MotilalOswal ITC 30July 2014

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29 July 2014

1QFY15 Results Update | Sector: Consumer

ITC

Gautam Duggad ([email protected]); +91 22 3982 5404

Manish Poddar ([email protected]); +91 22 3027 8029

BSE SENSEX S&P CNXCMP: INR357 TP: INR400 Buy

25,991 7,749

Bloomberg ITC IN

Equity Shares (m) 7,818.4M.Cap. (INR b)/(USD b) 2,789/46.4

2-Week Range (INR) 387/285

1, 6, 12 Rel. Per (%) 8/-17/-35

Financials & Valuation (INR Billion)

Y/E MAR 2015E 2016E 2017E

ales 374.1 429.1 489.5

EBITDA 141.2 162.9 187.0

dj. PAT 100.7 116.8 134.5

dj. EPS (INR) 12.9 14.9 17.2

EPS Gr. (%) 16.3 16.1 15.1

BV/Sh.(INR) 31.7 34.4 37.5

RoE (%) 40.6 43.4 45.8

RoCE (%) 57.0 61.2 64.9

P/E (x) 27.7 23.9 20.7

P/BV (x) 11.2 10.4 9.5

ITC’s 1QFY15 results were largely in-line though seasonality in Agri revenues

resulted in 9.5% beat on sales vs. our estimates. 1Q15 net sales, EBITDA and PATcame in at INR92.5b (est. INR84.5b), INR32.8b (est. INR31.9b) and INR21.9b (est.

INR 22b), up 24.9%, 17.4% and 15.6%, respectively.

Cig volumes declined 2.5% with net sales growth of 18.8% to INR42b while Cig

EBIT grew robust 21.4% and posted 140bp net EBIT margin expansion to 64.8%.

ITC has discontinued sharing gross sales figures from this quarter.

EBITDA grew 17.4% to INR 32.8b; margins contracted 220bps to 35.4 due to mix

deterioration post higher growth in Agri sales and EBIT losses in Hotels division

due to higher depreciation expenses on revision of useful life.

Non-Cig FMCG posted 10.9% sales growth (lowest since 1QFY10) with mid single

digit volume growth; impacted by weak macros with moderation in Biscuits andNoodles category (high single digit growth vs. high teens earlier). Lifestyle and

matches business have also witnessed sharp moderation. The segment reported a

loss of INR156m.

Agri revenues grew 50.6% YoY to INR32.9b on account of higher trading in non-

leaf tobacco portfolio. Leaf tobacco sales were impacted due to change in order

pattern and margins contracted 300bp due to mix deterioration. Hotels

continued to suffer with lower occupancies (shift in IPL out of India in 2014) and

lower beverage sales during elections and posted 0.5% revenue decline with

sharp 840bps EBIT margin contraction. Paper revenues grew 10.8% YoY to

INR12.8b with 30bp margin contraction to 21.3%.

Continued robust Cig EBIT growth and margin expansion are the key highlights of

the quarter. Given the unprecedented third consecutive year of ~20% excise hike

in cigarettes, we expect delayed volume recovery in Cig. Reiterate Buy with a

Target Price of INR400 (27x FY16E).

Investors are advised to refer through disclosures made at the end of the Research Report.



29 July 2014 2

ITC

Sales beat driven by Cig & Agri division: Cig volume decline 2.5%

1QFY15 revenues grew 24.8% to INR92.4b (est. INR84.5b), led by 18.8% and

50.6% growth in Cigarettes Agri division, respectively. Non-Cig FMCG and Paper

business sales grew 10.9% and 10.8% respectively while Hotels underperformed

with 0.5% YoY revenue decline.

Cigarette volumes declined 2.5% in our view but margins expanded 140bp to

64.8%.

Gross margins contracted by 430bp largely led by raw material inflation and mix

deterioration due to higher growth in Agri business.

EBITDA posted 17.4% YoY growth to INR32.8b (est. INR31.9b).

Adj. PAT posted 15.6% growth to INR21.9b (est. INR22.0b), slightly lower than

the 18.2% growth in PBT as tax rate expanded 150bps YoY to 33%.

