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12 January 2012
Update | Sector: Consumer
ITC
BSE SENSEX S&P CNX
16,038 4,831 CMP: INR204 TP: INR230 Buy
Tackling taxes
Cigarette profits shrug off excise hikes; non-cigarette outlook strong
Cigarette EBIT CAGR 15% since 2000 despite excise CAGR of 9.2%.
Bloomberg ITC IN Only consumer company to benefit from INR depreciation
Equity Shares (m) 7,738.1 Non-cigarette EBIT to post 25% CAGR over FY11-13; Outlook positive
52-Week Range (INR) 216/149
Strong cash flows and improving payout ratio positive; Maintain Buy
1,6,12 Rel. Perf. (%) 3/14/37
M.Cap. (INR b) 1,582.1 Cigarette EBIT CAGR 15% since 2000 despite excise CAGR of 9.2%: The ITC
M.Cap. (USD b) 30.6 stock gets a drubbing every year ahead of the Union Budget due to concerns over an
increase in excise duty on cigarettes. However, ITC's cigarette EBIT posted 15%
Y/E March 2011 2012E 2013E CAGR since 2,000 despite excise, VAT increases and regulatory changes. We believe
Sales (INR b) 211.7 250.5 289.7 increase in excise duty should not act as a drag as cigarettes are placed under
EBITDA (INR b) 74.7 89.9 105.4 specific excise duty, which does not cover the impact of inflation in duty collection
NP (INR b) 49.9 60.0 71.0
unlike in other products. Excluding the impact of a sharp increase in excise on micros
EPS (INR) 6.4 7.8 9.2
EPS Gr. (%) 27.3 20.3 18.4
and plains in FY09, excise has increased in line with WPI. However we believe VAT is
BV/Sh. (INR) 20.6 24.3 28.6 a key factor because (1) it is an ad valorem tax and has a greater cascading impact
P/E (x) 31.7 26.4 22.3 and (2) VAT has a wide range of 12.5-40% as it is a state subject. ITC has already
P/BV (x) 9.9 8.4 7.1 taken a pre-emptive price increase of 2% in the month of December.
EV/EBITDA (x) 20.1 16.7 14.0
EV/Sales (x) 7.1 6.0 5.1 State taxes on non-cigarette tobacco are steps in the right direction: Currently
RoE (%) 33.2 34.5 34.7 excise on cigarettes is 25x the excise duty on bidis as cigarettes are looked on as
RoCE (%) 42.9 45.3 45.8 being harmful. In FY12 some states imposed VAT on non-cigarette tobacco at par
with cigarettes and a few states increased it significantly. Imposition of a similar
Shareholding pattern % (Sep-11) strategy at the excise duty level can have far-reaching implications on government
revenue and growth in cigarettes. We expect volume growth in cigarettes to accelerate
Domestic Foreign
Inst., 35.2
as it becomes a preferred tobacco option for the younger generation. We model 7%
47.2
and 6% volume growth for ITC in FY12 and FY13 respectively with 17% EBIT CAGR.
Non-cigarette EBIT to post 25% CAGR over FY11-13; INR depreciation to provide
upside: ITC is the only consumer company to benefit from INR depreciation due to
net exports of INR18b and higher margins in paper. We estimate for every 1%
depreciation of the INR, ITC EPS will increase by 0.4%. ITC posted non-cigarette
Others,
EBIT of 25% CAGR over the past five years and EBIT of 27.4% in 1HFY12. We
17.6
estimate 25% CAGR in ITC's non-cigarette business over FY11-13, driven by 31%
CAGR in loss reduction in FMCG, EBIT of 22% CAGR in hotels and EBIT of 15-17%
CAGR in paperboards and the agri business.
Stock performance (1 year)
Strong cash flow, improving payout ratio positive; Maintain Buy: ITC's dividend
ITC Sensex - Rebased
220 payout jumped from 45-50% until FY09 to 115% and 80% in FY10 and FY11
respectively, due to payment of one-time dividend. We believe there is a strong case
195 for ITC's dividend payout ratio being higher than in the past as (1) capex as a proportion
of cash flows declined from 62% to current levels of 18-19% and (2) ITC's cash and
170
liquid investment will increase to INR95b from INR67b at a payout ratio of ~50%. We
145
expect ITC to post 19% PAT CAGR over FY11-13 powered by 17% growth in cigarette
EBIT and 24% EBIT growth in its non-cigarette businesses. Upside to estimates can
120 come from (1) higher volume growth in cigarettes, (2) gains from rupee depreciation in
Jan-11 May-11 Sep-11 Jan-12 the agri and paper and (3) faster recovery of the hotels business. The stock trades at
26.4x FY12E EPS and 22.3x FY13E EPS. Maintain Buy with a target price of INR230.
