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Result Update

July 26, 2013


Rating matrix
Rating Target Target Period Potential Upside : : : : Hold | 328 12 months -9%

ITC Limited (ITC)


| 359
WHATS CHANGED
PRICE TARGET .................................................................................................... Unchanged
FY14E 33,328.9 12,687.7 8,696.7 11.0
FY14E 32.6 29.1 1.7 8.5 34.5 46.5 32.7

Key Financials
| Crore Net Sales EBITDA Net Profit EPS (Rs) FY12 24,798 8,848.6 6,162.4 7.9
FY12 45.5 40.7 1.3 11.4 32.8 42.9 31.0

FY13 29,605.6 10,620.7 7,418.4 9.4


FY13 38.2 34.1 1.5 9.6 33.6 44.1 31.6

FY15E 38,296.3 14,573.6 10,477.8 13.2


FY15E 27.1 24.2 2.1 7.4 36.4 47.1 34.7

EPS (FY14E) ......................................................................... Changed from | 11.5 to | 11.0 EPS (FY15E) ........................................................................................................ Unchanged RATING ............................................................................................................... Unchanged

Valuation summary
P/E Target P/E Dividend yield Price/Sales RoNW RoCE RoA

Slowdown trickles down to revenues


ITC reported disappointing Q1FY14 results with 10.3% YoY sales growth. The lower sales growth was on the back of slowing YoY growth in cigarettes & FMCG business at 13.5% & 18.3%, respectively. We believe the aggressive price hikes in cigarettes (14-20% post budget and VAT hikes) have taken a toll on volumes (1-2% de-growth) during the quarter. The slowdown in FMCG revenues was on the back of the tough economic scenario. Hotels, paper & paperboards and agri business posted modest growth (YoY) of 7.5%, 11.8% and 29.4%, respectively. Led by price increases & premiumisation in cigarettes, margins zoomed higher by 243 bps YoY to 38%. We believe sales growth would remain grim in FY14E due to the slowdown in the economy and revive only by FY15E. Further, with ITC being the market leader in cigarettes, pricing power in cigarettes would continue to drive higher margins, though cigarette volume growth will be impacted (-2% in FY14E and 1% in FY15E). We maintain a HOLD rating considering the near term slowdown in growth. De-growth in cigarette volumes witnessed after FY11 After two years of positive volume growth, ITC seems to trending towards de-growth in cigarette volumes in Q1FY14 and FY14E. We expect degrowth of 2% in FY14E on the back of two rounds of price increases already during the year (14-20% post Budget in April, 2013 and 5-8% in July, 2013). FMCG to break-even in FY14 FMCG losses have been on a declining trend, with losses during the quarter decreasing to | 18.9 crore against | 38.8 crore in Q1FY13. With the continuous improvement in FMCG performance, we expect it to achieve breakeven by FY14E itself and contribute positively to margins from FY15E. However, we expect sales growth in FMCG to moderate to 20% CAGR in FY13-15E against 23% CAGR during FY08-13. Valuations at uncomfortable zone We expect overall sales growth to moderate to 13.7% CAGR during FY1315E from 16.2% during FY08-13. Considering the demand slowdown, 27x FY15E valuation multiples are expensive. We maintain our HOLD rating on the stock with a target price of | 328.
Exhibit 1: Financial Performance
(| Crore) Net Sales EBITDA EBITDA Margin (%) Depreciation Interest Other Income Reported PAT EPS (|) Q1FY14E 7338.5 2791.3 38.0 217.8 17.0 203.2 1888.8 2.4 Q1FY14E 7888.7 2828.2 35.4 217.8 19.3 176.5 1937.3 2.5 Q1FY13 6652.2 2368.3 35.6 194.8 13.8 176.8 1602.1 2.0 Q4FY13 8180.3 2706.3 33.1 206.7 24.3 254.0 1928.0 2.4 QoQ (Chg %) -10.3 3.1 495 bps 5.4 -30.2 (20.0) -2.0 -2.0 YoY (Chg %) 10.3 17.9 243 bps 11.8 23.2 14.9 17.9 16.7

