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Edelweiss Securities Limited

The 6% YoY dip in ITC’s Q2FY18 cigarette volumes came bang in line with our estimate, while 7.2%, 3.6% and 5.6% YoY revenue, EBITDA and PAT growth, respectively, was marginally ahead. To counter the GST rate, the company effected price hikes of ~10-11% YoY. Underlying FMCG sales grew 10% YoY with food and personal care segments performing well on revenue as well as margin fronts; retail, however, remained muted (similar to performance of other retailers). The tax hike effected in GST regime is likely to continue to impact cigarette volumes (as has been the case historically). Maintain ‘HOLD’.

Cigarette volumes decline; FMCG sustains good run

Cigarette volumes declined 6% YoY on a base of 3% growth. This was expected

considering the hike in effective tax rate in GST regime. In order to offset higher GST

rate, ITC has hiked prices ~10-11% YoY. While volumes were comparatively better for

64mm portfolio (contributes ~38% to overall sales), premium portfolio is facing some

stress. Underlying sales of the FMCG segment jumped 10% YoY with profitability

improvement driven by enhanced scale, improved realisation and mix enrichment.

Rest of the businesses: Soft

Hotel’s performance was impacted by highway liquor ban and renovation work at ITC

Maurya & ITC Maratha properties. Room revenue however grew at a healthy pace on

account of increase in ARRs. Agri business remained subdued owing to limited trading

opportunities in agri commodities and shortage of leaf tobacco. Profitability was

impacted by steep increase in leaf farm prices and adverse crop quality. Paperboards,

Paper & Packaging segment registered a robust growth of 18% YoY driven by richer

product mix and structural cost saving initiatives. Improvement in profitability was also

aided by benign input costs.

Outlook and valuations: Uncertainty looms; maintain ‘HOLD’

With per capita consumption 1/18th China’s, the cigarette opportunity in India remains

attractive over the long term. However, the high GST rate will pressurise volumes due

to resultant price hikes. We maintain ‘HOLD/SP’ and value ITC on SOTP on FY19E to

arrive at target price of INR307. The stock is currently trading at 25.8x FY19E EPS.

RESULT UPDATE

ITC Cigarette volumes soft; FMCG holds fort

COMPANYNAME

EDELWEISS 4D RATINGS

Absolute Rating HOLD

Rating Relative to Sector Performer

Risk Rating Relative to Sector Medium

Sector Relative to Market Underweight

MARKET DATA (R: ITC.BO, B: ITC IN)

CMP : INR 269

Target Price : INR 307

52-week range (INR) : 368 / 222

Share in issue (mn) : 12,180.3

M cap (INR bn/USD mn) : 3,281 / 50,429

Avg. Daily Vol.BSE/NSE(‘000) : 12,981.8

SHARE HOLDING PATTERN (%)

Current Q1FY18 Q4FY17

Promoters *

- - -

MF's, FI's & BK’s 36.3 35.8 35.7

FII's 19.1 20.0 20.0

Others 44.6 44.2 44.2

* Promoters pledged shares (% of share in issue)

: NIL

PRICE PERFORMANCE (%)

Stock Nifty

EW FMCG Index

1 month 4.2 6.0 5.1

3 months (6.7) 3.0 1.0

12 months 10.8 19.8 21.1

Abneesh Roy +91 22 6620 3141

[email protected]

Alok Shah +91 22 6620 3040

[email protected]

Rajiv Berlia +91 22 6623 3377

[email protected]

India Equity Research| Consumer Goods

October 27, 2017

Financials* (INR mn)