Segmental Performance

1QFY13 2QFY13 3QFY13 4QFY13 1QFY14 2QFY14 3QFY14 4QFY14 1QFY15

Sales (INR m)

Cigarettes 33,042 33,852 36,574 36,232 35,374 37,238 41,161 40,788 42,011

FMCG - Others 14,731 16,908 17,827 20,362 17,447 19,622 20,778 23,145 19,346

Hotels 2,324 2,170 3,095 3,155 2,499 2,470 3,154 3,205 2,487

Agri business 16,914 20,239 16,310 18,545 21,890 17,725 17,864 20,042 32,961

Paper and packaging 10,587 10,590 10,616 10,575 11,631 11,787 12,574 12,612 12,885

Sales growth (YoY)

Cigarettes 15.0 14.0 13.1 11.5 7.1 10.0 12.5 12.6 18.8

FMCG - Others 23.0 26.1 30.1 26.0 18.4 16.1 16.6 13.7 10.9

Hotels 0.8 2.8 11.0 10.4 7.5 13.8 1.9 1.6 -0.5

Agri business -0.9 41.1 43.1 31.1 29.4 -12.4 9.5 8.1 50.6

Paper and packaging 10.3 5.3 8.5 7.9 9.9 11.3 18.5 19.3 10.8

Volume growth (YoY)

Cigarettes 1.5 0.5 1.5 2.5 -2.0 -2.0 -2.0 -3.0 -2.5

EBIT (INR m)

Cigarettes 18,998 20,802 22,335 21,124 22,417 24,117 26,526 25,519 27,218

FMCG - Others -388 -303 -240 119 -189 -127 104 431 -156

Hotels 262 153 555 406 89 87 622 599 -121

Agri business 1,714 2,597 1,726 1,275 1,993 2,846 2,054 1,455 2,025

Paper and packaging 2,647 2,825 2,286 1,881 2,516 2,208 2,317 1,884 2,749

EBIT growth (YoY)

Cigarettes 20.5 20.3 21.1 20.2 18.0 15.9 18.8 20.8 21.4

FMCG - Others -49.1 -45.8 -48.8 -171.2 -51.3 -58.1 -143.2 263.0 -17.6

Hotels -48.9 -64.8 -45.5 -51.0 -65.9 -43.0 12.1 47.3 -235.2

Agri business 9.1 8.8 21.9 20.8 16.3 9.6 19.0 14.1 1.6

Paper and packaging 16.6 -2.5 1.9 -3.9 -5.0 -21.9 1.4 0.1 9.3

EBIT Margin (%)

Cigarettes 57.5 61.4 61.1 58.3 63.4 64.8 64.4 62.6 64.8

FMCG - Others -2.6 -1.8 -1.3 0.6 -1.1 -0.6 0.5 1.9 -0.8

Hotels 11.3 7.1 17.9 12.9 3.6 3.5 19.7 18.7 -4.9

Agri business 10.1 12.8 10.6 6.9 9.1 16.1 11.5 7.3 6.1

Paper and packaging 25.0 26.7 21.5 17.8 21.6 18.7 18.4 14.9 21.3

Source: Company, MOSL

Cigarette volumes decline ~2.5%; 140bp EBIT margin expansion

1QFY15 cigarette volumes declined 2.5%. Two consecutive years of sharp pricehikes in a weak macro backdrop is delaying the volume recovery, in our view.

We expect Cig volume growth to remain subdued in FY15 (estimate 3.3%



29 July 2014 3

ITC

volume decline for the year) as third consecutive year of steep excise increase

will result in fresh round of price hikes. Our channel checks indicate price hikes

to take effect in another fortnight.

While Cig volume decline has remained in 2.5-3% band for both 4Q14 and 1Q15,

net sales growth of the division has improved significantly from 12.6% in 4Q14

to 18.8% in 1Q15. We note that ITC has discontinued sharing gross sales figures

from this quarter.

Net EBIT Margin expanded 140bp to 64.8% on the back of price increases and

cost containment. Thus, Cigarette EBIT posted robust 21.4% YoY growth for

1Q15.

Cig volumes declined 2.5%


EBIT growth remains robust


FMCG – Others: Sales growth at 20 quarter low

FMCG others division posted 10.9% sales growth led by mid single digit volume

growth while segment reported a loss of INR156mn.

Sales growth was lowest since 1QFY10, impacted by overall consumption

slowdown with single digit growth in biscuits and noodles category vs. high

teens earlier. Lifestyle and matches business have also witnessed sharp

moderation. Atta and Notebooks segment outperformed.

Incremental EBIT margins stood at 1.8%.

