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ITC, Indias largest cigarette manufacturer by revenue, has garnered leading market share
through its popular brands. It's not without its share of challenges, which include competitive
pressures from cheaper substitutes such as chewing tobacco and leaf-rolled tobacco, and the
potential for further government intervention (like the passage of higher taxes). Even so, ITC has
defended its turf for several years by investing in product innovation, and in marketing its core
brands. In addition, ITC has also recently expanded its product set to include lower-priced
products (which are subject to a lower tax rate) to expand its customer reach. This has allowed it
to post solid sales growth and expand operating margins in its cigarette business, despite rising
taxes. We believe ITC will continue to hold a dominant position in the Indian cigarette market
for over a decade, and we think Indian smokers will trade up to more premium brands as the
prevalence of smoking increases (unlike in developed economies, where smoking is declining).

ITC Ltd: An Investment Profile

Company description
ITC Ltd. is the largest tobacco company in India. It enjoys the leadership position in the Indian
cigarette market with a market share of 80% in terms of value. ITC has emerged as a
diversified conglomerate with leading presence in Paperboards, Hotels and Processed foods. EChoupal, the agri rural initiative of the company has been widely appreciated for its foresight in
harnessing the potential in the rural market.
Key investment arguments

Strong pricing power due to dominant market share in the cigarettes.

Offers best earnings visibility in the sector.

FMCG business improving profitability

Key investment risks

Taxation related risks though Excise and VAT hikes for FY14 are announced.

Lower than expected Cig volume growth.

Recent developments

ITC entered into Deodorants category with the launch of its brand Engage.

It launched 3 offerings in 64mm segment

Sector view

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

Relatively we prefer ITC, Emami and Britannia.


Valuation (Taken from Morning Star)

ITC's fair value estimate raised by 6% to INR 386per share, which implies a fiscal 2015
price/adjusted earnings of 35.1 times, enterprise value/adjusted EBITDA of 21.3 times, and a
free cash flow yield of 2.3%. While our overall operating income forecast remains unchanged,
we now assume these figures come from marginally lower revenue growth and higher margin
expansion than our previous assumptions--especially in the cigarettes business. This is based on
the slower growth in cigarette volumes ITC has witnessed in the wake of rising cigarettetaxes.
However, the company has been able to pass on tax hikes in the form of higher prices while
simultaneously expanding its margins. As such, we have reduced our five-year cigarette revenue
growth projection down to 12.0% from 12.4%, and margins up by 50 basis points to 34.8% on
average over the next five years, versus 34.3% assumed previously. These changes, along with
accounting for the additional cash generated since our last update, have an overall positive
impact on our fair value of 6%.


ITC was incorporated on August 24, 1910 under the name Imperial Tobacco Company of India
Limited. From the year, 2001 onwards, its name was rechristened as 'ITC Limited'. ITC operates
in a diverse range of businesses and its multi-business portfolio includes - Cigarettes & Tobacco,
Hotels, Packaging, Paperboards & Specialty Papers, Agri-business, Foods, Lifestyle Retailing,
Education & Stationery and Personal Care.
ITC is Indias leading cigarette player with over 80% market share by value. It has a leadership
position in every segment of the market, led by significant investments in marketing,
distribution, product design, innovation, manufacturing technology and quality. ITCs
distribution reach is one of the largest in India. The FMCG business has a retail network of over
2 mn retailers in the country, ranging from premium outlets in metros to small shops in the
interiors of rural India.
ITC multi- business portfolio includes:



Agri Business

Paper Borads & Specaility Paper


Education & Stationery



The Indian FMCG sector is the fourth largest in the Indian economy and has a market size of
USD13.1 bn. This industry primarily includes the production, distribution and marketing of
consumer packaged goods, that is those categories of products which are consumed at regular
intervals. The industry has tripled in size over the last 10 years and has grown at approximately
17% CAGR in the last 5 years driven by rising income levels, increasing urbanization, strong
rural demand and favorable demographic trends. These growth drivers, coupled with the lower
levels of penetration and per capita usage in India, are expected to result in robust industry
growth in excess of 15% per annum over the medium-term. The sector is growing at a rapid pace
with well-established distribution networks and intense competition between the organized and
unorganized segments.
Growth Rate
The FMCG sector is well poised to grow further and will prove to be a safe haven for investors
as it is expected that consumption in India is expected to rise from USD 900 bn to about USD
3,600 bn in the coming decade, presenting an unparalleled opportunity for FMCG and retail
companies. Further, early and good monsoon adds to the feel good factor in an economy and
creates a favourable emotional base for consumption of FMGC products. On account of stable or
decrease in raw material cost & ad-spend coupled with price hikes taken up by the companies,
we expect margins to improve slightly in the coming quarter. Decrease in the inflation rate will
help the sector perform better going forward, which we believe will happen once the overall
economy improves at higher rates.