Year to March Q2FY18 Q2FY17 % change Q1FY18 % change FY17 FY18E FY19E

Total op inc. 103,141 96,607 6.8 99,547 3.5 428,036 443,542 492,386

EBITDA 37,615 36,300 3.6 37,464 0.4 154,359 160,659 182,583

Adj. profit 26,398 25,000 5.6 25,605 3.1 104,772 111,908 126,737

Adj Dil. EPS (INR) 2.2 2.1 5.2 2.1 3.1 8.6 9.2 10.4

Diluted P/E (x) 31.3 29.2 25.8

EV/EBITDA (x) 20.4 19.5 17.0

ROAE (%) 23.4 23.0 24.0

*Quarterly numbers are standalone; Annual numbers are consolidated

Consumer Goods

2 Edelweiss Securities Limited

Table 1: ITC segmental snapshot

Note: Q4FY17 nos. for Cigarette, FMCG-Others, are not strictly comparable owing to adoption of IND-AS from Q1FY17. Revenue growth and EBIT

margin for Cigarette is not comparable for Q1FY18 owing to GST based accounting

Source: Company, Edelweiss research

Cigarettes: Volumes decline as expected

Cigarette business saw volume decline of 6% YoY. Legal cigarette industry volumes continue

to remain under severe pressure due to the sharp increase in tax incidence under the GST

regime.

Pressure on legal cigarette industry escalated significantly on account of steep increase in

tax incidence and additional burden on business due to GST transition costs. While the

intention of the Government was to correct an apparent anomaly in cigarette taxation

under the new tax regime announced earlier on account of the removal of the cascading

effect of excise duty which existed in the pre GST regime, the upward revision resulted in

significantly higher tax incidence on cigarettes compared to the pre-GST scenario which is

not in keeping with the fundamental principle of revenue neutrality. In fact, the combined

impact of increase in excise duty announced by the Union Budget 2017 and the revision in

GST Compensation Cess resulted in an incremental tax burden of over 20% on ITC. It is

pertinent to note that the cumulative growth in tax incidence on cigarettes, after cognising

for the latest increase in Cess rates, stands at a staggering 202% since FY12.

Further, the cigarette business had to contend with additional costs associated with the

transition to GST due to non-availability of additional duty surcharge credit on transition

stocks and the unanticipated revision of GST Compensation Cess. It is apprehended that the

sharp increase in tax incidence on cigarettes will further increase the huge tax arbitrage.

This will severely undermine the legal cigarette industry and adversely impact tobacco

farmers and the revenue objective of the Government. According to an independent study

conducted by Euromonitor International, India is today the 4th largest market for illegal

cigarettes in the world. It isestimated that almost 68% of the tobacco consumed in the

country remains outside the tax net on account of evasion. Legal cigarettes account for

only about 11% of total tobacco consumption in the country, they contribute more than

87% of tax revenue from the tobacco sector. Despite the extremely challenging operating

(%) Q3FY15 Q4FY15 Q1FY16 Q2FY16 Q3FY16 Q4FY16 Q1FY17 Q2FY17 Q3FY17 Q4FY17 Q1FY18 Q2FY18

FMCG-Cigarettes 0.6 3.2 (1.2) 1.6 5.7 10.2 6.4 7.1 2.2 4.8 6.6 NA

FMCG-Others 11.4 10.9 12.2 7.1 7.1 5.4 9.5 13.3 3.4 6.5 9.0 5.0

Hotels 4.7 8.1 15.7 10.9 4.5 4.8 (0.2) 2.5 7.3 6.5 6.1 1.0

Agribusiness (10.6) (28.8) (29.4) (10.4) (7.3) 26.5 20.2 2.0 12.9 6.2 (1.2) 4.7

Paperboards, paper & packaging (4.7) (4.6) (1.8) (2.3) 5.1 3.0 (1.6) - (0.1) 4.4 2.8 (1.7)

FMCG-Cigarettes 8.8 6.0 2.2 3.0 3.4 11.5 8.0 8.4 1.7 8.0 9.0 2.3

FMCG-Others 10.7 12.6 48.9 (7.7) 63.6 46.0 (43.3) (70.6) (204.9) (29.3) (220.1) (728.5)