Amnish Aggarwal (AmnishAggarwal@MotilalOswal.com) + 91 22 3982 5404
Harit Kapoor (Harit.Kapoor@MotilalOswal.com)+ 9122 3029 5120
ITC
Cigarette EBIT CAGR 15% over 10 years despite excise
increases
Every year, the fear of a sharp increase in excise duty on cigarettes depresses the ITC
stock. This year, those fears are likely to intensify after an excise increase holiday in the
2011 Union Budget, even though VAT increased by 3.5% in FY12. This follows the
government's rising fiscal constraints amid lower forecast of economic growth. We analyze
excise duty trends and their impact on government revenue collection and ITC's growth
over the past decade.
Specific excise duty A case for gradual increase in excise duty: Excise duty on cigarettes is specific and
does not captures inflation not ad valorem, as is the case for most consumer products. This means excise collections
in excise collections are a function of cigarette volumes and not price. In a given year, the increase in excise
collection is a function of cigarette volume growth, given a stable excise duty. A 5%
volume growth in cigarettes and a 5% increase in MRP would result in a 10.3% increase
in excise collections if calculated on an ad valorem basis like other FMCG products.
Hence, we believe a moderate increase in excise duty would enable the government to
offset the loss to the exchequer due to specific excise duty on cigarettes.
Specific excise duty does not capture inflation in cigarette prices
Cigarettes FMCG
YE X X+1 X X+1
MRP (INR) 100 105 100 105
Exciseable sales NA NA 65 68
Excise Rate (INR/Stick) 2 2 8% 8%
Excise Duty 2 2 5.2 5.5
Volume (units) 100 105 100 105
Growth (%) 5 5
Total Excise 200 210 520 573
Excise Inc (%) 5.0 10.3
Source: Company/MOSL
Excise duty rates have Excise duty increase slightly ahead of inflation: Our analysis of data over the past 10
increased by 9.2% CAGR years indicates that CAGR in excise duty rates was 9.2%, whereas WPI inflation was
5.8%. If we remove FY09 from the sample as the year had an abnormal 390% and 140%
increase in duty on micros and plains respectively, the CAGR of cigarette excise would be
only 5.8%, in line with inflation. We note that excise duty outgo on the cigarette industry
increased by 8.7% CAGR over the past 10 years and the share of excise on cigarettes in
total excise collections increased by 310bp.
Cigarette excise CAGR was 9.2% over the past 10 years and WPI inflation was 5.8%. Excluding FY09, excise on cigarettes
was in line with the WPI inflation
FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 CAGR (%)
Excise Duty Change (%) 5.0 15.5 0.0 0.0 0.0 10.0 5.0 5.0 43.7 0.0 17.0 9.2
Cigarette Excise (INRb) 40.3 42.8 46.9 48.0 51.0 61.0 67.6 71.9 75.6 79.6 92.5 8.7
Increase % 6.4 6.2 9.6 2.3 6.4 19.5 10.9 6.4 5.1 5.3 16.2
WPI Inflation % 7.1 3.6 3.4 5.5 6.5 4.4 6.5 4.8 8.0 3.6 9.9 5.8
Cigarette Industry Excise (INR b) 50.3 53.5 58.6 60.0 63.8 76.2 84.5 89.9 94.5 99.5 115.7 8.7
Indian Excise duty (INRb) 619 685 726 823 908 991 1,112 1,176 1,236 1,086 1,030 5.2
Cigarette Excise proportion % 8.1 7.8 8.1 7.3 7.0 7.7 7.6 7.6 7.6 9.2 11.2
Source: Company/MOSL
12 January 2012 2
ITC
Years of moderate excise increase have worked best for the exchequer as the increase in
excise collections captured the excise duty increase and volume growth. Conversely, a
sharp increase in duty resulted in volume pressure and less than proportionate benefits.
We believe an increase in excise duty, in line with inflation, is here to stay and should not
be perceived as a big drag for ITC.
Rising VAT increases cascading impact of taxes
560bp increase in VAT Cigarettes face several taxes at the state level. The taxes include octroi, VAT, luxury
rates over FY08-12E taxes and others that have a different nomenclature in different states. VAT was introduced
from FY08 at a flat rate of 12.5% across India. However VAT rates today vary between
12.5-40%. We estimate VAT revenue for states increased from INR21b in FY08 to INR37b
in FY11 and we estimate it will be INR50b in FY12. The average VAT rate increased
from 12.5% to current levels of 18.1%. The rising VAT rate has been detrimental to the
cigarette industry's volume growth as VAT is applicable on an ad-valorem basis after
excise duty and has much more impact on duties and product pricing.
