ITC Ltd (ITC) | 243content.icicidirect.com/mailimages/IDirect_ITC_Q2FY17.pdf · ITC, the undisputed...

October 28, 2016

ICICI Securities Ltd | Retail Equity Research

Result Update

Cigarette volumes back on track... • ITC reported 7.8% YoY growth in revenue for Q2FY17 to | 13491.4

crore (I-direct estimate: | 14,288.7 crore). The company witnessed 7.1% YoY growth in cigarette business. FMCG segment grew strongly by 13.3% YoY largely driven by volumes supported by brand building and consumer/trade promotion activities. Hotels & agri business grew moderately by 2.5% and 2.0%, respectively; however, paperboard remained flat

• Our estimates suggest cigarette volume growth in the quarter was ~3-4% YoY and cigarette price hike was ~3%, which was lower than our annual estimate of 10%. The company is consciously increasing the contribution 64 mm cigarettes due to lower tax incidence.

• EBITDA margin remained largely flat on YoY basis to 26.7%. Other income grew substantially by 21.1% YoY leading to a 10.5% YoY growth in profit to | 2500.0 crore (I-direct estimate: | 2737.6 crore)

Cigarette volume growth bounced back in FY17E ITC, the undisputed leader in cigarettes (~75% volume share), has been witnessing moderation in volume growth since FY14. The strain on volumes (-9% in FY15) was largely led by incessant price hikes taken to pass on increasing excise duty (~16% in 2014 Budget & ~15% in 2015 Budget in above 65 mm category). In 2014 & 2015 Budget, excise hike on 64 mm segment was ~115% cumulatively, further compounded by VAT hike in Tamil Nadu, Kerala, Maharashtra and UP. Budget 2016 witnessed increase of 10% in excise on cigarettes irrespective of length of the stick. However, the magnitude of excise increase for cigarettes in particular is not as steep compared to prior excise hikes. ITC took selective price increases across its cigarettes portfolio (prices hiked for Classic & Gold Flake Kings brands by up to 13% post Budget 2016) to pass on excise increase. Considering the excise hike in Budget is not as aggressive as previous hikes & creation of low base for last couple of years, we expect 3% & 2% growth in cigarette volumes for FY17E & FY18E respectively. Opportunities galore for the company in packaged foods segment ITC’s growth in FMCG segment has been phenomenal at 18.5% CAGR in FY08-16. ITC’s branded packaged food segment reported sales of | 7097.5 crore in FY16 out of total FMCG segmental sales of | 9731.2 crore. Aashirvaad & Sunfeast are now brands with annual sales of over | 3000 crore & | 2500 crore respectively. Classmate & Bingo are | 1000+ crore brands. It also entered dairy segment with the launch of Aashirvaad Svasti ghee and Sunfresh dairy whitener in FY16. We believe ITC remains one of the key beneficiaries in terms of change in consumption patterns shifting from unorganised to organised sector, going forward. Thus, we remain positive on ITC’s non-cigarette FMCG business in general and its branded packaged food business in particular. We model revenue CAGR of 13.1% in FY16-18E clocking revenues of | 12438.2 crore by FY18E. Cigarette volume growth back in positive territory; maintain BUY We believe the cigarettes business would witness some relief on the volumes front in the near term mainly due to the 10% excise hike in Budget 2016, which the company would be easily able to pass on to the consumers in the form of strategic price increases. We believe ITC’s focus on growing its FMCG business by entering newer segments and tapping opportunity in foods segment would be a catalyst for topline growth in the long run. We maintain positive stance with a target price of | 277.

ITC Ltd (ITC) | 243 Rating matrix

Rating : BuyTarget : | 277Target Period : 12 monthsPotential Upside : 14%

What’s changed?

Target UnchangedEPS FY17E Changed from | 8.8 to | 8.7EPS FY18E Changed from | 10.0 to | 9.7Rating Unchanged

Quarterly performance | crore Q2FY17 Q2FY16 YoY (%) Q1FY17 QoQ (%)Sales 13491.4 12511.8 7.8 13156.7 2.5EBITDA 3630.0 3382.7 7.3 3526.2 2.9EBITDA (%) 26.7 26.8 -16 bps 26.6 5 bpsPAT 2500.0 2262.5 10.5 2384.7 4.8

Key financials

| Crore FY15 FY16 FY17E FY18ERevenue 36,083.2 51,582.5 55,862.9 62,711.6 EBITDA 13,473.6 13,717.9 15,134.2 17,064.0 Net Profit 9,607.7 9,311.3 10,501.2 11,746.7 EPS (|) 8.0 7.7 8.7 9.7

*From FY16 onwards, financials are reported as per Ind AS Valuation summary

FY15 FY16 FY17E FY18EP/E 30.4 31.4 27.8 24.9 Target P/E 34.8 35.9 31.9 28.5 Div. Yield 2.6 3.5 3.0 3.0 Mcap/Sales 8.1 5.7 5.2 4.7 RoNW (%) 31.3 28.7 31.6 34.7 RoCE (%) 43.4 42.2 45.2 49.1

*From FY16 onwards, financials are reported as per Ind AS Stock data Particular AmountMarket Capitalization (| Crore) 292,113.4Total Debt (FY16) (| Crore) 29.4Cash and Investments (FY16) (| Crore) 12,491.8EV (| Crore) 279,651.052 week H/L 266 / 179Equity capital | 1207.1 croreFace value | 1 Price performance