Hotels (53.8) (29.8) (40.0) (42.2) (10.0) 1.5 (116.8) NM 63.2 56.9 335.2 552.3

Agribusiness 16.3 13.0 15.5 (1.4) (3.1) 6.1 1.5 1.0 0.7 (20.8) (0.9) (13.7)

Paperboards, paper & packaging (7.7) 1.1 (7.4) (13.6) 12.7 6.5 (2.7) 10.8 2.1 18.3 3.9 18.2

FMCG-Cigarettes 69.7 64.3 67.0 37.3 68.1 65.1 36.5 37.7 36.6 36.4 37.3 NA

FMCG-Others 0.5 1.9 (0.4) (0.5) 0.8 2.6 (0.2) (0.1) (0.8) 1.9 0.2 0.7

Hotels 8.7 12.1 (2.5) (1.9) 7.5 11.8 0.4 0.2 11.4 17.3 1.7 1.4

Agribusiness 14.9 11.5 10.1 15.9 15.6 9.7 8.5 15.8 14.2 7.0 8.5 13.0

Paperboards, paper & packaging 17.8 15.8 20.1 15.7 19.1 16.4 18.7 17.4 18.4 17.5 18.9 20.9

Overall EBIT margins 38.4 34.3 38.3 27.6 38.5 34.9 26.5 27.7 26.3 25.2 27.5 39.8

EBIT margins

EBIT growth YoY

Revenues growth YoY

ITC


environment, ITC has sustained its leadership position in the industry through relentless

focus on delivering world-class products, continuous innovation & value addition and best-

in-class execution.

Chart 1: Cigarette volumes


FMCG-others

ITC’s FMCG others segment revenue grew 10% YoY on a comparable basis despite muted

demand environment and disruption due to GST transition. This growth was driven by

strong performance of the Branded Packaged Foods and Personal Care businesses. However

ongoing restructuring of retail & trade footprint in the Lifestyle Retailing Business partially

offset strong performance of packaged foods and personal care segment.

The Branded Packaged Foods posted healthy growth in revenue led by atta, snacks and

noodles. In Staples, Snacks and Meals Business, ‘Aashirvaad’ atta continued to perform well

consolidating its leadership position across markets. The ‘Bingo!’ range of snack foods

recorded robust growth driven by ‘Yumitos’ potato chips and ‘Tedhe Medhe’. Several

innovative products such as Tedhe Medhe ‘Lime’ & ‘Tomato Masti’ and Mad Angles

‘Kasundi’, tailored to suit regional tastes and preferences were launched during Q2FY18.

In the Instant Noodles category, YiPPee! continued to perform well leveraging its superior

value proposition anchored on best-in-class product quality, safety and taste.

In the Confections Business, ‘Sunfeast’ biscuits performed well with ‘Dark Fantasy Choco

Fills’, ‘Sunfeast Marie’ and ‘Mom’s Magic’ continuing to enhance market standing. During

the quarter, company launched ‘Dark Fantasy Creations’ - a campaign themed around

‘making exquisite desserts with Dark Fantasy’ in collaboration with ITC Hotels. Product

portfolio was augmented with the introduction of innovative products anchored on the

health vector in select markets viz. ‘Farmlite Active Protein Power’, ‘Farmlite Digestive High

Fibre’ biscuits and ‘Sunfeast A2 Naat Maad Paal’ biscuits. Portfolio premiumisation

continued in the Confectionery category.

In the Dairy and Beverages business, B Natural juices continued to register strong growth.