Comparative Analysis

ITC has overtaken Hindustan Unilever in branded foods and beverages sales for the first
time in the year ended March, marking a significant breakthrough in the cigarettes-tohospitality conglomerates ambition to become the countrys largest non-cigarette
FMCG company. ITC, which entered the packaged foods business over a decade ago,
will report a 24% sales growth in branded foods at over Rs 4,600 crore for 2012-13, a
person with direct knowledge of the development said.

Financial Summary

Financial Analysis

Gross Revenue for the year grew by 11.7% to `46712.62crores.

Net Revenue at `32882.56 crores grew by11.1% primarily driven by a 16.0% growth in
the non-cigarette FMCG segment, 14.7% growth in Paperboards, Paper and Packaging
segment and 10.6%growth in the Cigarettes segment.

Profit Before Tax registered a growth of 18.5% to ` 12659.11 crores while Net Profit at
`8785.21 crores increased by 18.4%

.Earnings Per Share for the year stood at `11.0 (previous year `9.45).

Cash flows from Operations aggregated ` 10759.50 crores compared to`9596.24 crores in
the previous year.

ITC is one of Indias most admired and valuable corporations with a current market
capitalization of over `270000 crores and has consistently featured amongst the top 10
private sector companies in terms of market capitalisation and profits.

Over the last 18years, your Companys Net Revenue and Profit AfterTax recorded an
impressive compound annual growth rate of 15.3% and 21.6% respectively.

During this period, Return on Capital Employed improved substantially from28.4% to

45.8% while Total Shareholder Returns, measured in terms of increase in market
capitalization and dividends, grew at a compound annual rate of 25.9%,placing your
Company amongst the foremost in the country in terms of efficiency of servicing
financial capital.

Major Catalysts

Robust FY13 performance driven by better product mix

ITC has posted 22% growth in consolidated net profit at `76.1 bn in FY13, mainly on account of
strong performance across all financial parameters, leveraging its corporate strategy of creating
multiple drivers of growth. Net revenue surged 19.4% YoY to `316.3 bn, due to 26% YoY
growth both from its Agri and other non-cigarette FMCG segment and ~16% YoY growth from
its cigarette segment.

Growth in leaf tobacco exports resulted in strong revenue growth

ITCs Agri business reported a sales growth of 26% YoY to `72.0 bn in FY13, driven by strong
performance of leaf tobacco exports. Currently, agri business which contributes ~20% to the
total revenues is the fastest growing business followed by FMCG segment, which contributing ~
25% to the revenues. The company trades in agriculture product like tobacco leaves, soya, wheat
and coffee; where the company enjoys strong competencies in procurement which has been
created by long-term association with farmers through its E-choupal program.

Non cigarette FMCG business will provide strong earning visibility

ITCs non-cigarette FMCG business grew by 26% YoY in FY13, surpassing the industry
growth, a sign that ITC is fast gaining market share in the Indian FMCG industry, which is still
dominated by HUL, with a 15% market share. In a short span of time, ITC has penetrated
successfully in segments like food & confectionery and personal care products. The company has
leveraged its strong distribution network developed over the years for its cigarette business to
penetrate the FMCG market. The company plans to enter into dairy products soon. Its foods
division already has positive cash flows; the personal care division would take at least another
six months to turn positive. Consequently we expect non-cigarette businesses to add to the
earnings in FY15 in a better way.

Current Ratio
ITCs average current ratio over the last 5 financial years has been 1.65 times which
indicates that the company is comfortably placed to pay for its short term obligations.

Long term Debt to Equity Ratio

ITCs average long term debt equity ratio over the 5 financial years has been 0.01 times
which indicates that the company operates with extremely low level of debt and accordingly
is placed well to withstand economic slowdowns.

Interest Coverage ratio

Interest coverage ratio indicates the comfort with which the company may be able to service
the interest expense (i.e. finance charges) on its outstanding debt. Higher interest coverage
ratio indicates that the company can easily meet the interest expense pertaining to its debt
obligations. ITCs average interest coverage ratio over the last 5 financial years has been
157.20 times which indicates that the company can meet its debt obligations without any

Investment Risk

The major risks facing ITC stem from potential changes in government regulations related to
taxation, manufacturing licenses, and advertising or distribution bans. More specifically, if the
government drastically increases the excise tax rate on cigarettes (similar to past actions), the
company's production volumes and profitability could suffer. Apart from regulatory risks, we
also believe there is a risk that ITC management may expand further into less profitable
businesses--and away from its core competencies in cigarettes--which would not be in the best
interest of its shareholders. Overall, we rate ITC as having medium uncertainty, reflecting that
the firm derives more than half of its sales from the cigarette business, which in itself is a noncyclical business that operates with minimal financial leverage.

BETA Analysis
Here the Beta of ITC is 0.46. i.e. less than
1, hence, it signifies that the stock is less.
volatile as compared to the overall market
But it also implies that the stock is
expected to increase at a rate lesser than the overall market. Conversely, during
down markets, the stock would be expected to decline at a lesser amount.

Disclosure risks recommendations:

The information contained in this document has been made available on the basis of publically
available information, internal data and other reliable sources, but it do not represent that it is
accurate or complete and it should not be relied on as such, as this document is for general
guidance only.