1M 3M 6M 12MITC -5.0 -3.4 11.1 1.0HUL -6.7 -6.0 -4.0 6.1Nestle India 6.1 -3.1 15.0 8.2VST Industries 3.1 24.2 41.5 44.4

Research Analyst

Sanjay Manyal [email protected]

Tejashwini Kumari

[email protected]


Variance analysis Q2FY17 Q2FY17E Q2FY16 YoY (%) Q1FY17 QoQ (%) Comments

Net Sales 13,491.4 14,288.7 12,511.8 7.8 13,156.7 2.5 Net sales witnessed a growth of 7.8% YoY to | 13491.4 crore mainly led by 13.3% growth in FMCG and 7.0% growth in cigrettes business

Operating Income 125.2 131.9 99.5 25.8 96.4 29.9

Raw Material Expenses 3,671.4 4,132.8 3,113.5 17.9 4,245.6 -13.5Employee Expenses 600.3 671.6 578.1 3.9 700.3 -14.3Other operating Expenses 1,759.0 1,457.5 1,724.6 2.0 1,581.9 11.2

EBITDA 3,630.0 4,004.1 3,382.7 7.3 3,526.2 2.9EBITDA Margin (%) 26.7 27.8 26.8 -16 bps 26.6 5 bps EBITDA margins remained flat. Margins looks optically lower due to change

in accounting standard Depreciation 268.4 260.1 258.2 4.0 261.3 2.8Interest 10.7 11.6 10.3 4.0 10.1 6.1Other Income 475.4 408.4 392.6 21.1 420.5 13.0

PBT 3,826.2 4,140.7 3,506.8 9.1 3,675.4 4.1Tax Outgo 1,326.2 1,403.1 1,244.3 6.6 1,290.7 2.7PAT 2,500.0 2,737.6 2,262.5 10.5 2,384.7 4.8 21% increase in other income aided 10.1% YoY growth in PAT

Key Metrics YoY growth (%)Cigarette Growth (%) NA NA 1.6 6.4FMCG (Others) Growth (%) 13.3 14.0 7.1 620 bps 9.5 380 bps Grew strongly by 13.3% supported by enhanced scale and sales mix to offset

impact of increase in input cost, continued investment in brand building and promotion activities

Hotels Growth (%) 2.5 NA 10.9 -840 bps -0.2 270 bpsAgri Business Growth (%) 2.0 16.0 -10.4 1240 bps 20.2 -1820 bps Muted growth of 2.0% YoY growth led by domestic sales. Export continued to

remain impacted Paperboards Growth (%) 0.0 15.0 -2.3 230 bps -1.6 160 bps remained flat

Source: Company, ICICIdirect.com Research

Change in estimates

(| Crore) Old New % Change Old New % Change CommentsSales 57,964.4 55,862.9 -3.6 64261.6 62711.6 -2.4 Due to marginal cut in the cigarette revenue estimates EBITDA 15,595.4 15,134.2 -3.0 17181.3 17064.0 -0.7EBITDA Margin (%) 26.7 26.9 13 bps 26.5 27.0 47 bpsPAT 10,606.7 10,501.2 -1.0 12032.1 11746.7 -2.4EPS (|) 8.8 8.7 -1.0 10.0 9.7 -2.4

FY17E FY18E


Assumptions Comments

FY15E FY16E FY17E FY18E FY16E FY17E FY18ECigarettes (| cr) 30,452.4 32,348.3 35,666.4 38,561.9 32,348.3 36,012.5 40,404.6 We have marginally tweaked our cigarette volume assumptions

downwards considering the H1FY17 performance

Cigarette Vol. Growth (%) -9.0 -10.0 3.0 2.0 -10.0 4.0 2.0Cigarette Price Growth (%) 21.2 12.0 7.0 6.0 12.0 7.0 10.0FMCG - Others (| cr) 9,038.0 9,731.2 11,124.7 12,438.2 9,731.2 11,000.5 12,299.2Hotels (| cr) 1,187.0 1,286.2 1,459.4 1,491.4 1,286.2 1,399.2 1,490.4Agri Business (| cr) 8,380.5 7,456.9 8,963.4 9,664.5 7,456.9 8,792.5 9,482.1Paperboards (| cr) 5,281.6 5,327.7 5,785.5 6,257.4 5,327.7 5,741.1 6,199.0

Current Earlier



Quarterly Highlights • FMCG – Others grew strongly by 13.3% during the quarter amidst

weak demand conditions supported by enhanced scale and sales mix to offset impact of increase in input cost, continued investment in brand building and promotion activities.

• New launches: Aashirvaad Sugar Release Control Atta, Bingo! Yumitos Original Style, new variants under the Engage brand

• The company strengthened its presence in the north-east market by leveraging its biscuits manufacturing facility at Mangaldoi, Assam (set up through a joint venture company, North East Nutrients Private Ltd.).

• In dairy and beverages segment, company scaled up its sales of the ‘B Natural’ range of juices and launched two blends of coffee under the ‘Sunbean’ brand – Nicamalai and Panagiri.

• It expanded the footprint of Fabelle Chocolate Boutiques to ITC Sonar, Kolkata, ITC Maurya, New Delhi and ITC Grand Chola, Chennai.