The recently launched, first-to-market ‘100% Not from Concentrate Pomegranate juice’

(20.0)

(14.0)

(8.0)

(2.0)

4.0

10.0

Q2

FY1

3

Q3

FY1

3

Q4

FY1

3

Q1

FY1

4

Q2

FY1

4

Q3

FY1

4

Q4

FY1

4

Q1

FY1

5

Q2

FY1

4

Q3

FY1

5

Q4

FY1

5

Q1

FY1

6

Q2

FY1

6

Q3

FY1

6

Q4

FY1

6

Q1

FY1

7

Q2

FY1

7

Q3

FY1

7

Q4

FY1

7

Q1

FY1

8

Q2

FY1

8

(Cig

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Consumer Goods


continued to garner impressive consumer franchise in the health and wellness segment. In

Dairy, ‘Aashirvaad Svasti’ ghee was extended to the Delhi & NCR markets during the quarter.

The Personal care business continues to focus on product mix enrichment. The ‘Engage On’

range of pocket perfumes recorded robust growth on the back of its unique value

proposition. The Fiama shower gel range and Vivel Lotus Oil soap continued to garner

impressive traction. During the quarter, company also launched moisturising skin cream

under the recently acquired ‘Charmis’ brand.

Company made steady progress during the quarter towards setting up state-of-the-art

owned integrated consumer goods manufacturing facilities at Panchla (West Bengal) and

Kapurthala (Punjab). These facilities are expected to commence operations in phases,

beginning Q3FY18.

Paper

Paperboards, Paper & Packaging segment registered a robust growth of 18% YoY driven by

richer product mix and structural cost saving initiatives. Improvement in profitability was

also aided by benign input costs. Growth in Segment Revenue, however, remained muted

on account of subdued demand environment prevailing in the FMCG and legal Cigarette

industry.

Capacity utilisation of India’s first Bleached Chemical Thermo Mechanical Pulp mill (BCTMP),

recently commissioned was ramped up progressively thereby reducing dependence on pulp

import. pulp. Capacity expansion projects in the value added Paperboard and Décor

segments are also making satisfactory progress.

Agri

The performance of Agri Business segment was impacted by shortage of leaf tobacco AP due

to lower crop output on account of drought in 2016 & adverse crop quality, relative strength

of INR vis-à-vis currencies of competing origins and limited trading opportunities in other

agri-commodities.

Hotel

During the quarter, room revenue grew at a healthy pace on account of increase in ARRs.

However, Food & Beverage revenue growth was impacted by highway liquor ban which

prevailed for a significant part of the quarter. While segment results improved sequentially,

it remained muted due to the challenging business context and gestation costs of the

recently commissioned ITC Grand Bharat, Gurgaon. Renovation work at ITC Maurya and ITC

Maratha also weighed on overall performance.

ITC


Table 2: Segmental Performance


YoY and QoQ numbers not comparable owing to GST based accounting in Q2FY18 which was not

in the base quarter.

Outlook: Uncertainty looms; maintain ‘HOLD’

The government’s move to increase overall taxation under the new GST rate has come as a

surprise—against benefit envisaged under previous GST rates declared by the government.

This, along with the ~6% hike in budget, has resulted in overall tax burden of ~20% for the

company—ITC’s cigarette volumes had come under tremendous pressure during FY13-16

when the government had increased excise duty on cigarette by ~18% on an average

(volumes were down 20%). Government’s statement that it is not right that demerit goods

should benefit due to decrease in taxation indicates government’s tough stance on the sin

sector. Also, with cigarette under GST, it remains a key source for the government to

address any deficit it may have due to GST implementation and hence uncertainly looms in

terms of taxation.

However, ITC has recently increased prices across cigarette segments which are lower than

what we initially anticipated—price increase in 84mm cigarette is ~7.1%, in 69mm it is

~6.7%, while in 74mm it is 4.4%. Price increase in 64mm is varied—with ~20% hike in some

brands (example Bristol). This highlights that ITC has been cautious in hiking prices across

segments, keeping in mind the impact on volumes. We remain positive on ITC over the long

Year to March - Net Revenues (INR mn) Q2FY18 Q2FY17 % growth YoY Q1FY18 % growth QoQ