Stock data
Market Capitalization Total Debt (FY12) Cash and Investments (FY12) EV 52 week H/L Equity capital Face value MF Holding (%) FII Holding (%) 283,674.6 184.4 2,818.7 281,040.4 298 / 192 790.2 |1 33.5 19.7

Price movement
6,500 6,000 5,500 5,000 4,500 4,000 3,500 3,000 Aug-12 Nov-12
Price (R.H.S)

400 350 300 250 200 150 100 Jan-13 May-13


Nifty (L.H.S)

Jul-13

Analysts name
Sanjay Manyal sanjay.manyal@icicisecurities.com Parineeta Poddar parineeta.poddar@icicisecurities.com

Source: Company, ICICIdirect.com Research

ICICI Securities Ltd | Retail Equity Research

Exhibit 2: Assumption
Particulars Cigarettes Volumes (in m illion sticks) Volume growth(%) Reaslisations (| per stick) Average Price Hike (%) Excise duty (| crore) Revenues (| crore) FMCG Paper & Pare Boards Agri business Hotels 4482.4 3666.9 4748.0 1000.9 5544.6 4129.8 5695.3 1006.3 7012.4 4481.8 7200.7 1074.4 8324.7 4980.2 8955.2 1141.6 10022.0 5503.5 10624.0 1201.9 81723 -2.8 2.4 18.0 9360.3 85360 2.9 2.5 4.0 10073.4 87308 2.3 3.0 18.1 12204.2 85562 -2.0 3.4 15.5 13890.5 86418 1.0 3.8 10.0 15293.3 FY11 FY12 FY13E FY14E FY15E

Source: Company, ICICIdirect.com Research

Exhibit 3: Cigarettes sales and EBIT (%) trend


8000 7000 6000 5000 4000 Q1FY12 Q2FY12 Q3FY12 Q4FY12 Q1FY13 Q2FY13 Q3FY13 Q4FY13 Q1FY14 29.9 31.5 31.7 29.9 31.3 32.4 32.8 32.6 34 32 30 28

Exhibit 4: Excise duty and percentage to sales


3500 3100 2700 2300 1900 1500 Q1FY12 Q2FY12 Q3FY12 Q4FY12 Q1FY13 Q2FY13 Q3FY13 Q4FY13 Q1FY14 35 28 17.9 10.9 12.9 7.1 3.6 21 14 7 0 Q1FY12 Q2FY12 Q3FY12 Q4FY12 Q1FY13 Q2FY13 Q3FY13 Q4FY13 Q1FY14 45.5 45.9 44.4 44.7 45.8 47.3 48.6 46.3 45.9 50 48 46 44 42 40 38

31.5

Cigarettes Sales (| crore )

EBIT (%)

Cig Excise duty (| crore)

% to cig sales

Source: Company, ICICIdirect.com Research

Source: Company, ICICIdirect.com Research

Exhibit 5: FMCG revenues and margins (%) trend


2500 2000 1500 1000 500 0 Q1FY12 Q2FY12 Q3FY12 Q4FY12 Q1FY13 Q2FY13 Q3FY13 Q4FY13 Q1FY14 -500 -1000 1201 1345 1375 1623 1479 1700 1789 2043 25% 1750 20% 15% 10% 5% 0% -5% -10%

Exhibit 6: Hotel revenues and margins (%) trend


375 300 225 150 75 0 29.2 18.5 32.7 29.0

-6%

-4%

-3%

-1% -3%

-2%

-1%

1%

-1%

FMCG sales (| '000 crore)

EBIT (RHS)

Hotels sales (| crore) -LHS

EBIT (%)

Source: Company, ICICIdirect.com Research

Source: Company, ICICIdirect.com Research

ICICI Securities Ltd | Retail Equity Research

Page 2

Exhibit 7: Paper revenues and margins (%) trend


1500 1200 900 600 300 0 Q1FY12 Q2FY12 Q3FY12 Q4FY12 Q1FY13 Q2FY13 Q3FY13 Q4FY13 Q1FY14 0 27.5 22.4 21.8 19.0 23.9 25.2 20.2 16.7 20.4 30 20 10