• The performance of the cigarette segment remained subdued on account of continued pressure on the legal cigarette industry in India and grew at a 7.1% YoY. We believe volume growth during the quarter was ~3-4% and price hikes were at 3% lower than our annual estimates of 10%.

• Hotel segment grew marginally by 2.5% YoY on account of continued subdued operating conditions of the domestic hospitality industry

• Agri segment witnessed 2.0% YoY growth led by higher agri-commodity sales in the domestic market, however, the export continued to remain impacted due lower wheat output domestically and steep currency depreciation in competing geographies.

• The paperboards, paper & packaging segment’s revenue was flat on YoY basis, however, the on account of improved product mix and benign input costs, there was improvement in the profitability from the segment. The company is setting up bleached chemical thermo mechanical pulp mill at its Bhadrachalam unit to reduce dependence on imported pulp. The mill is expected to be commissioned in H2FY17. It is also planning for capacity expansion in the value added paperboards and decor segments which will further improve the profitability.


Company Analysis

Cigarette volume growth expected to trend upwards in FY17E

Being the leader in the Indian cigarette industry (brands: Gold Flake, Wills, Bristol, Scissors), ITC commands complete pricing power in the segment. The revenue growth of 12.4% (CAGR FY09-15) from cigarettes (~46.6% of revenues) has been led by 12.9% price led CAGR. Volume growth witnessed a setback in FY15 (-9%) following a cumulative price hike of ~16% and ~22% in FY14 and FY15, respectively. The significant price hikes taken by the company were on the back of ~18%, ~16% and ~15% increase in excise duty (on sticks above 65 mm) for FY14, FY15 and FY16, respectively. Further, led by the considerable increase in excise in above 65 mm sticks, cigarette companies forayed into the 64 mm segment to vary their sales mix. ITC has also extended its existing brands, Scissors, Bristol and Capstan in the 64 mm segment at | 5/stick to revive its volume growth and target downtrading consumers. However, in the FY15 Budget, the government increased excise on all lengths of cigarettes for a fourth consecutive year by 11-72% (<64 mm segment by 72% and on all other length of cigarettes by 11-22%) in July 2014 and by 25% in <65 mm category and by 15% in >65 mm category. In Union Budget 2016, the government hiked excise on tobacco products other than bidis by 10-15%. However, the magnitude of excise increase for cigarettes, in particular is not as steep as prior excise hikes. Budget 2016 witnessed an increase of 10% in excise duty on cigarettes irrespective of the length of the stick. This is the fifth consecutive year of excise hike and ITC has passed on the excise increase by way of gradual price hikes in the past. It took selective price increases across its cigarettes portfolio (prices hiked for Classic & Gold Flake Kings brands by up to 13% post Budget 2016) to pass on the excise increase. Considering that the excise hike in Budget 2016 is not as aggressive as previous hikes & creation of low base for last couple of years, we expect 3% & 2% growth in cigarette volumes for FY17E & FY18E respectively coupled with 7% and 6% price hike respectively for the same period. We believe ITC’s dominance in the cigarette segment in India would continue to aid its dominance in ITC’s EBIT at 80.5% until FY18E with EBIT growth from cigarettes remaining modest at 5% CAGR in FY16-18E.

Exhibit 1: Cigarette revenues, revenue growth (YoY)

9.3

14.3 14.712.2

16.8

11.9

4.7

8.16.2

10.3

05000

10000150002000025000300003500040000

FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17EFY18E

0

5

10

15

20

Cigarette Revenues (| crore) - LHS Cigarette revenue Growth (%)

Source: Company, ICICIdirect.com, Research

Exhibit 2: Cigarette volume growth (YoY)

-12-10

-8-6-4-202468

FY08 FY09 FY10 FY11 FY12E FY13E FY14E FY15E FY16E FY17E FY18E

Volume growth (%)



Exhibit 3: Cigarette EBIT (| crore) and cigarette EBIT growth (%)

14.6 15.118.0 16.8

19.8 20.5 20.3

11.8

5.0

-2.6

12.4

0

2000

4000

6000

8000

10000

12000

14000

FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17E FY18E

-5

0

5

10

15

20

25

Cigarette EBIT (| crore) Cigarette EBIT Growth (%)