FMCG-Cigarettes 45,542 85,285 NA 87,742 NA

FMCG-Others 28,041 26,717 5.0 26,009 7.8

Hotels 3,002 2,973 1.0 3,049 (1.5)

Agribusiness 19,680 18,801 4.7 27,605 (28.7)

Paperboards, paper & packaging 13,094 13,314 (1.7) 13,598 (3.7)

Less: Inter-segment revenue 12,597 12,176 3.5 20,781 (39.4)

Net income (Excl other income) 96,762 134,914 (28.3) 137,222 (29.5)

FMCG-Cigarettes 32,917 32,169 2.3 32,741 0.5

FMCG-Others 205 (33) (728.5) 54 NM

Hotels 42 7 552.3 53 (20.2)

Agribusiness 2,562 2,970 (13.7) 2,351 9.0

Paperboards, paper & packaging 2,742 2,320 18.2 2,573 6.6

Profit before tax (Excl other income) 38,468 37,432 2.8 37,773 1.8

Year to March - Margin Q2FY18 Q2FY17 bps exp y-o-y Q1FY18 bps exp q-o-q

FMCG-Cigarettes 72.3 37.7 NA 37.3 NA

FMCG-Others 0.7 (0.1) 85 0.2 52

Hotels 1.4 0.2 119 1.7 (33)

Agribusiness 13.0 15.8 (278) 8.5 450

Paperboards, paper & packaging 20.9 17.4 352 18.9 202

Margin 39.8 27.7 1,201 27.5 1,223

EBIT (INR mn)

Consumer Goods


term as per capita consumption of cigarettes in India is 1/18th of China, while the proportion

of legal cigarettes in overall tobacco consumption remains low at 11%.

We maintain ‘HOLD/ Sector Performer’ and value ITC on SOTP basis on FY19E to arrive at a

target price of INR307.

Table 3: SOTP valuation

Source: Edelweiss research

Chart 2: 1 year forward price to earning

Source: Bloomberg, Edelweiss research

FY19E Methodology

Target

multiple

Per share

contribution

Cigs EPS 8.6 P/E 27x 232

FMCG Sales/Share 9.6 P/S 4x 39

Hotels EBITDA/Share 0.3 EV/EBITDA 15x 5

Agri EBITDA/Share 1.0 EV/EBITDA 10x 10

Paper EBITDA/Share 1.1 EV/EBITDA 10x 11

Net cash 11

307Value of share

0

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ITC


Financial snapshot (INR mn) Year to March Q2FY18 Q2FY17 % change Q1FY18 % change YTD18 FY18E FY19E

Net revenues 102,264 95,355 7.2 98,765 3.5 201,029 439,943 488,648 Other operating income 877 1,252 (30.0) 782 12.2 1,659 3,599 3,738

Total operating Income 103,141 96,607 6.8 99,547 3.6 202,688 443,542 492,386

Raw material costs 43,564 36,714 18.7 38,360 13.6 81,924 172,458 186,663

Staff costs 6,065 6,003 1.0 6,746 (10.1) 12,812 35,635 40,069

Other expenses 15,897 17,590 (9.6) 16,976 (6.4) 32,873 74,790 83,070

Total expenditure 21,963 23,593 (6.9) 23,723 (7.4) 45,685 110,426 123,139

EBITDA 37,615 36,300 3.6 37,464 0.4 75,079 160,659 182,583

Depreciation 2,824 2,684 5.2 2,682 5.3 5,506 11,079 11,538

EBIT 34,791 33,616 3.5 34,782 0.0 69,573 149,579 171,046

Other income 4,942 4,754 4.0 4,768 3.7 9,710 20,394 21,182

Interest 290 107 170.6 104 179.5 394 509 307

Add: Prior period items

Add: Exceptional items

Profit before tax 39,443 38,262 3.1 39,446 0.0 78,889 169,464 191,921

Provision for taxes 13,045 13,262 (1.6) 13,841 (5.8) 26,885 57,618 65,253

Minority interest (62) (69)