VAT on cigarettes increased by 330bp in FY12 (%)
18.1
14.8
14.0
12.5 12.5
FY08 FY09 FY10 FY11 FY12E
Source: Company/MOSL
State taxes on non-cigarette tobacco, GST to offer relief to tobacco industry
Share of cigarettes in The world over, governments have aimed at increasing their revenue by targeting cigarettes
tobacco consumption has as social concerns offer little resistance to tax increases. However, India has one of the
fallen from 23% to 14% over lowest ratios of cigarette consumption to total tobacco consumption, which significantly
the past 40 years negates the benefits of an excise increase on cigarettes. The share of cigarettes in tobacco
consumption has fallen from 23% to 14% over the past 40 years, even as less taxed
products have grown fast.
Cigarette contribution to total tobacco consumption negates benefits of high duty on
cigarettes (%)
23 21 20
17
14
FY72 FY82 FY92 FY03 FY10
Source: Company/MOSL
12 January 2012 3
ITC
States recently increased Since 1982, tobacco consumption through cigarettes declined by 14% but more than doubled
taxes on non cigarettes through other products. We note that excise duty on the cheapest cigarette is ~25x the
tobacco which is a positive duty charged on bidis. However state governments have started realizing the impact of
trend for the cigarette this anomaly on the exchequer. Several states increased VAT on bidis and other tobacco
industry products, in addition to taxes on cigarettes. In J&K, Gujarat, Himachal Pradesh, Karnataka
and Rajasthan, VAT on bidis is on par with VAT on cigarettes and Delhi and Tamil Nadu
introduced VAT on bidis. We expect more states to tax non-cigarette tobacco products at
par with cigarettes.
Although in India, bidis outsell cigarettes 10x, in neighboring developing countries such as
Pakistan, Bangladesh and Sri Lanka, cigarettes dominate tobacco consumption. We believe
the trend of increasing taxes on bidis, can significantly increase excise collections.
The various state taxes, put together, would average about 20% of cigarette revenue on
an ad valorem basis. Imposition of a fixed GST, at 20%, which subsumes all the taxes, can
provide relief to the tobacco industry as multiplicity of taxes would be removed.
Long-term outlook positive; Lower price differential can accelerate growth
A combination of rising incomes, rural awareness, higher literacy and a young population
augurs well for growth of the cigarette industry in the coming years. Growth rates can be
far higher and surprise positively if regulatory action can cut the price differential between
cigarettes and bidis, which is currently 3-5x at the lower level. As such, we expect volume
growth to accelerate as the young population prefers cigarettes. With half the population
below 24 years and a likely addition of a large pool of young consumers (born after 2000)
into the smoking age, growth rates should accelerate.
Age profile and preference of the tobacco consumer
Younger consumers prefer Any Cigarettes Bidi Proportion %
cigarettes to bidis, which is 15-24 5.3 3.4 2.2 64.2
25-44 14.9 6.5 9.8 43.6
positive for the cigarette
45-64 22.0 7.6 15.7 34.5
industry 65+ 20.3 4.9 14.8 24.1
Source: GATS/MOSL
Education profile and preference of the tobacco consumer
Higher the education level, Any Cigarettes Bidi Proportion %
No schooling 16.9 4.4 12.9 26.0
higher the incidence
<class 5 20.3 6.6 15.3 32.5
of cigarette smoking Class5-10 12.9 6.3 8.1 48.8
>class 10 8.9 6.3 3.4 70.8
Source: GATS/MOSL
Average monthly expenditure on cigarettes and bidis
The average monthly Avg Monthly Rural Urban No >Secondary
expenditure is 33% higher Expense (INR) Schooling
for cigarettes in urban areas Cigarettes 399.3 347.5 469.0 307.6 462.1
Bidis 93.4 98.0 92.5 93.3 84.4
Source: GATS/MOSL
The average monthly
expenditure on bidis Monthly Expense (INR)/Age
15-17 18-24 >24
increases with age but it
Cigarettes 670 303 412
declines in the case of Bidis 41 70 95
cigarettes Source: GATS/MOSL
12 January 2012 4
ITC
Cigarettes post EBIT of 17% CAGR despite an unfavorable
operating environment
Resilient growth in a tough ITC's cigarette business posted EBIT of 14.8% CAGR since 2000, but only on two
regulatory environment occasions was it in single digits. The last time ITC's cigarette business had single digit
EBIT growth was in 2004, after which it faced major headwinds, such as:
FY08: VAT introduction in cigarettes.