Exhibit 8: Agri revenues and margins (%) trend


2500 2000 1500 1000 500 0 Q1FY12 Q2FY12 Q3FY12 Q4FY12 Q1FY13 Q2FY13 Q3FY13 Q4FY13 Q1FY14 9.2 16.6 12.4 7.5 12.8 10.1 10.6 6.9 9.1 18 16 14 12 10 8 6 4 2 0

Paper sales (| crore)-LHS

EBIT (%)

Agri sales (| crore)

EBIT (%)

Source: Company, ICICIdirect.com Research

Source: Company, ICICIdirect.com Research

Exhibit 9: EBIT Contribution - Quarterly


100% 80% 60% 40% 20% 0% Q1FY12 -20% Cigarettes FMCG Hotels Agri-Business Paperboards Q2FY12 Q3FY12 Q4FY12 Q1FY13 Q2FY13 Q3FY13 Q4FY13 Q1FY14 1577 1729 1844 1758 1900 2080 2234 2112 2242 227 157 290 239 142 224 106 196 265 171 260 283 173 229 128 188 199 252

Source: Company, ICICIdirect.com Research

Exhibit 10: Revenue contribution in Q1FY14


Agri 18%

Exhibit 11: EBIT contribution in Q1FY14


Agri 7% Hotels 0% Paperboard 9%

Paperboard 10% Hotels 2% FMCG 14% Cigarettes 56%

FMCG -1%

Cigarettes 83%

Source: Company, ICICIdirect.com Research

Source: Company, ICICIdirect.com Research

ICICI Securities Ltd | Retail Equity Research

Page 3

Financial Performance
Exhibit 12: Profit & Loss Account
(Year-end March) Total operating Income Growth (%) Raw Material Expenses Employee Expenses Marketing Expenses Administrative Expenses Other expenses Total Operating Expenditure EBITDA Growth (%) Depreciation Interest Other Income PBT Others Total Tax PAT Growth (%) EPS (|) FY12 25,173.8 9,632.5 1,265.4 1,062.6 2,349.3 2,015.4 16,325.2 8,848.6 698.5 77.9 825.3 8,897.5 2,735.2 6,162.4 7.8 FY13 29,909.2 18.8 12,065.8 1,391.3 0.0 0.0 5,831.4 19,288.5 10,620.7 20.0 795.6 86.5 945.5 10,684.2 3,265.8 7,418.4 20.4 9.3 FY14E 33,328.9 11.4 13344.7 1502.4 0.0 0.0 6176.8 21023.9 12,687.7 19.5 871.3 70.9 739.8 12485.3 3788.6 8,696.7 17.2 11.0 (| Crore) FY15E 38,296.3 14.9 15431.6 1685.0 1455.3 1531.9 3619.0 23722.7 14,573.6 14.9 913.4 0.0 1277.5 14937.6 4459.8 10,477.8 20.5 13.2

Exhibit 13: Cash Flow Statement


(Year-end March) Profit After Tax Add: Depreciation (Inc)/dec in Current Assets Inc/(dec) in CL and Provisions Others CF from operating activities (Inc)/dec in Investments (Inc)/dec in Fixed Assets Others CF from investing activities Issue/(Buy back) of Equity Inc/(dec) in loan funds Dividend paid & dividend tax Inc/(dec) in Sec. premium Others CF from financing activities Net Cash flow Opening Cash Closing Cash FY12 6,162.4 698.5 -822.3 624.4 6,662.9 5,726.9 -1,162.4 0.0 -2,767.8 8.0 -21.1 -4,088.5 757.0 -0.3 -3,319.7 575.4 2,243.2 2,818.7 FY13E 7,418.4 795.6 -2,352.1 1,228.9 7,090.7 0.0 -2,325.3 0.0 -2,379.6 8.3 -9.3 -4,148.5 0.0 0.0 -4,132.5 578.5 2,818.7 3,397.2 FY14E 8,696.7 871.3 -833.0 -648.0 8,087.0 0.0 -1,785.3 0.0 -2,301.0 0.0 -10.9 -5,523.4 0.0 0.0 -5,522.9 263.1 3,397.2 3,660.3 (| Crore) FY15E 10,477.8 913.4 -4,304.2 1,336.4 8,423.3 0.0 -1,920.0 0.0 -795.8 0.0 0.5 -6,904.2 0.0 0.0 -6,903.2 724.3 3,660.3 4,384.6