Aggressive expansion into packaged foods indicates its focus on FMCG

ITC’s emerging strength is the FMCG (others) business led by robust growth of 20.1% CAGR (FY09-15) and strong brands like Aashirvaad, Sunfeast, Bingo, Candyman (branded packaged foods), Vivel, Fiama Di Wills, Superia (personal care), Classmate, Paperkraft (education & stationery) and Wills Lifestyle & John Players (lifestyle retailing). Post strong growth of 21.9% CAGR during FY08-12, the revenue from the segment has been steadily growing at 15.1% CAGR (during FY12-16). The company’s constant endeavour to enter higher growth segments, especially in the branded packaged foods segment, has aided it to carve out a significant place for itself in the Indian FMCG markets with revenues of | 9704.4 crore in FY16. We believe ITC has an edge over other FMCG players in the segment led by its strong and established distribution network of cigarettes. We expect ITC’s presence in the segment to continue to grow at 13.1% revenue CAGR in FY16-18E led by further strengthening of its brand equity in established segments and entry into new segments (beverages and milk), going forward. Recent acquisitions (B natural juices in May 2014, Savlon, Shower to Shower from Johnson & Johnson in February 2015) and new launches in FY16 (Sunfeast Farmlite All Good biscuits, entry into premium chocolates segment with Fabelle, extension of B Natural beverage portfolio to nine variants) signal ITC’s intent to be one of the leading Indian FMCG players. ITC’s branded packaged food segment reported sales of | 7097.5 crore in FY16 out of total FMCG segmental sales of | 9731.2 crore. Aashirvaad & Sunfeast are now brands with annual sales of over | 3000 crore & | 2500 crore respectively. Classmate & Bingo are | 1000+ crore brands. It also entered dairy segment with the launch of Aashirvaad Svasti ghee and Sunfresh dairy whitener in FY16. We believe that ITC has been sharpening its focus on core FMCG business with foray into new product categories whilst strengthening its presence in existing ones. Thus, we remain positive on ITC’s non-cigarette FMCG business in general and its branded packaged food business in particular, given its strong brands as well as robust distribution network. Despite growing at a healthy pace, the FMCG business has been able to achieve breakeven in FY15 since inception (2001) led by entry into new segments, year after year. However, losses have declined much faster than anticipated from | 483.5 crore (FY09) to | 81.3 crore (FY13) with marginal profit at | 70.5 crore in FY16, which we estimate to grow to


|289.7 crore in FY18E. With the company’s brands gaining strength across segments and operational efficiency (back-end integration with ITC’s agri business and paperboards business) yielding positive results, we expect the FMCG business to increasingly contribute to profits in a staggered manner in FY17E and FY18E.

Exhibit 4: FMCG revenues (| crore) and growth (%)

20.0 20.823.1 23.7

26.5

15.8

11.37.7

14.315.1

02000

4000

60008000

10000

1200014000


0

5

10

15

20

25

30

Revenues (| crore) Revenue Growth (%)


Exhibit 5: FMCG EBIT (| crore)

-483.5 -349.5 -297.6

-195.5-81.3

21.8 34.1 70.5

176.0289.7

-600

-400

-200

0

200

400

FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17E FY18E

EBIT (| crore)


Hotels remain drag on return ratios

ITC’s hotel business (2.5% of revenues FY16) has remained a drag on return ratios given the huge capital employed in the segment (~| 4475 crore FY16) and earnings (EBIT) remaining subdued (| 55.7 crore in FY16). With the company actively investing in the segment, we expect upcoming new properties along with gradually improving occupancy levels to aid revenue growth albeit at a modest rate of 7.7% CAGR in FY16-18E. Going forward, we do not expect any significant turnaround in the business with earnings from the segment improving marginally to | 178.4 crore by FY18E.

Exhibit 6: Hotel revenues (| crore) and growth (%)

-7.3

0.52.2

-10.7

9.9 6.8

5.4

4.8

8.4

13.5

-1200-900-600-300

0300600900

12001500


-12-9-6-303691215



Exhibit 7: Hotel EBIT (| crore)

316.2

216.6

266.6279.4

137.7139.7

49.1 55.7

210.5 178.5

0

50

100

150

200

250

300

350


EBIT (| crore)


Slowdown in cigarettes & FMCG, cheaper imports impacting paperboards

ITC’s paperboards business (10.3% of revenues in FY16) posted modest revenue CAGR (FY08-15) of 12.2% led by 8% volume CAGR and ~4% price led CAGR. With ITC being the leader in the paperboards and speciality papers segment and the company increasing its capacity in the segment (brownfield expansion in Bhadrachalam, Andhra Pradesh) we expect ITC’s dominance to strengthen further. The company is setting up a pulp mill at its Bhadrachalam unit to reduce dependence on imported


pulp, which is expected to be commissioned in H2FY17. It is also planning for capacity expansion in the value added paperboards and decor segments which will provide better profitability. Thus, we estimate the profitability from the segment to improve, though we are factoring moderate growth in the segment at 8.4% CAGR in FY16-18E.

Exhibit 8: Paperboards revenues (| crore) and growth (%)

19.4

14.6 13.4 12.69.1

14.7

2.2 0.9

8.6 8.2

0

1300

2600

3900

5200

6500


0

5

10

15

20

25



Exhibit 9: Paperboards EBIT (| crore)

508.6684.3

819.2936.8

964.0 892.5 921.5907.6

1109.21434.3

0

200

400

600

800

1000

1200

1400


EBIT (| crore)