FY09: A 371% and 140% increase in excise duty on micros and plains respectively.
ITC then exited the segments, which accounted for 15% of its volumes.
FY10: A 2% increase in average VAT, pictorial warnings on cigarette packets became
mandatory.
FY11: A 17% increase in excise duty.
FY12: A 3.5% increase in the average VAT rate.
The headwinds resulted in FY11 cigarette volumes being higher by only 0.6% over FY07
levels but realization per stick increased by ~50%. Consequently, ITC's cigarette business
posted EBIT CAGR of 17% over FY07-11. ITC showed commanding pricing power,
raising its cigarette prices to pass on the entire increase in duty to the consumer, thus
maintaining healthy profit growth.
ITC's cigarette EBIT increased by 15% CAGR over the past 10 years (INR/1,000 sticks)
Length (mm) FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12E FY13E
Micros <60 115 135 135 135 135 150 158 167 819 819 669 669 702
Plains 61-70 390 450 450 450 450 495 520 551 1,323 1,323 1,473 1,473 1,547
Small Filter <60mm - - - - - - - - - - 669 669 702
Filter - Regular <70 580 670 670 670 670 740 777 819 819 819 969 969 1,017
Filter - Long 71-75 945 1,090 1,090 1,090 1,090 1,200 1,260 1,323 1,323 1,323 1,473 1,473 1,547
Filter - King 76-85 1,260 1,450 1,450 1,450 1,450 1,595 1,675 1,759 1,759 1,759 1,959 1,959 2,057
Filter - Extra large 86-100 1,545 1,780 1,780 1,780 1,780 1,960 2,058 2,163 2,163 2,163 2,363 2,363 2,481
Excise Duty Change (%) 5 16 0 0 0 10 5 5Micros 391 0 11 0 5
Plains 140 RFC - 18
VAT (%) - - - - - - - 12.5 12.514.5 (avg) 14.5 18.0 18.0
Volume Growth (%) 0.5 -8.4 4.2 3.1 7.1 8.4 7.1 -0.7 -2.9 7.2 -2.8 7.0 6.0
Excise (% of realisation) 53 54 54 52 51 54 53 52 50 46 47 44 44
Net Realisation Gr (%) 10.1 13.3 8.8 4.5 4.5 5.9 9.1 11.9 17.3 15.2 16.6 10.4 7.7
EBIT Growth (%) 24.4 6.0 13.6 5.7 12.6 18.3 17.1 14.6 15.1 18.0 16.8 20.1 15.2
Source: Company/MOSL
High entry barriers We believe the rising influence on consumption patterns of the generation born post-2000
strengthen ITC's position in will result in increasing cigarette consumption as a part of total tobacco usage. We believe
the cigarette industry ITC is uniquely placed to gain from the unfolding opportunity in the Indian cigarette industry
over the coming decade, as a ban on FDI in tobacco will prevent other global players from
entering a high potential consumer market. ITC will thus have the lion's share of growth in
the Indian tobacco industry over the next decade. We factor in volume growth of 7% in
FY12 and 6% in FY13 and EBIT growth of 19.7% in FY12 and 14.6% in FY13. We
believe ITC will settle for lower volumes and higher margins in cigarettes for mid-teen
EBIT growth, if cigarette excise is increased by more than 10-12%.
12 January 2012 5
ITC
Non-cigarette EBIT to post 25% CAGR over FY11-13; INR depreciation to
provide upside
ITC is the only consumer company to benefit from INR depreciation due to net exports of
INR18b and higher margins in paper. We estimate for every 1% depreciation of the INR,
ITC EPS will increase by 0.4%. ITC posted non-cigarette EBIT of 25% CAGR over the
past five years and EBIT of 27.4% in 1HFY12. We estimate 25% CAGR in ITC's non-
cigarette business over FY11-13, driven by 31% CAGR in loss reduction in FMCG, EBIT
of 22% CAGR in hotels and EBIT of 15-17% CAGR in paperboards and the agri business.
ITC's non-cigarette business: Agri and paperboards business change fortunes
FY06 FY07 FY08 FY09 FY10 FY11 FY12E FY13E
Net Sales 61,618 80,072 95,481 104,342 114,545 137,277 159,841 186,035
Growth (%) 30 19 9 10 20 16 16
EBIT 5,286 6,891 7,296 5,975 9,991 13,545 16,850 21,331
EBIT Growth (%) 64.1 30.4 5.9 -18.1 67.2 35.6 24.4 26.6
EBIT Margin (%) 8.6 8.6 7.6 5.7 8.7 9.9 10.5 11.5
Source: Company/MOSL
Paperboard and paper: ITC will commission its paperboard capacity expansion by 0.1mt
in 1QCY12, which will strengthen its leadership in the value-added paperboard market.