Source: Company, ICICIdirect.com Research

Source: Company, ICICIdirect.com Research

Exhibit 14: Balance Sheet


(Year-end March) Liabilities Equity Capital Reserve and Surplus Total Shareholders funds LT Borrowings & Provisions Deferred Tax Liability Others Non-current Liabilities Total Liabilities Assets Gross Block Less: Acc Depreciation Net Block Capital WIP Net Intangible Assets Non-current Investments LT loans & advances Current Assets Inventory Debtors Loans and Advances Other Current Assets Cash Current Investments Current Liabilities Creditors Provisions Short term debt & other CL Application of Funds FY12 781.8 18010.1 18791.9 184.4 872.7 15.5 19864.6 13,803.3 4,819.4 8,983.9 2,269.3 123.0 1,953.3 1,193.6 5,637.8 986.0 500.6 136.9 2,818.7 4363.3 9,101.8 1,424.8 4,304.0 3,373.0 19,864.6 FY13E 790.2 21280.0 22070.2 192.0 1203.7 3.1 23469.0 15,919.6 5,615.0 10,304.6 2,269.3 123.0 2,000.9 1,728.0 6,600.2 1,163.6 512.1 641.4 3,397.2 5059.4 10,330.7 1,669.0 5,133.1 3,528.6 23,469.0 FY14E 790.2 24453.3 25243.5 192.5 1183.7 3.1 26622.9 17,719.6 6,422.3 11,297.3 2,269.3 159.1 2,331.9 1,778.0 7,096.6 1,461.0 954.3 691.8 3,660.3 4606.0 9,682.7 1,734.9 4,337.3 3,610.4 26,622.9 (| Crore) FY15E 790.2 28026.9 28817.1 193.5 1203.7 3.1 30217.5 19,219.6 7,253.4 11,966.2 2,269.3 176.8 1,497.7 1,828.0 9,690.8 1,888.6 1,343.4 840.1 4,384.6 5351.1 11,019.1 1,836.1 4,590.3 4,592.6 30,217.5

Exhibit 15: Ratio Analysis


(Year-end March) Per share data (|) EPS Cash EPS BV DPS Cash Per Share Operating Ratios (%) EBITDA Margin PBT / Total Operating income PAT Margin Inventory days Debtor days Creditor days Return Ratios (%) RoE RoCE RoIC Valuation Ratios (x) P/E EV / EBITDA EV / Net Sales Market Cap / Sales Price to Book Value Solvency Ratios Debt/EBITDA Debt / Equity Current Ratio Quick Ratio FY12 7.8 8.8 24.0 4.5 3.6 35.2 35.9 24.5 4.5 25.2 15.2 32.8 42.9 40.6 45.5 31.8 11.3 11.4 14.9 0.0 0.0 1.6 1.3 FY13E 9.3 10.4 27.9 5.3 4.3 35.5 36.1 24.8 4.8 25.4 17.4 33.6 44.1 41.7 38.2 26.4 9.5 9.6 12.9 0.0 0.0 1.7 1.4 FY14E 11.0 12.1 31.9 6.0 4.6 37.6 37.5 25.8 4.9 22.8 17.7 34.5 46.5 43.7 32.6 22.1 8.4 8.5 11.2 0.0 0.0 1.9 1.5 FY15E 13.2 14.4 36.5 7.5 5.5 38.1 39.0 27.4 4.6 20.3 19.2 36.4 47.1 42.6 27.1 19.2 7.3 7.4 9.8 0.0 0.0 2.1 1.7