10.9% sales growth, lowest since 1Q10


Incremental EBIT margins at 1.8%


-3.5

-0.5

2.5

-2.0

8.07.5

5.0 5.0

1.50.5

1.52.5

-2.0-4.0

-2.0-3.0-2.5

1 Q F Y 1 1

2 Q F Y 1 1

3 Q F Y 1 1

4 Q F Y 1 1

1 Q F Y 1 2

2 Q F Y 1 2

3 Q F Y 1 2

4 Q F Y 1 2

1 Q F Y 1 3

2 Q F Y 1 3

3 Q F Y 1 3

4 Q F Y 1 3

1 Q F Y 1 4

2 Q F Y 1 4

3 Q F Y 1 4

4 Q F Y 1 4

1 Q F Y 1 5

Cig volume growth (%)

1 5

. 5

1 5

. 7

1 6

. 0

1 6

. 5

1 7

. 0

1 7

. 5 2 0

. 8

1 8

. 6 2 0

. 3

1 9

. 5 2 0

. 5

2 0

. 3 2 1

. 1

2 0

. 2

1 8

. 0

1 5

. 9 1 8

. 8 2 0

. 8 2 1 . 4

3 Q F Y 1 0

4 Q F Y 1 0

1 Q F Y 1 1

2 Q F Y 1 1

3 Q F Y 1 1

4 Q F Y 1 1

1 Q F Y 1 2

2 Q F Y 1 2

3 Q F Y 1 2

4 Q F Y 1 2

1 Q F Y 1 3

2 Q F Y 1 3

3 Q F Y 1 3

4 Q F Y 1 3

1 Q F Y 1 4

2 Q F Y 1 4

3 Q F Y 1 4

4 Q F Y 1 4

1 Q F Y 1 5

Cig EBIT growth (%)

1 4

2 3

3 4

3 2

. 4

2 2

. 5 2 3

. 8

1 6

. 8

1 9

. 4

2 7

. 2

2 4

. 1

2 2

. 9

2 2

. 6 2 5

. 7 3 0

. 1

2 6

. 0

1 8

. 4

1 6

. 1

1 6

. 6

1 3

. 7

1 0

. 9

2 Q F Y 1 0

3 Q F Y 1 0

4 Q F Y 1 0

1 Q F Y 1 1

2 Q F Y 1 1

3 Q F Y 1 1

4 Q F Y 1 1

1 Q F Y 1 2

2 Q F Y 1 2

3 Q F Y 1 2

4 Q F Y 1 2

1 Q F Y 1 3

2 Q F Y 1 3

3 Q F Y 1 3

4 Q F Y 1 3

1 Q F Y 1 4

2 Q F Y 1 4

3 Q F Y 1 4

4 Q F Y 1 4

1 Q F Y 1 5

Sales Growth (%)

1 , 9

5 4

2 , 8

7 6

2 , 6

6 5

3 , 0

1 7

2 , 7

2 0

3 , 4

5 5

4 , 1

2 0

4 , 1

9 7

2 , 7

1 6

2 , 7

1 4

2 , 9

5 1

2 , 7

8 3

1 , 9

0 06.6

3.8

10.0

17.0

13.8

7.45.5

6.8 7.3 6.5

11.6 11.2

1.8

1 Q F Y 1 2

2 Q F Y 1 2

3 Q F Y 1 2

4 Q F Y 1 2

1 Q F Y 1 3

2 Q F Y 1 3

3 Q F Y 1 3

4 Q F Y 1 3

1 Q F Y 1 4

2 Q F Y 1 4

3 Q F Y 1 4

4 Q F Y 1 4

1 Q F Y 1 5

Incr Sales (INR m) Incr EBIT Margin (%)



29 July 2014 4

ITC

EBIT loss attributed to higher brand investments and low operating leverage

Source: MOSL, Company

Agri business: Boosted by non-Leaf tobacco trading

Agri revenues grew 50.6% YoY to INR32.9b on account of higher trading in

wheat and soya as leaf tobacco sales were impacted due to change in orderpattern. EBIT margin contracted by 300bp to 6.1% due to mix deterioration.

Agri margins down 300bp YoY due to mix deterioration


Agri contribution to revenue


Hotels: Revenues down marginally; material margin contraction

Hotels revenues declined marginally (down 0.5% YoY) impacted by lower

occupancies (shift in IPL out of India in 2014) and lower beverage sales during

elections.

Division reported EBIT loss of INR 121mn with INR143mn impact coming from

higher depreciation due to change in accounting standard. Additionally, it also

bore the start up costs of My Fortune property in Bengaluru during 1Q15.

The segment witnessed material EBIT margin contraction of 840bp.