ITC's paper division is backward integrated (80-85%); with the depreciating INR and
hence increasing landed cost of pulp, margins are likely to benefit. We estimate EBIT of
15.5% CAGR in ITC's paperboard segment over FY11-13, aided by a 70bp margin
expansion.
Paperboards: Capacity expansion to accelerate growth in FY13
FY07 FY08 FY09 FY10 FY11 FY12E FY13E
Net Sales (INR m) 19,106 21,579 26,471 31,078 35,072 39,631 45,340
Growth (%) 7.5 12.9 22.7 17.4 12.9 13.0 14.4
EBIT (INR m) 4,168 4,531 5,086 6,843 8,192 9,130 10,920
Growth (%) 18.6 8.7 12.2 34.5 19.7 11.4 19.6
EBIT margin (%) 21.8 21.0 19.2 22.0 23.4 23.0 24.1
Source: Company/MOSL
FMCG Others losses FMCG: ITC's new FMCG losses declined by 15% in 1HFY12 mainly due to rising
declined 15% in 1HFY12 profitability in the foods portfolio and lower losses in lifestyle retailing. Its incremental
sales yielded lower margins due to high input costs and rising competition. Besides, ITC
continues to achieve mid single-digit EBITDA margins in the stationery business and
expects breakeven for the entire business by FY13. However, we believe this is a tall
order given the competitive intensity and material price inflation in processed foods and
personal care.
ITC is now the No 2 player Processed foods: ITC's processed foods business achieved EBITDA breakeven at
in instant noodles the SBU level after Bingo broke even. Yippee instant noodles have been a success
and ITC has shifted its focus from market share to the higher margin cookies-and-
creams segment in the biscuits segment. We expect ITC's processed foods business
to post sales of INR40b by FY13, but we note that over the longer term, stable EBIT
margins in the business will be in mid to high single digits, given highly competitive
categories.
12 January 2012 6
ITC
Revenue CAGR of 35% over FY06-11 Incremental margins over sales
Packaged Foods sales (INR m) 39,957 Incr Sales (INR m) Incr EBIT Margin (%)
34,000 9.3
28,937
6.8 6.6
23,173 5.7
19,385 4.3 3.8
17,171
10,834
6,567 2,462 1,944 2,124 1,896 1,954 2,876
1QFY11
2QFY11
3QFY11
4QFY11
1QFY12
2QFY12
FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13
Source: Company/MOSL
Personal care: ITC achieved 6% market share by volume in the toilet soaps segment
and the response to Vivel fairness cream has been encouraging. However, it is tweaking
its formulations in shampoos. ITC also entered the talcum powder market under the
Vivel brand. We believe ITC has a long way to go before it gets a firm foothold in this
segment.
FMCG Others: 31% CAGR in loss reduction over FY11-13
FY07 FY08 FY09 FY10 FY11 FY12E FY13E
Net Sales (INR m) 16,895 25,096 30,056 36,339 44,716 54,068 63,003
Growth (%) 66.7 48.5 19.8 20.9 23.1 20.9 16.5
EBIT (INR m) -2,020 -2,635 -4,835 -3,495 -2,976 -2,163 -1,386
Source: Company/MOSL
Delayed recovery Hotels: The hotel industry is recovering slowly as weak economic conditions in Europe
expected in hotels and the US impacted tourist arrivals. Occupancies are flat due to an increasing supply and
ARR (average revenue per room) has not picked up meaningfully. ITC will commission a
600-room property in Chennai in 2HFY12. Construction of properties in Gurgaon and
Kolkata is progressing per schedule. We expect macro headwinds to result in a slow,
delayed recovery for the segment and estimate EBIT of 22% CAGR over FY11-13.
Hotels: Slow recovery likely, uncertain economy a key headwind
FY07 FY08 FY09 FY10 FY11 FY12E FY13E
Net Sales (INR m) 9,058 10,121 9,355 8,507 10,008 11,216 12,673
Growth (%) 30.8 11.7 -7.6 -9.1 17.6 12.1 13.0
EBIT (INR m) 3,508 4,108 3,162 2,166 2,666 3,292 3,995
Growth (%) 35.9 17.1 -23.0 -31.5 23.0 23.5 21.4
EBIT Margin (%) 38.7 40.6 33.8 25.5 26.6 29.3 31.5
Source: Company/MOSL
Margins to benefit from Agri business: ITC transformed its agri business, which posted an 850bp increase in
rupee depreciation EBIT margins and a 3.4x increase in profits over FY08-11. ITC significantly revamped
the agri business, shifting away from low margin commodity trading to high margin leaf
tobacco exports. External agri sales increased by only 14% from INR24b in FY08 to
INR27b in FY11, but leaf tobacco sales were up 125% from INR5b to ~INR13b.