Treading into new frontiers with clear long term vision

ITC has been aggressive in recent times to shape itself into India’s leading FMCG company. It has set before itself an ambitious vision of achieving a topline of | 100000 crore from non-cigarette FMCG business by 2030. This translates to a CAGR of 17.4% in this segment in FY15-30E. After starting the FMCG business from scratch in 2001, it had a topline of | 9731.2 crore from this segment in FY16. Further, ITC’s foods portfolio, on the back of strong brands like Sunfeast, Aashirvaad, Yippee, alone accounted for over | 7000 crore of sales in FY16. ITC ventured into new business of dairy products with the launch of Aashirvaad Svasti cow ghee, luxury chocolates under Fabelle and dairy whitener segment under Sunfresh. We believe it would continue to leverage the brand equity of its prominent brands by driving line extensions. Additionally, the expanse of opportunities for the company can be gauged from the untapped potential in the organised wheat flour market, which is estimated at ~| 7500 crore. India’s wheat production was at ~86.5 million tonnes in 2015. Of this, organised wheat flour market size is ~2.5 million tonnes while unorganised sector has a market share with ~12.5 million tonnes. This translates to a potential market size of ~| 46000 crore. Thus, the organised wheat flour market currently constitutes ~16% of this potential size. With growing urbanisation and changing lifestyles of Indian households, if more consumers shift to organised wheat flour, taking 16% to ~50% levels in the next four or five years, then the expected organised wheat flour market size comes to ~| 23000 crore. ITC (Aashirvaad atta) is expected to be the major beneficiary by virtue of its current market of ~40%. This may translate into 3x growth to ~| 9000 crore for the company from branded wheat flour category alone.


Annual report analysis Company’s gross sales growth slowed down to 3.3% vis-à-vis 6% last year. The business environment was extremely challenging during the year on account of a) pressure on the legal cigarette industry due to the cumulative impact of steep increase in taxation and regulatory pressures, b) sluggish demand and price deflationary conditions in the FMCG space coupled with start-up costs relating to new products and categories, c) hotels segment facing challenges due to excess room inventory and gestation costs of new properties, d) Agri exports were impacted due to higher crop output and steeper currency depreciation in competing regions, and lastly e) the paperboards, paper and packaging segment faced a weak demand and pricing environment.

A. Cigarette: impacted by excise duty and illegal trade Cigarette segment’s gross revenue grew by 6.2% during the year amidst challenging environment. Over the last 4 years, the excise duty and VAT on cigarettes has gone up cumulatively by 118% and 142% respectively at a per unit level, leading to pressure on demand for branded cigarettes and inturn increasing the demand for the illegal cigarettes. Though the company expects the operating environment for the legal cigarette industry to remain challenging in going ahead too on account of a) high levels of taxation, b) rising illegal trade and c) increasing regulatory pressures (graphic health warnings), it remains confident to sustain its leadership position in the legal cigarette industry. Fmcg – Others: The FMCG-Others segment, comprising of branded packaged foods, personal care products, education and stationery products, lifestyle retailing, incense sticks and safety matches grew by 7.7% for the year. It witnessed a slowdown due to a) curbing discretionary spending, b) headwinds in rural demand and c) increase in competitive intensity in the backdrop of decline in commodity prices. In addition to aforesaid reasons, the branded food Industry was further affected by regulatory issues in the Noodles segment which had an adverse rub-off effect on other related categories like snack foods. The company commissioned two manufacturing facilities for a) Finger Snacks at Dhulagarh, West Bengal and d) Dairy at Munger, Bihar. It also commissioned a biscuits manufacturing unit at Mangaldoi, Assam through a JV company, North East Nutrients Private Limited.

B. Hotels Hotel segment’s revenue grew by 8.4% driven by improvement in room occupancy and robust growth in the Food & Beverage segment. However, headwinds like lower average room rates and addition of new rooms continued to be there which reflected in the profitability of the segment. Additionally, the impact of floods in Chennai, gestation costs of the recently commissioned ITC Grand Bharat, Gurgaon and higher depreciation charge due to revision in useful life of fixed assets further put pressure on the segment’s profitability.

C. Paperboards, paper and packaging The Paperboards, Paper and Packaging segment reported muted revenue growth by 0.9% and decline in profitability by 1.5% due to the the muted demand environment in the FMCG and Cigarette industry during the year. Additionally, zero duty on imports under the Free Trade Agreement (FTA) with ASEAN countries, coupled with cheaper imports from China continued to impact the domestic Paper and Paperboard industry. However, the overall demand is expected to grow at a CAGR of 6% over


next five years with 6% growth in Paperboard segment (constituting 46% of the market) and 4% in Writing & Printing paper (constituting 31% of the market).

D. Agri business

The agri business segment of the company which export of leaf tobacco and other agri commodities like rice and wheat. During the year this segment was under pressure owing to the continuation of decline in global cigarette demand due to steep hikes in taxation and the impact of stringent regulatory. Additionally, the food grain production in India is estimated to have declined by 12 million tonnes yoy in FY15 due to unseasonal rains and drought during 2014 & 2015 impacting both the Kharif and Rabi crops. Consequently, the company had not any material opportunity for exports during the year.

New Launches during FY16 Segment New Launches

Cigarettea) Classic Fine Taste - Low Smell, b) Noir - first 97mm super slim cigarette in the country, c) new Kretek and capsule filter offers and d) EON with rechargable option in Delhi and Bengaluru

Branded packaged foodsa) Sunfeast Delishus Gourmet cookies - Chocolate Chip made with Ghana Cocoa, b) Sunfeast Farmlite Oats with Chocolate, c) Sunfeast Marie Light Rich Taste and d) Strawberry variant of Gum-on, e) ITC Master Chef (spices)

Personal care productsa) Fiama Di Wills Double Moisturiser Bathing Bar, b) Vivel Neem, c) Superia Silk Cherry bar soaps, d) Vivel Cell Renew brand for skin care products like Makeup Cleanser, Toner and Night Cream and e) Engage Perfume Sprays in two variants each for men and women

Education and stationery productsa) Several differentiated offerings under the Classmate, Classmate Pulse, Paperkraft and ‘Saathi brands, b) new range of Classmate Octanepens and c) introduction of oil pastels and plastic crayons.