Source: Company, ICICIdirect.com Research

Source: Company, ICICIdirect.com Research

ICICI Securities Ltd | Retail Equity Research

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Company Description
ITC, incorporated in 1910, is a professionally managed company with institutions holding 49.9% of shares, British American Tobacco (BAT) holding 31.2% of shares and the public having 18.9% shareholding as in FY11. Until 1925, ITC was only in the cigarettes and leaf tobacco business. From 1925 onwards, it diversified into various other businesses, paper (1925), hotels (1975), agriculture (1990) and FMCG (2000), capitalising on the opportunity in each segment. Entry into each business has also helped it to build a synergistic value chain for all its related businesses by providing forward and backward integration channels.
Exhibit 16: Recommendation History
400 350 300 250 200 150 100 Aug-12 Sep-12 Nov-12 Dec-12
Price

Jan-13

Mar-13
Target Price

May-13

Jun-13

Jul-13

Source: Company, ICICIdirect.com Research

Exhibit 17: Recent Releases


Date 8-Oct-12 22-Oct-12 8-Jan-13 18-Jan-13 5-Apr-13 27-May-13 5-Jul-13 Event Q2FY13 Preview Q2FY13 Result Update Q3FY13 Preview Q3FY13 Result Update Q4FY13 Preview Q4FY13 Result Update Q1FY14 Preview CMP 278 294 286 287 291 334 343 Target Price 270 297 297 297 297 328 328 Rating HOLD HOLD HOLD HOLD HOLD HOLD HOLD

Source: Company, ICICIdirect.com Research

ICICI Securities Ltd | Retail Equity Research

Page 5

ICICIdirect.com Coverage Universe (FMCG)


Sector / Company Dabur India (DABIND) Hindustan Unilever (HINLEV) ITC Limited (ITC) Jyothy Lab (JYOLAB) Marico (MARIN) Nestle (NESIND) VST Industries (VSTIND) EPS (|) P/E (x) EV/EBITDA (x) CMP M Cap (|) TP(|) Rating (| Cr) FY13E FY14E FY15E FY13E FY14E FY15E FY13E FY14E FY15E 171 180 Hold 29,790 4.4 5.5 6.6 38.9 31.2 25.8 38.9 31.2 25.8 688 590 Hold 148,574 17.6 15.4 17.3 39.2 44.7 39.7 36.3 32.0 27.9 359 328 Hold 283,675 9.3 11.0 13.2 38.4 32.8 27.2 26.4 22.1 19.2 177 161 Sell 2,854 1.0 2.6 5.0 171.5 68.8 35.2 24.8 19.8 15.6 218 252 Buy 13,405 6.1 7.2 9.0 35.5 30.1 24.2 22.7 19.4 16.2 5,578 4,564 Hold 53,781 110.7 125.0 138.3 50.4 44.6 40.3 29.4 25.7 22.9 1,628 2,146 Buy 2,514 81.8 114.2 125.9 19.9 14.3 12.9 13.6 9.6 8.3 RoCE (%) RoE (%) FY13E FY14E FY15E FY13E FY14E 38.6 41.1 43.2 39.1 38.9 141.7 143.9 141.4 142.8 112.0 44.1 46.5 47.1 33.6 34.5 9.9 13.5 18.0 3.0 7.6 30.2 28.0 29.5 25.3 21.3 55.5 58.8 68.7 59.4 53.0 53.7 77.5 91.2 42.9 58.8 FY15E 38.7 108.5 36.4 14.0 21.8 51.3 67.4

Source: Company, ICICIdirect.com Research

ICICI Securities Ltd | Retail Equity Research

Page 6

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

pankaj.pandey@icicisecurities.com

ANALYST CERTIFICATION
We /I, Sanjay Manyal M.B.A.(FINANCE) Parineeta Poddar M.B.A.(FINANCE) research analysts, authors and the names subscribed to this report, hereby certify that all of the views expressed in this research report accurately reflect our personal views about any and all of the subject issuer(s) or securities. We also certify that no part of our compensation was, is, or will be directly or indirectly related to the specific recommendation(s) or view(s) in this report. Analysts aren't registered as research analysts by FINRA and might not be an associated person of the ICICI Securities Inc.