12 January 2012 7
ITC
Consequently leaf tobacco's share in external sales rose from 21% to 46%. Volumes
increased 22% over the past three years and realizations more than doubled, boosting
sales and profitability. ITC is setting up a leaf tobacco processing unit near Mysore, which
will increase volumes and help to save on logistics costs. We expect strong, sustained
global demand for Indian leaf tobacco, which will enable steady growth for the agri business
in the coming years. The depreciation of the rupee will boost profit and margins.
Agri business sales mix: Leaf tobacco increases from 21% to 46% of external sales
FY08 FY11
Soya
Others
26%
22%
Others
16%
Soya
Coffee 48%
9%
Coffee
12%
Leaf
Leaf Tobacco
Tobacco 46%
21%
Source: Company/MOSL
The agri business: Rupee depreciation, a new leaf-tobacco unit to boost growth
FY07 FY08 FY09 FY10 FY11 FY12E FY13E
Net Sales (INR m) 35,013 38,684 38,460 38,621 47,480 54,926 65,018
Growth (%) 30.7 10.5 -0.6 0.4 22.9 15.7 18.4
EBIT (INR m) 1,236 1,292 2,562 4,478 5,663 6,591 7,802
Growth (%) 36.0 4.6 98.3 74.8 26.5 16.4 18.4
EBIT margin (%) 3.5 3.3 6.7 11.6 11.9 12.0 12.0
Source: Company/MOSL
12 January 2012 8
ITC
Valuation and view: Strong cash flow, improved payout
ratio positive; Maintain Buy
ITC's dividend payout jumped from 45-50% until FY09 to 115% and 80% in FY10 and
FY11, respectively, mainly due to payment of one-time dividend in both years. We believe
there is a strong case for ITC's dividend payout ratio to be higher than in the past, though
it is unlikely to be as high as it was in FY10 and FY11. This is because:
Operating cash flows nearly doubled over the past three years and capex increases
have not been commensurate with operating cash flows. Capex as a proportion of
cash flow declined from 62% to current levels of mid to high teens.
ITC had cash and liquid investments of INR67b as on March 2011, which will increase
to INR95b in FY13 at a payout ratio of ~50%.
Capex is only 18% of cash flows Cash position remains strong
Operating Cash flow s (INR b) Cash and Liquid Investm ents (INRb) 95
Capex as a % of Op cash flow s
84
62 62 67 69
58
60 65 63
42
36
31 30
23 20 26
34 17 18 18
40
25
23
FY06 FY07 FY08 FY09 FY10 FY11 FY12E FY13E FY06 FY07 FY08 FY09 FY10 FY11 FY12E FY13E
Dividend payout higher in FY10 and FY11 Return ratios inch up
DPS (INR) Dividend payout ratio (%) RoE (%) RoCE (%)
45.3 45.7
115 42.9
4.5 38.5
5.0 4.1
35.7 35.9 35.3
3.5
32.8
80
33.2 34.5 34.6
1.8 1.9
1.6 27.5 27.4 27.7 27.8
1.3 53 53
49 25.3
51 50
48
FY06 FY07 FY08 FY09 FY10 FY11 FY12E FY13E FY06 FY07 FY08 FY09 FY10 FY11 FY12E FY13E
Source: Company/MOSL
Maintain Buy with a We expect ITC to post 19% PAT CAGR over FY11-13, powered by 16% EBIT growth in
target price of INR230 cigarettes and 24% EBIT growth in its non-cigarette businesses. Upside to estimates can
come from (1) higher volume growth in cigarettes, (2) gains from a new leaf tobacco
processing facility and (3) faster-than-expected recovery of its hotels business. The stock
trades at 26.4x FY12E EPS of INR7.8 and 22.3x FY13E EPS of INR9.2. Maintain Buy
with a target price of INR230.