Lifestyle retailing business New collections - Luxuria, Regalia and Ecostyle (natural- fibre products such as linens) under Wills Classic



Outlook & valuation We believe that the cigarettes business would witness some relief on the volumes front due to 10% excise duty hike in budget 2016 (much lower than earlier years) and hence we are factoring 3% and 2% volume growth for FY17E and FY18E respectively. We believe company will be able to pass on the effect of increased excise duty to the consumers in the form of strategic price increases and factoring in 7% and 6% prices hikes for FY17E and FY18E respectively. Additionally, ITC’s focus on growing its FMCG business by entering newer segments and tapping opportunity in foods segment would be a catalyst for topline growth in the long run. We reiterate our BUY recommendation on the stock and maintain our target price of | 277 valuing it on SOTP basis. We have valued the cigarettes business at | 208 (26x FY18E EPS), FMCG at | 37 (3.5x MCap/sales FY18E), paperboards at | 5 (3x FY18E EV/EBITDA), agri-business at | 6 (3x P/BV FY18E) and hotels at | 9 (2x EV/room FY18E) and have also added the cash per share of | 12. Exhibit 10: Sum of the parts valuation

208

27737 5

6 9 12

0

50

100

150

200

250

300

Cigarettes FMCG Paper Agri Hotels Cash pershare

SOTP


Exhibit 11: Valuations

Sales Growth EPS Growth PE EV/EBITDA RoNW RoCE (| cr) (%) (|) (%) (x) (x) (%) (%)

FY15 36083.2 21.9 8.0 29.5 30.4 21.1 31.3 43.4FY16 51582.5 43.0 7.7 -3.1 31.4 20.9 28.7 42.2FY17E 55862.9 8.3 8.7 12.8 27.8 18.8 31.6 45.2FY18E 62711.6 12.3 9.7 11.9 24.9 16.8 34.7 49.1

Source: Company, ICICIdirect.com Research *From FY16 onwards, financials are reported as per Ind AS


Recommendation history vs. Consensus

150

250

350

Oct-16Aug-16Jun-16Mar-16Jan-16Oct-15Aug-15May-15Mar-15Dec-14Oct-14

(|)

0.010.020.030.040.050.060.070.080.090.0100.0

(%)

Price Idirect target Consensus Target Mean % Consensus with BUY

Source: Bloomberg, Company, ICICIdirect.com Research

Key events Date EventFeb-10 The GoI reduces excise duty on < 64 mm cigarettes by ~23% while increasing the excise on above 64 mm cigarettes by ~14% for its FY11 BudgetDec-10 ITC shuts all its five cigarette manufacturing units awaiting clarity from the government on the pictorial representation of packs

Feb-11 The GoI leaves excise duty unchanged in its FY12 Budget; a key positive for the company

Feb-12 GoI increases basic excise duty on cigarettes by whopping 20% in its FY13 Budget

Sep-12 Inaugurates its largest luxury hotel, Grand Chola, in Chennai. It has a capacity of ~600 rooms

Dec-12 Begins the construction of milk processing unit in Munger, Bihar

Feb-13 The GoI in its Budget again raises the basic excise duty on cigarettes by 18%

May-13 For the first time during the quarter the company reports a profit in its FMCG (others) business

Jul-14 GoI increases excise duty on cigarettes for a third consecutive year. It announces an increase of 11-72% in excise duty in its FY15E Budget

Oct-14 Health Ministry proposes ban on loose cigarettes, higher penalty on smoking in public places

Dec-14 Volume declines significantly in Q3FY15 as excessive price hike in last two years impacts growth

Feb-15 Acquisition of Shower To Shower, Savlon brands from Johnson & Johnson

Feb-15 Excise hike of 25% in below 65 mm category & 15% in above 65 mm category in Budget 2015

Feb-16 Excise hike of 10% on cigarettes in Budget 2016


Top 10 Shareholders Shareholding Pattern Rank Name Latest Filing Date % O/S Position (m) Change (m)1 British American Tobacco PLC 30-Jun-16 24.58 2,978.3 0.02 Myddleton Investments Co., Ltd. 30-Sep-16 24.58 2,978.3 2,492.03 Life Insurance Corporation of India 30-Sep-16 14.30 1,732.6 0.04 UTI Asset Management Co. Ltd. 30-Sep-16 11.10 1,345.1 0.05 Rothmans International Enterprises, Ltd. 30-Sep-16 5.29 641.3 486.36 The New India Assurance Co. Ltd. 30-Sep-16 1.78 215.2 -2.77 General Insurance Corporation of India 30-Sep-16 1.77 214.3 -0.28 Oriental Insurance Company Ltd. 30-Sep-16 1.47 177.6 -2.49 Vontobel Asset Management, Inc. 31-Aug-16 1.30 157.3 -4.210 GIC Private Limited 30-Sep-16 1.25 151.9 -4.9

(in %) Sep-15 Dec-15 Mar-16 Jun-16 Sep-16Promoter - - - - -FII 20.7 20.8 20.5 20.6 20.8DII 35.1 35.3 35.2 35.1 34.9Others 44.2 43.9 44.4 44.4 44.2

