
43.8
0.0
35.1
21.0
43.9
0.0
34.8
21.0
44.2
As highlighted in our earlier communication dated 7
th
March, ITC has
implemented ~13% price hikes in King Size Filter segment.
ITC’s focus on Cig volume growth is quite evident as there is no price hike in
RSFT (Regular Size Filters) and <65mm segment as of now as per our
distributor checks. We expect price hikes in RSFT segment in next six
months. However <64mm may not see any hike this year given the
consistent increase in share of illicit Cigarettes to ~18% and price sensitive
nature of the segment.
FY17 Cig volumes could stabilize given the relatively benign excise increase
and a consequent benign Cigarette price hike calendar, in our view.
We like ITC’s Cig. Volume focus and a staggered pricing approach. Cigarette
volume recovery will be an important driver for multiple re-rating in the
near term. Maintain BUY with a TP of INR 365 (23x FY18 EPS). We see upside
risks and a strong possibility of ITC trading at 25x P/E if Cig volumes recover
in next few quarters.
13% price hikes in King Size Cigarettes:
As highlighted in our earlier
communications, ITC has implemented a 13% price hike in King Size Cigarettes
with both Classic and Gold Flake Kings prices revised upwards from INR 218 to
INR 246 for a pack of 20 sticks. In some states with higher Cig. VAT, prices are
revised to INR 250/20 sticks. This price hike amounts to ~3.5% on ITC’s total
Cig portfolio on a weighted average basis.
No price hike in RSFT and DSFT; volume focus strategy:
Our distributor
checks do not suggest any increase in prices in the RSFT (~ 70% of volumes)
and DSFT (~ 15% of volumes) segments at the moment. We expect price hikes
in RSFT in next six months but no price change in DSFT this year. In our view,
ITC is prioritizing Cig volumes in FY17 and thus price hikes in rest of the
segments will be staggered. Secondly, the persistent price hikes of last 3-4
years post the aggressive excise increases have driven the share of illicit
Cigarettes to ~18-20% vs. ~9% eight years back. Therefore a price hike in
64mm at this stage may drive volumes further towards illicit segment (entry
level pricing for 64mm segment stands at INR 3/stick).
FII Includes depository receipts
Stock Performance (1-year)
ITC
Sensex - Rebased
400
360
320
280
240
Gautam Duggad
(Gautam.Duggad@MotilalOswal.com); +91 22 3982 5404
Vishal Punmiya
(Vishal.Punmiya@MotilalOswal.com); +91 22 3980 4261
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
Pictorial warnings may not be as drastic as earlier envisaged?
As per media
reports, the government parliamentary panel constituted to look into the issue
of pictorial warnings seems to have suggested the pictorial warnings at 50% of
pack size instead of the earlier recommended 85% (Source:
http://www.dnaindia.com/india/report-parliament-panel-suggests-reducing-size-
of-pictorial-warnings-on-tobacco-products-2188819).
Currently the pictorial
warnings form 40% of pack size). While size of pictorial warnings may not have
material impact given 70% of Cigarette sales in India happen via loose sticks, it
nonetheless signals some sort of rationality in the policymaking in our view.
Staggered pricing could help stabilize Cig volumes; Maintain BUY:
The subtle
change in strategy towards driving volumes vs. prices and a relatively benign
budget can aid the multiple re-rating for ITC, in our view. The recent news flow
around reduction in the size for pictorial warnings from earlier proposed 85% to
50% also suggests some sort of rationality in the policymaking. Maintain
Buy with a TP of INR 365 (23x FY18 EPS, unchanged 15% discount to three year
average P/E). We see upside risks and a strong possibility of ITC trading at 25x
P/E if Cig volumes recover in next few quarters.
Downside risks to our rating:
a) Sharp VAT increase by state governments b)
Incremental non-tax punitive actions by government and c) Acceptance of 40%
GST rate for Cigarette (unlikely in our view).