12 January 2012 9
ITC
Sales mix EBIT mix
Net Sales Paperboard PBIT
12%
Paperbord Agri
14% 8%
Cigarettes Hotels
44% 4%
Agri
20% FMCG
4%
Cigarettes
Hotels
81%
4%
FMCG
18%
Source: Company/MOSL
Sales growth and EBIT margins for various segments (INR m)
FY06 FY07 FY08 FY09 FY10 FY11 FY12E FY113E
Net Sales
Cigarettes 51,050 58,949 66,350 77,807 93,212 105,737 126,670 143,784
FMCG 10,135 16,895 25,096 30,056 36,339 44,716 54,068 63,003
Hotels 6,926 9,058 10,121 9,355 8,507 10,008 11,216 12,673
Agri Business 26,784 35,013 38,684 38,460 38,621 47,480 54,926 65,018
Paperboards & Paper 17,773 19,106 21,579 26,471 31,078 35,072 39,631 45,340
Sales Growth (%)
Cigarettes 14.4 15.5 12.6 17.3 19.8 13.4 19.8 13.5
FMCG 72.0 66.7 48.5 19.8 20.9 23.1 20.9 16.5
Hotels 37.0 30.8 11.7 -7.6 -9.1 17.6 12.1 13.0
Agri Business 52.0 30.7 10.5 -0.6 0.4 22.9 15.7 18.4
Paperboards & Paper 12.0 7.5 12.9 22.7 17.4 12.9 13.0 14.4
EBIT
Cigarettes 27,088 31,722 36,340 41,838 49,381 57,668 69,035 79,081
FMCG -1,718 -2,020 -2,635 -4,835 -3,495 -2,976 -2,163 -1,386
Hotels 2,581 3,508 4,108 3,162 2,166 2,666 3,292 3,995
Agri Business 909 1,236 1,292 2,562 4,478 5,663 6,591 7,802
Paperboards & Paper 3,514 4,168 4,531 5,086 6,843 8,192 9,130 10,920
EBIT Margin (%)
Cigarettes 53.1 53.8 54.8 53.8 53.0 54.5 54.5 55.0
FMCG -17.0 -12.0 -10.5 -16.1 -9.6 -6.7 -4.0 -2.2
Hotels 37.3 38.7 40.6 33.8 25.5 26.6 29.3 31.5
Agri Business 3.4 3.5 3.3 6.7 11.6 11.9 12.0 12.0
Paperboards & Paper 19.8 21.8 21.0 19.2 22.0 23.4 23.0 24.1
EBIT Growth (%)
Cigarettes 18.3 17.1 14.6 15.1 18.0 16.8 19.7 14.6
FMCG -12.0 17.6 30.5 83.5 -27.7 -14.9 -27.3 -35.9
Hotels 83.1 35.9 17.1 -23.0 -31.5 23.0 23.5 21.4
Agri Business -5.8 36.0 4.6 98.3 74.8 26.5 16.4 18.4
Paperboards & Paper 25.5 18.6 8.7 12.2 34.5 19.7 11.4 19.6
Source: Company/MOSL
12 January 2012 10
ITC
Financials and Valuation
Income Statement (INR Million)
Y/E March 2008 2009 2010 2011 2012E 2013E
Net Sales 139,475 156,119 181,532 211,676 250,529 289,668
Operational Income 2,345 1,946 2,392 3,007 3,521 3,833
Total Revenue 141,820 158,065 183,924 214,683 254,050 293,501
Change (%) 15.6 11.5 16.4 16.7 18.3 15.5
Total Expenditure 95,231 107,341 120,619 139,944 164,104 188,070
EBITDA 46,589 50,724 63,305 74,739 89,946 105,431
Change (%) 14.8 8.9 24.8 18.1 20.3 17.2
Margin (%) 33.4 32.5 34.9 35.3 35.9 36.4
Depreciation 4,385 5,494 6,087 6,560 7,276 8,041
Int. and Fin. Charges 251 376 820 679 750 750
Other Inc. - Recurring 3,764 3,403 3,756 5,182 6,183 7,189
Profit before Taxes 45,717 48,257 60,153 72,682 88,103 103,830
Change (%) 17.3 5.6 24.7 20.8 21.2 17.9
Margin (%) 32.8 30.9 33.1 34.3 35.2 35.8
Tax 13,690 12,550 20,511 22,809 27,664 32,291
Deferred Tax 827 3,071 968 3 441 519
Tax Rate (%) 31.8 32.4 32.5 31.4 31.9 31.6
Profit after Taxes 31,201 32,636 40,610 49,876 59,998 71,020
Change (%) 16.8 4.6 24.4 22.8 20.3 18.4
Margin (%) 22.4 20.9 22.4 23.6 23.9 24.5
Reported PAT 31,201 32,636 40,610 49,876 59,998 71,020
Balance Sheet (INR Million)
Y/E March 2008 2009 2010 2011 2012E 2013E
Share Capital 3,769 3,774 3,818 7,738 7,738 7,738
Reserves 116,808 133,576 136,826 151,795 180,204 213,831