Disclosures:
ICICI Securities Limited (ICICI Securities) and its affiliates are a full-service, integrated investment banking, investment management and brokerage and financing group. We along with affiliates are leading underwriter of securities and participate in virtually all securities trading markets in India. We and our affiliates have investment banking and other business relationship with a significant percentage of companies covered by our Investment Research Department. Our research professionals provide important input into our investment banking and other business selection processes. ICICI Securities generally prohibits its analysts, persons reporting to analysts and their dependent family members from maintaining a financial interest in the securities or derivatives of any companies that the analysts cover. The information and opinions in this report have been prepared by ICICI Securities and are subject to change without any notice. The report and information contained herein is strictly confidential and meant solely for the selected recipient and may not be altered in any way, transmitted to, copied or distributed, in part or in whole, to any other person or to the media or reproduced in any form, without prior written consent of ICICI Securities. While we would endeavour to update the information herein on reasonable basis, ICICI Securities, its subsidiaries and associated companies, their directors and employees (ICICI Securities and affiliates) are under no obligation to update or keep the information current. Also, there may be regulatory, compliance or other reasons that may prevent ICICI Securities from doing so. Non-rated securities indicate that rating on a particular security has been suspended temporarily and such suspension is in compliance with applicable regulations and/or ICICI Securities policies, in circumstances where ICICI Securities is acting in an advisory capacity to this company, or in certain other circumstances. This report is based on information obtained from public sources and sources believed to be reliable, but no independent verification has been made nor is its accuracy or completeness guaranteed. This report and information herein is solely for informational purpose and may not be used or considered as an offer document or solicitation of offer to buy or sell or subscribe for securities or other financial instruments. Though disseminated to all the customers simultaneously, not all customers may receive this report at the same time. ICICI Securities will not treat recipients as customers by virtue of their receiving this report. Nothing in this report constitutes investment, legal, accounting and tax advice or a representation that any investment or strategy is suitable or appropriate to your specific circumstances. The securities discussed and opinions expressed in this report may not be suitable for all investors, who must make their own investment decisions, based on their own investment objectives, financial positions and needs of specific recipient. This may not be taken in substitution for the exercise of independent judgment by any recipient. The recipient should independently evaluate the investment risks. The value and return of investment may vary because of changes in interest rates, foreign exchange rates or any other reason. ICICI Securities and affiliates accept no liabilities for any loss or damage of any kind arising out of the use of this report. Past performance is not necessarily a guide to future performance. Investors are advised to see Risk Disclosure Document to understand the risks associated before investing in the securities markets. Actual results may differ materially from those set forth in projections. Forward-looking statements are not predictions and may be subject to change without notice. ICICI Securities and its affiliates might have managed or co-managed a public offering for the subject company in the preceding twelve months. ICICI Securities and affiliates might have received compensation from the companies mentioned in the report during the period preceding twelve months from the date of this report for services in respect of public offerings, corporate finance, investment banking or other advisory services in a merger or specific transaction. It is confirmed that Sanjay Manyal M.B.A.(FINANCE) Parineeta Poddar M.B.A.(FINANCE) research analysts and the authors of this report have not received any compensation from the companies mentioned in the report in the preceding twelve months. Our research professionals are paid in part based on the profitability of ICICI Securities, which include earnings from Investment Banking and other business. ICICI Securities or its subsidiaries collectively do not own 1% or more of the equity securities of the Company mentioned in the report as of the last day of the month preceding the publication of the research report. It is confirmed that Sanjay Manyal M.B.A.(FINANCE) Parineeta Poddar M.B.A.(FINANCE) director or advisory board member of the companies mentioned in the report. research analysts and the authors of this report or any of their family members does not serve as an officer,

ICICI Securities may have issued other reports that are inconsistent with and reach different conclusion from the information presented in this report. ICICI Securities and affiliates may act upon or make use of information contained in the report prior to the publication thereof. This report is not directed or intended for distribution to, or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction, where such distribution, publication, availability or use would be contrary to law, regulation or which would subject ICICI Securities and affiliates to any registration or licensing requirement within such jurisdiction. The securities described herein may or may not be eligible for sale in all jurisdictions or to certain category of investors. Persons in whose possession this document may come are required to inform themselves of and to observe such restriction.

ICICI Securities Ltd | Retail Equity Research

Page 7

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