Source: Reuters, ICICIdirect.com Research

Recent Activity

Investor name Value Shares Investor name Value SharesMyddleton Investments Co., Ltd. 9038.11m 2492.04m Bessemer Trust Company, N.A. (US) -29.97m -9.19mRothmans International Enterprises, Ltd. 1763.76m 486.31m GIC Private Limited -17.68m -4.87mCapital Research Global Investors 106.76m 29.44m Vontobel Asset Management, Inc. -16.29m -4.2mAberdeen Asset Management (Asia) Ltd. 25.52m 6.57m The New India Assurance Co. Ltd. -9.82m -2.71mColumbia Threadneedle Investments (US) 22.42m 6.18m Oriental Insurance Company Ltd. -8.68m -2.39m

Buys Sells

Source: Reuters, ICICIdirect.com Research


.

Financial summary Profit and loss statement | Crore

FY15 FY16 FY17E FY18ETotal operating Income 36,507.4 51,944.6 56,364.6 63,177.6Growth (%) 9.8 42.3 8.5 12.1Raw Material Expenses 14,672.0 13,450.0 15,991.4 16,561.1Employee Expenses 1,780.0 2,328.3 2,542.5 2,822.0Marketing Expenses 930.4 0.0 906.2 815.3Administrative Expenses 2,127.4 0.0 614.1 1,693.2Other expenses 2,633.6 7,086.5 5,766.3 5,016.9Total Operating Expenditure 23,033.9 38,226.6 41,230.4 46,113.7EBITDA 13,473.6 13,717.9 15,134.2 17,064.0Growth (%) 8.2 1.8 10.3 12.8Depreciation 961.7 1,031.9 1,027.3 1,291.5Interest 57.4 49.1 45.3 46.8Other Income 1,543.1 1,769.3 1,803.7 1,829.8PBT 13,997.5 14,406.1 15,867.2 17,555.5OthersTotal Tax 4,389.8 5,094.9 5,366.0 5,808.7PAT 9,607.7 9,311.3 10,501.2 11,746.7Growth (%) 9.4 -3.1 12.8 11.9EPS (|) 8.0 7.7 8.7 9.7

Source: Company, ICICIdirect.com Research *From FY16 onwards, financials are reported as per Ind AS

Cash flow statement | Crore

(Year-end March) FY15 FY16 FY17E FY18EProfit After Tax 9,607.7 9,311.3 10,501.2 11,746.7Add: Depreciation 961.7 1,031.9 1,027.3 1,291.5(Inc)/dec in Current Assets 1,272.9 -1,204.4 -6,917.0 -2,830.4Inc/(dec) in CL and Provisions 177.6 2,906.0 2,400.6 1,910.9CF from operating activities 12,020.0 12,044.8 7,012.0 12,118.9(Inc)/dec in Investments 70.5 -3,951.3 4,158.4 -170.9(Inc)/dec in LT loans & advances -26.3 -779.1 -50.0 -50.0(Inc)/dec in Fixed Assets -2,945.9 -1,444.7 -549.9 -2,620.0Others 336.6 224.9 20.0 0.0CF from investing activities -2,565.1 -5,950.1 3,578.5 -2,840.9Issue/(Buy back) of Equity 6.2 3.2 402.4 0.0Inc/(dec) in loan funds -12.3 -12.9 5.0 10.0Dividend paid & dividend tax -5,999.0 -8,181.6 -10,578.0 -10,578.0Inc/(dec) in Sec. premium 0.0 0.0 0.0 0.0Others -9.3 11.5 13.8 14.9CF from financing activities -5,155.7 -7,652.8 -9,620.4 -11,089.6Net Cash flow 4,299.2 -1,558.1 970.1 -1,811.6Opening Cash 3,289.4 7,588.6 6,030.5 7,000.6Closing Cash 7,588.6 6,030.5 7,000.6 5,189.0


Balance sheet | Crore

(Year-end March) FY15 FY16 FY17E FY18ELiabilitiesEquity Capital 801.6 804.7 1,207.1 1,207.1Reserve and Surplus 29,934.1 31,590.8 32,050.4 32,682.7Total Shareholders funds 30,735.7 32,395.6 33,257.5 33,889.7LT Borrowings & Provisions 38.7 25.8 30.8 40.8Deferred Tax Liability 1,631.6 1,848.4 1,868.4 1,868.4Others Non-current Liabilities 107.8 127.3 141.1 156.1Total Liabilities 32,513.8 34,397.1 35,297.9 35,955.1AssetsGross Block 20,990.8 21,868.4 23,368.4 25,368.4Less: Acc Depreciation 7,213.6 8,051.6 9,078.9 10,370.4Net Block 13,777.1 13,816.8 14,289.5 14,998.0Capital WIP 2,085.5 2,470.1 1,500.0 2,100.0Net Intangible Assets 430.0 418.5 438.5 458.5Non-current Investments 2,441.6 6,392.9 2,234.5 2,405.4LT loans & advances 1,506.4 2,285.4 2,335.4 2,385.4Current AssetsInventory 7,836.8 8,519.8 11,478.7 12,885.9Debtors 1,722.4 1,686.4 1,836.6 2,061.8Loans and Advances 549.9 501.8 1,224.4 1,374.5Other Current Assets 293.6 401.4 1,071.3 1,202.7Cash 7,588.6 6,030.5 7,000.6 5,189.0Current Investments 5963.8 6461.3 8876.8 9793.3Current Liabilities 11,681.9 14,587.9 16,988.4 18,899.4Creditors 1,904.6 2,265.6 3,061.0 3,436.3Provisions 6,106.1 8,318.6 9,336.0 10,308.8Short term debt & other CL 3,671.2 4,003.7 4,591.5 5,154.4Application of Funds 32,513.7 34,397.1 35,297.9 35,955.1