Net Worth 120,577 137,351 140,644 159,533 187,942 221,570
Loans 2,144 1,776 1,077 992 992 992
Deferred Liability 5,451 8,672 7,850 8,019 7,232 6,333
Capital Employed 128,172 147,798 149,571 168,543 196,166 228,895
Gross Block 89,597 105,587 119,679 127,658 142,658 157,658
Less: Accum. Depn. 27,909 32,867 38,255 44,208 51,483 59,524
Net Fixed Assets 61,688 72,719 81,424 83,451 91,175 98,135
Capital WIP 11,268 12,141 10,090 13,334 10,000 10,000
Investments 29,346 28,378 57,269 55,547 67,018 91,158
Curr. Assets, L&A 70,193 81,597 81,279 101,840 109,333 123,813
Inventory 40,505 45,997 45,491 52,675 62,775 71,541
Account Receivables 7,369 6,687 8,581 9,076 11,668 13,491
Cash and Bank Balance 5,703 10,310 11,263 22,432 13,249 14,834
Others 16,616 18,603 15,945 17,656 21,640 23,947
Curr. Liab. and Prov. 44,323 47,036 80,491 85,628 81,361 94,210
Account Payables 27,397 29,237 34,449 43,821 47,807 54,656
Other Liabilities 3,736 3,833 7,859 7,371 6,554 7,595
Provisions 13,190 13,966 38,183 34,436 27,000 31,960
Net Current Assets 25,870 34,561 788 16,212 27,972 29,602
Application of Funds 128,172 147,798 149,571 168,543 196,166 228,895
E: MOSL Estimates
12 January 2012 11
ITC
Financials and Valuation
Ratios
Y/E March 2008 2009 2010 2011 2012E 2013E
Basic (INR)
EPS 8.3 8.6 10.1 6.4 7.8 9.2
Cash EPS 9.4 10.1 11.7 7.3 8.7 10.2
BV/Share 16.0 18.2 18.4 20.6 24.3 28.6
DPS 3.5 3.7 10.0 4.5 3.5 4.1
Payout % 49.5 49.9 115.1 80.2 52.7 52.7
Valuation (x)
P/E 31.7 26.4 22.3
Cash P/E 28.0 23.5 20.0
EV/Sales 7.1 6.0 5.1
EV/EBITDA 20.1 16.7 14.0
P/BV 9.9 8.4 7.1
Dividend Yield (%) 2.2 1.7 2.0
Return Ratios (%)
RoE 27.7 25.3 27.8 33.2 34.5 34.7
RoCE 35.3 32.8 38.5 42.9 45.3 45.8
Working Capital Ratios
Debtor (Days) 18 16 15 15 15 16
Asset Turnover (x) 1.1 1.1 1.2 1.3 1.3 1.3
Leverage Ratio
Debt/Equity (x) 0.0 0.0 0.0 0.0 0.0 0.0
Cash Flow Statement (INR Million)
Y/E March 2008 2009 2010 2011 2012E 2013E
OP/(loss) before Tax 45,717 48,257 60,153 72,682 88,103 103,830
Int./Div. Received 3,764 3,403 3,756 5,182 6,183 7,189
Depreciation and Amort. 4,385 5,494 6,087 6,560 7,276 8,041
Interest Paid 251 376 820 679 750 750
Direct Taxes Paid 14,517 15,622 21,480 22,812 28,105 32,810
Incr in WC 3,413 2,648 -6,956 1,827 32,416 24,185
Diff in dep 371 535 700 607 0 0
CF from Operations 29,030 32,990 49,481 50,707 29,425 48,436
Extraordinary Items 0 0 0 0 1 2
Incr Decr in FA 20,861 16,862 12,041 11,224 11,666 15,000
Pur of Investments -1,332 -968 28,891 -1,722 11,472 24,140
CF from Invest. -19,529 -15,894 -40,933 -9,502 -23,137 -39,138
Issue of shares 446 448 7,207 5,220 0 0
Incr in Debt -369 -698 -85 0 0 0
Interest Income 3,764 3,403 3,756 5,182 6,183 7,189
Interest Paid 251 376 820 679 750 750
Dividend Paid 11,663 13,190 13,965 38,182 34,435 26,999
Others -4,729 -2,075 -3,688 -1,576 13,530 12,846
CF from Fin. Activity -12,801 -12,489 -7,596 -30,035 -15,472 -7,714
Incr of Cash -3,300 4,607 953 11,170 -9,183 1,584
Add: Opening Balance 9,002 5,703 10,310 11,263 22,432 13,249
Closing Balance 5,702 10,310 11,263 22,433 13,249 14,833
E: MOSL Estimates
12 January 2012 12
Motilal Oswal Company Gallery
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