Valuation Matrix of coverage universe
Company
Consumer
Asian Paints
Britannia
Colgate
Dabur*
Emami*
Neutral
Buy
Neutral
Neutral
Buy
871 12,517
2,693 4,840
836 3,407
248 6,526
941 3,200
1,290 6,585
5,898 3,717
849 27,537
330 39,023
283
768
245 4,739
5,089 7,354
11,405 1,907
595 4,573
95
189
2,526 5,502
1,141 1,121
346
426
340 4,520
27.0
49.8
7.1
15.0
15.1
24.5
20.0
5.0
2.7
26.4
25.8
-21.4
21.0
48.5
-3.0
LP
6.8
32.6
-7.2
15.1
18.9
14.3
16.2
22.6
20.0
15.6
10.9
13.1
-8.7
15.5
22.2
25.0
10.2
31.5
76.9
48.0
35.8
20.9
9.9
14.0
14.1
12.5
16.9
14.4
9.4
14.2
14.0
12.6
12.4
21.1
31.3
15.1
28.9
46.6
41.2
39.7
13.2
46.2
37.5
38.0
35.5
38.2
38.9
35.4
46.2
26.3
31.9
43.9
50.1
53.6
40.0
14.8
87.9
63.1
53.4
39.5
40.2
31.6
33.2
30.5
31.2
32.4
30.6
41.7
23.3
34.9
38.0
41.0
42.9
36.3
11.3
49.7
42.6
39.3
32.7
36.5
27.7
29.1
27.1
26.6
28.3
28.0
36.5
20.4
31.0
33.8
33.8
32.7
31.6
8.7
33.9
30.2
28.2
28.8
31.6
26.1
23.2
28.3
31.7
29.3
25.1
31.9
17.2
26.4
29.4
29.7
33.5
25.0
9.8
40.9
25.4
13.2
29.7
27.0
21.3
20.6
24.1
26.2
24.8
21.3
29.2
15.3
22.2
25.2
24.2
27.2
22.0
8.1
29.6
18.3
11.3
24.3
24.3
18.2
18.5
21.4
22.4
22.4
18.8
25.7
13.6
19.6
22.2
20.2
21.0
19.0
6.7
22.1
13.5
9.3
21.3
35.2
57.8
72.6
33.0
40.6
23.2
30.5
110.3
30.4
19.6
35.5
34.2
46.9
29.8
9.5
48.1
16.1
6.8
21.2
1.1
0.9
1.8
1.0
1.1
0.8
1.1
2.0
2.4
1.4
0.8
1.5
0.8
0.7
1.0
0.0
0.4
0.4
0.8
Reco
Price
MCap
EPS Growth YoY (%)
FY17E
FY18E
FY16E
P/E (x)
FY17E
FY18E
EV/EBITDA (x)
FY16E
FY17E
FY18E
RoE (%) Div. (%)
FY16E
FY16E
(INR) (USD m) FY16E
Godrej Consum Neutral
GSK Consumer Buy
Hind. Unilever
ITC
Jyothy Labs
Marico*
Nestle
Pidilite Inds.
United Spirits
Retail
Jubi. Foodworks Buy
Shopper's Stop Neutral
Titan Company Neutral
Neutral
Buy
Buy
Neutral
Neutral
Buy
Buy
Page Industries Buy
Radico Khaitan Buy
Source: Company, MOSL
21 March 2016
2

ITC
Financials and Valuations
Income Statement
Y/E Mar
Net Sales
Change (%)
EBITDA
EBITDA Margin (%)
Depreciation
EBIT
Interest
Other Income
Extraordinary items
PBT
Tax
Tax Rate (%)
Min. Int. & Assoc. Share
Reported PAT
Adjusted PAT
Change (%)
2011
214,590
16.7
74,123
34.5
6,560
67,563
679
5,798
0
72,682
22,806
31.4
0
49,876
49,876
22.6
2012
251,475
17.2
88,687
35.3
6,985
81,702
980
8,253
0
88,975
27,352
30.7
0
61,624
61,624
23.6
2013
299,013
18.9
106,470
35.6
7,956
98,514
1,059
9,387
0
106,842
32,658
30.6
0
74,184
74,184
20.4
2014
332,386
11.2
124,755
37.5
8,999
115,756
236
11,071
0
126,591
38,739
30.6
0
87,852
87,852
18.4
2015
365,074
9.8
134,946
37.0
9,617
125,328
785
15,431
0
139,975
43,898
31.4
0
96,077
96,077
9.4
2016E
365,858
0.2
140,784
38.5
10,571
130,213
489
17,565
0
147,288
48,605
33.0
0
98,683
98,683
2.7
2017E
397,691
8.7
156,289
39.3
11,956
144,334
520
20,386
0
164,199
52,544
32.0
0
111,655
111,655
13.1
(INR Million)
2018E
439,555
10.5
173,841
39.5
13,106
160,735
503
22,847
0
183,079
55,839
30.5
0
127,240
127,240
14.0
Balance Sheet
Y/E Mar
Share Capital
Reserves
Net Worth
Debt
Deferred Tax
Total Capital Employed
Gross Fixed Assets
Less: Acc Depreciation
Net Fixed Assets
Capital WIP
Investments
Current Assets
Inventory
Debtors
Cash & Bank
Loans & Adv, Others
Curr Liabs & Provns
Curr. Liabilities
Provisions
Net Current Assets
Total Assets
2011
7,738
151,795
159,533
343
8,019
167,894
127,658
44,208
83,451
13,334
55,547
97,901
52,692
8,851
22,432
13,926
82,338
47,904
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
112,957
56,378
9,824
28,189
18,565
93,117
57,934
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
142,600
66,002
11,633
36,150
28,815
105,146
63,661
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
160,975
73,595
21,654
32,894
32,832
116,549
68,830
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
194,976
78,368
17,224
75,886
23,498
118,140
68,043
50,097
76,835
323,816
2016E
8,016
334,522
342,537
143
11,585
354,266
234,908
82,707
152,201
25,155
102,010
197,596
78,992
19,873
72,535
26,196
122,697
68,421
54,276
74,900
354,266
(INR Million)
2017E
8,016
374,327
382,343
143
6,315
388,801
259,908
94,663
165,245
25,155
120,052
215,514
85,488
21,600
80,320
28,106
137,165
75,755
61,410
78,349
388,801
2018E
8,016
419,688
427,704
143
1,360
429,207
284,908
107,769
177,139
25,155
143,015
236,662
92,742
23,874
89,931
30,115
152,765
82,783
69,982
83,897
429,207
21 March 2016
3

ITC
Financials and Valuations
Ratios
Y/E Mar
Basic (INR)
EPS
Cash EPS
Book Value
DPS
Payout (incl. Div. Tax.)