- 8 9 3

- 6 6 9

- 7 3 6

- 6 7 8

- 7 6 3 - 5

5 9

- 4 6 8

- 1 6 7

- 3 8 8

- 3 0 3

- 2 4 0

1 1 9

- 1 8 9

- 1 2 7

1 0 4

4 3 1

- 1 5 6

1 Q F Y 1 1

2 Q F Y 1 1

3 Q F Y 1 1

4 Q F Y 1 1

1 Q F Y 1 2

2 Q F Y 1 2

3 Q F Y 1 2

4 Q F Y 1 2

1 Q F Y 1 3

2 Q F Y 1 3

3 Q F Y 1 3

4 Q F Y 1 3

1 Q F Y 1 4

2 Q F Y 1 4

3 Q F Y 1 4

4 Q F Y 1 4

1 Q F Y 1 5

EBIT (INR m)

9.2

16.6

12.4

7.510.1

12.810.6

6.99.1

16.1

11.5

7.36.1

1 Q F Y 1 2

2 Q F Y 1 2

3 Q F Y 1 2

4 Q F Y 1 2

1 Q F Y 1 3

2 Q F Y 1 3

3 Q F Y 1 3

4 Q F Y 1 3

1 Q F Y 1 4

2 Q F Y 1 4

3 Q F Y 1 4

4 Q F Y 1 4

1 Q F Y 1 5

EBIT Margins (%)

28.7%

24.0%

18.4%20.6%

25.4%28.3%

21.4%22.7%

29.8%

22.8%20.7%

21.9%

36.0%

1 Q F Y 1 2

2 Q F Y 1 2

3 Q F Y 1 2

4 Q F Y 1 2

1 Q F Y 1 3

2 Q F Y 1 3

3 Q F Y 1 3

4 Q F Y 1 3

1 Q F Y 1 4

2 Q F Y 1 4

3 Q F Y 1 4

4 Q F Y 1 4

1 Q F Y 1 5

Agri contri to ITC sales



29 July 2014 5

ITC

Hotel margins contract 840bp YoY


Hotel revenues declined marginally YoY


Paper: capacity utilization improves; margins contract 30bp

Paper and Paperboard business sales were up 10.8% to INR12.8b driven by

volumes and product mix. As per management, capacity utilization improvedduring the quarter

EBIT margins down 30bp YoY to 21.3% led by higher input costs while EBIT

posted 9.3% growth.

Paper segment sales grew at 10.8%

Source: MOSL, Company

Valuation and view: Reiterate Buy with TP of INR400

Continued robust Cig EBIT growth and margin expansion are the key highlights

of the quarter.

Within our overall cautious sector stance, we find ITC relatively better placed as

it offers the best earnings predictability driven by resilient Cig EBIT growth of

18-20%.

Given the unprecedented third consecutive year of ~20% excise hike in

cigarettes, we expect volume recovery in Cig to get delayed.

Maintain our top sector pick and reiterate Buy with a Target Price of INR400

(27x FY16E).

22.3 20.6

36.5

29.0

11.37.1

17.912.9

3.6 3.5

19.7 18.7

-4.9

1 Q F Y 1 2

2 Q F Y 1 2

3 Q F Y 1 2

4 Q F Y 1 2

1 Q F Y 1 3

2 Q F Y 1 3

3 Q F Y 1 3

4 Q F Y 1 3

1 Q F Y 1 4

2 Q F Y 1 4

3 Q F Y 1 4

4 Q F Y 1 4

1 Q F Y 1 5

EBIT Margins (%)

2 , 3

0 5

2 , 1

1 1

2 , 7

8 7

2 , 8

5 8

2 , 3

2 4

2 , 1

7 0

3 , 0

9 5

3 , 1

5 5

2 , 4

9 9

2

, 4 7 0

3 , 1

5 4

3 , 2

0 5

2 , 4

8 7 5 1 3

4 3 4 1

, 0 1 7

8

2 9

2 6 2

1 5 3 5

5 5

4 0 6

8 9

8 7 6 2

2

5 9

9

- 1 2 1

1 Q F Y 1 2

2 Q F Y 1 2

3 Q F Y 1 2

4 Q F Y 1 2

1 Q F Y 1 3

2 Q F Y 1 3

3 Q F Y 1 3

4 Q F Y 1 3

1 Q F Y 1 4

2 Q F Y 1 4

3 Q F Y 1 4

4 Q F Y 1 4

1 Q F Y 1 5

Sales (INR m) EBIT (INR m)