Key ratios

(Year-end March) FY15 FY16 FY17E FY18EPer share data (|)EPS 8.0 7.7 8.7 9.7Cash EPS 8.8 8.6 9.6 10.8BV 25.5 26.8 27.6 28.1DPS 6.3 8.5 7.3 7.3Cash Per Share 6.3 5.0 5.8 4.3Operating Ratios (%)EBITDA Margin 36.9 26.4 26.9 27.0PBT / Total Operating income 38.3 27.7 28.2 27.8PAT Margin 26.3 17.9 18.6 18.6Inventory days 79.3 60.3 75.0 75.0Debtor days 17.4 11.9 12.0 12.0Creditor days 19.3 16.0 20.0 20.0Return Ratios (%)RoE 31.3 28.7 31.6 34.7RoCE 43.4 42.2 45.2 49.1RoIC 51.1 45.4 50.6 52.0Valuation Ratios (x)P/E 30.4 31.4 27.8 24.9EV / EBITDA 21.1 20.9 18.8 16.8EV / Net Sales 7.9 5.5 5.1 4.6Market Cap / Sales 8.1 5.7 5.2 4.7Price to Book Value 9.5 9.0 8.8 8.6Solvency RatiosDebt/EBITDA 0.0 0.0 0.0 0.0Debt / Equity 0.0 0.0 0.0 0.0Current Ratio 1.4 1.2 1.4 1.4Quick Ratio 0.7 0.6 0.8 0.8



ICICIdirect.com coverage universe (FMCG) CMP M Cap(|) TP(|) Rating (| Cr) FY16 FY17E FY18E FY16 FY17E FY18E FY16 FY17E FY18E FY16 FY17E FY18E FY16 FY17E FY18E

Colgate (COLPAL) 937 971 Hold 26,402 21.2 22.1 27.0 44.2 42.3 34.7 6.4 5.6 5.0 77.6 71.5 75.6 58.7 50.1 52.9Dabur India (DABIND) 291 338 Buy 2,975 7.1 8.0 9.4 40.9 36.3 31.1 6.9 6.2 5.6 31.1 29.7 30.1 30.2 27.9 27.9GSK CH (GLACON) 6,028 6,765 Buy 25,965 163.3 171.7 190.9 36.9 35.1 31.6 6.0 5.5 5.0 39.4 36.4 35.8 28.1 26.3 26.1Hindustan Unilever (HINLEV) 840 978 Buy 187,610 19.1 20.7 24.2 43.9 40.5 34.7 6.2 5.8 5.2 106.8 208.0 239.6 111.1 181.2 219.5ITC Limited (ITC) 243 277 Buy 301,589 7.7 8.8 10.0 31.5 27.7 24.4 5.8 5.2 4.7 42.2 46.0 49.1 28.7 31.8 35.1Jyothy Lab (JYOLAB) 359 397 Buy 6,463 5.0 10.0 12.3 71.6 36.0 29.1 4.1 3.8 3.3 19.2 18.2 21.4 8.8 16.3 18.9Marico (MARIN) 278 323 Buy 37,738 5.6 7.0 8.4 49.6 39.9 33.1 6.3 5.7 5.0 46.2 49.3 49.4 34.5 37.3 38.0Nestle (NESIND) 6,936 7,495 Buy 65,635 58.4 108.2 155.1 118.7 64.1 44.7 8.1 6.6 5.7 29.7 34.2 40.8 32.3 36.3 44.9Tata Global Bev (TATTEA) 137 147 Hold 8,693 5.2 7.6 8.5 26.5 18.1 16.2 1.1 1.0 1.0 7.7 9.7 10.0 5.6 8.0 8.4VST Industries (VSTIND) 2,382 2,437 Buy 3,166 99.2 117.0 135.4 24.0 20.4 17.6 3.6 3.2 3.0 59.7 67.4 70.6 41.3 45.4 49.1

Sector / CompanyRoE (%)EPS (|) P/E (x) Price/Sales (x) RoCE (%)



RATING RATIONALE ICICIdirect.com endeavours to provide objective opinions and recommendations. ICICIdirect.com assigns ratings to its stocks according to their notional target price vs. current market price and then categorises them as Strong Buy, Buy, Hold and Sell. The performance horizon is two years unless specified and the notional target price is defined as the analysts' valuation for a stock. Strong Buy: >15%/20% for large caps/midcaps, respectively, with high conviction; Buy: >10%/15% for large caps/midcaps, respectively; Hold: Up to +/-10%; Sell: -10% or more;

Pankaj Pandey Head – Research [email protected]

ICICIdirect.com Research Desk, ICICI Securities Limited, 1st Floor, Akruti Trade Centre, Road No 7, MIDC, Andheri (East) Mumbai – 400 093

[email protected]


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