Valuation(x)
P/E
Cash P/E
Price / Book Value
EV/Sales
EV/EBITDA
Dividend Yield (%)
Profitability Ratios (%)
RoE
RoCE
Turnover Ratios (%)
Asset Turnover (x)
Debtors (No. of Days)
Leverage Ratios (%)
Net Debt/Equity (x)
-0.1
2011
74,123
607
-4,522
-22,806
0
47,402
-11,224
36,178
1,722
0
-9,502
5,220
183
-679
-31,455
-26,731
11,170
11,263
22,432
-0.1
2012
88,687
2,996
1,480
-27,352
1
65,812
-20,964
44,848
-7,619
0
-28,583
7,650
-224
-980
-37,918
-31,472
5,757
22,432
28,189
-0.2
2013
106,470
1,454
-9,654
-32,658
2
65,614
-19,714
45,900
-7,437
0
-27,151
9,223
-6
-1,059
-38,660
-30,502
7,961
28,189
36,150
-0.1
2014
124,755
1,428
-10,228
-38,739
3
77,220
-23,684
53,535
-17,631
0
-41,316
6,911
43
-236
-45,877
-39,160
-3,256
36,150
32,894
-0.2
2015
134,946
-250
10,583
-43,898
0
101,381
-29,709
71,673
4,180
0
-25,529
9,788
-12
-785
-41,851
-32,859
42,993
32,894
75,887
-0.2
2016E
140,784
0
-1,416
-48,605
0
90,763
-25,000
65,763
-17,956
0
-42,956
0
0
-489
-50,669
-51,159
-3,351
75,886
72,535
-0.2
2017E
156,289
0
4,336
-52,544
0
108,082
-25,000
83,082
-18,042
0
-43,042
0
0
-520
-56,734
-57,254
7,785
72,535
80,320
-0.2
2018E
173,841
0
4,062
-55,839
0
122,064
-25,000
97,064
-22,963
0
-47,963
0
0
-503
-63,986
-64,490
9,611
80,320
89,931
1.3
15.0
1.3
13.7
1.3
13.2
1.2
18.5
1.1
19.7
1.0
18.7
1.0
19.2
1.0
19.0
33.2
42.7
35.5
44.8
36.1
45.6
36.2
45.3
33.7
41.8
30.4
38.4
30.8
38.8
31.4
39.3
26.8
24.3
9.0
6.9
18.1
2.4
24.7
22.4
7.7
6.1
16.4
2.5
24.0
21.7
6.9
6.1
15.6
2.7
21.2
19.2
6.2
5.5
13.9
3.0
18.6
16.9
5.5
4.9
12.3
3.5
6.4
7.3
20.6
5.2
80.2
7.9
8.8
24.0
5.2
66.4
9.4
10.4
28.2
6.1
65.4
11.0
12.2
33.0
7.0
63.5
12.0
13.2
38.3
7.5
62.8
12.3
13.6
42.7
7.9
64.4
13.9
15.4
47.7
9.0
64.4
15.9
17.5
53.4
10.2
64.4
2011
2012
2013
2014
2015
2016E
2017E
2018E
Cash Flow Statement
Y/E Mar
Adjusted EBITDA
Non cash opr. exp (inc)
(Inc)/Dec in Wkg. Cap.
Tax Paid
Other operating activities
CF from Op. Activity
(Inc)/Dec in FA & CWIP
Free cash flows
(Pur)/Sale of Invt
Others
CF from Inv. Activity
Inc/(Dec) in Net Worth
Inc / (Dec) in Debt
Interest Paid
Divd Paid (incl Tax) & Others
CF from Fin. Activity
Inc/(Dec) in Cash
Add: Opening Balance
Closing Balance
(INR Million)
21 March 2016
4

ITC
NOTES
21 March 2016
5

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ITC
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21 March 2016
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