2 3

. 7

2 8

. 8

2 2

. 9

2 0

. 0 2 5

. 0

2 6

. 7

2 1

. 5

1 7

. 8

2 1

. 6

1 8

. 7

1 8

. 4

1 4

. 9

2 1

. 3

20.9

9.411.5

6.9

10.3

5.38.5

7.9

9.9 11.3

18.5 19.3

10.8

1 Q F Y 1 2

2 Q F Y 1 2

3 Q F Y 1 2

4 Q F Y 1 2

1 Q F Y 1 3

2 Q F Y 1 3

3 Q F Y 1 3

4 Q F Y 1 3

1 Q F Y 1 4

2 Q F Y 1 4

3 Q F Y 1 4

4 Q F Y 1 4

1 Q F Y 1 5

EBIT Margins (%) Sales growth (%)



29 July 2014 6

ITC

ITC: an investment profileCompany descriptionITC is an associate of BAT (British American Tobacco)

controls more than 2/3rd of the cigarette market in

India. ITC has emerged as a diversified conglomerate

with leading presence in Paperboards, Hotels andProcessed foods. E-Choupal, 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

Valuation and view

The stock trades at 27.7x FY15 and 23.9x FY16

estimates. Maintain Buy with TP of INR400 (27x

FY16E EPS).

Sector view

Sector stance remains cautious with preference for

companies with high earnings visibility and lowcompetitive intensity.

Lagged impact of GDP slowdown is reflecting in the

sector with moderation in volume growth.

Relatively we prefer ITC, Emami and Britannia.

Comparative valuations

ITC HLL Nestle

P/E (x) FY15E 27.7 37.0 40.3

FY16E 23.9 33.2 34.1

P/BV (x) FY15E 11.2 27.2 23.4

FY16E 10.4 23.9 20.1

EV/Sales (x) FY15E 7.0 4.6 4.9

FY16E 6.1 4.1 4.3

EV/EBITDA (x) FY15E 18.6 39.7 19.5

FY16E 16.0 35.6 17.8

EPS: MOSL forecast v/s consensus (INR)

MOSL Consensus Variation

Forecast Forecast (%)

FY15 12.9 12.9 0

FY16 14.9 15.2 -1.8

Target price and recommendation

Current Target Upside Reco.

Price (INR) Price (INR) (%)

357 400 12.0 Buy

Shareholding pattern (%)Jun-14 Mar-14 Jun-13

Promoter 0.0 0.0 0.0

DII 35.0 34.7 33.8

FII 19.5 19.5 19.9

Others 45.5 45.8 46.3

Note: FII Includes depository receipts

Stock performance (1-year)



29 July 2014 7

ITC

Financials and valuation



29 July 2014 8

ITC

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Analyst ownership of the stock No

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amended (the "Exchange Act") and interpretations thereof by the U.S. Securities and Exchange Commission ("SEC") in order to conduct business with Institutional Investors based in the U.S., MOSL has

entered into a chaperoning agreement with a U.S. registered broker-dealer, Motilal Oswal Securities International Private Limited. ("MOSIPL"). Any business interaction pursuant to this report will have to beexecuted within the provisions of this chaperoning agreement.

The Research Analysts contributing to the report may not be registered /qualified as research analyst with FINRA. Such research analyst may not be associated persons of the U.S. registered broker-dealer,

MOSIPL, and therefore, may not be subject to NASD rule 2711 and NYSE Rule 472 restrictions on communication with a subject company, public appearances and trading securities held by a research

analyst account.

For SingaporeMotilal Oswal Capital Markets Singapore Pte Limited is acting as an exempt financial advisor under section 23(1)(f) of the Financial Advisers Act(FAA) read with regulation 17(1)(d) of the Financial Advisors

Regulations and is a subsidiary of Motilal Oswal Securities Limited in India. This research is distributed in Singapore by Motilal Oswal Capital Markets Singapore Pte Limited and it is only directed in Singapore

to accredited investors, as defined in the Financial Advisers Regulations and the Securities and Futures Act (Chapter 289), as amended from time to time.

In respect of any matter arising from or in connection with the research you could contact the following representatives of Motilal Oswal Capital Markets Singapore Pte Limited:

Anosh Koppikar Kadambari Balachandran

Email:[email protected] Email : [email protected]

Contact(+65)68189232 Contact: (+65) 68189233 / 65249115Office Address:21 (Suite 31),16 Collyer Quay,Singapore 04931

Motilal Oswal Securities LtdMotilal Oswal Tower, Level 9, Sayani Road, Prabhadevi, Mumbai 400 025

Phone: +91 22 3982 5500 E-mail: [email protected]

MotilalOswal ITC 30July 2014

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