Associate profit share

Reported net profit 26,398 25,000 5.6 25,605 3.1 52,003 111,908 126,737

Adjusted Profit 26,398 25,000 5.6 25,605 3.1 52,003 111,908 126,737

Diluted shares (mn) 12,152 12,112 12,152 12,152 12,147 12,147

Adjusted Diluted EPS 2.2 2.1 5.2 2.1 3.1 4.3 9.2 10.4

As % of net revenues

COGS 42.2 38.0 38.5 40.4 38.9 37.9

Employee cost 5.9 6.2 6.8 6.3 8.0 8.1

Other expenditure 15.4 18.2 17.1 16.2 16.9 16.9

EBITDA 36.5 37.6 37.6 37.0 36.2 37.1

EBIT 33.7 34.8 34.9 34.3 33.7 34.7

PBT 38.2 39.6 39.6 38.9 38.2 39.0

Adjusted net profit 25.6 25.9 25.7 25.7 25.2 25.7

Tax rate 33.1 34.7 35.1 34.1 34.0 34.0

Consumer Goods


Company Description

ITC is one of the largest consumer companies in India with businesses spanning cigarettes,

hotels, paper and agri-commodities. Its branded foods division with products such as

staples, confectionery, noodle, snacks and biscuits is doing well and gaining strong market

share across many categories. ITC has been successful in foods and constantly expanding its

personal product portfolio (soaps, shampoos, deo, talc). Though the cigarettes division is

still the major source of revenue, other businesses (agri, paper, hotel) have grown over the

years. Recently ITC has entered the nicotine gum space with the launch of Kwiknic.

Investment Theme

ITC has sustained its market leadership in the cigarettes space and delivered robust

performance (both topline and profitability) amidst heavy taxation burden (three

consecutive years of steep excise hike on cigarettes in Union Budget) and regulations with

constant focus on innovation and distribution. The e-Choupal network established by ITC

gives it a phenomenal sourcing edge, which has helped it transform into a consumer giant.

ITC’s FMCG business is likely to remain profitable in FY15 (turned profitable in FY14 with

overall profit of INR220mn). Paper business helps address packaging needs of FMCG

business with consistent quality and comparatively lower costs. Agri business has seen

robust performance aided by tobacco leaf and traded commodities exports; provides

strategic sourcing support to the company’s cigarette and branded packaged foods

businesses by ensuring high quality supplies. We expect ITC’s cigarette EBIT growth to

remain resilient and FMCG’s profitability surge to sustain. With a new business-friendly

government at the Centre, we expect hotel, paper and FMCG growth rates to improve over

ensuing years.

Key Risks

High incidence of taxation and strict regulatory norms on cigarette usage in public and

packaging poses threat to cigarette volume growth.

Growing contraband market of cigarettes also poses significant threat for the cigarettes

business.

Slowdown in macro-economic environment is a major threat to hotels business.

SUUTI stake sale is a likely overhang on the stock.


ITC

Financial Statements

Income statement (INR mn)

Year to March FY16 FY17 FY18E FY19E

Gross revenues 546,732 582,880 622,872 679,719

Excise duties 158,690 159,279 182,929 191,072

Net revenue 388,042 423,600 439,943 488,648

Other Operating Income 3,879 4,436 3,599 3,738

Total operating income 391,921 428,036 443,542 492,386

Materials costs 135,685 160,492 172,458 186,663

Gross profit 256,236 267,545 271,084 305,722

Manufacturing expenses 68,369 68,761 65,991 72,320

Employee costs 34,410 36,317 35,635 40,069

Ad. & sales costs 8,949 8,107 8,799 10,750

EBITDA 144,509 154,359 160,659 182,583

Depreciation 10,774 11,528 11,079 11,538

EBIT 133,735 142,831 149,579 171,046

Add: Other income 15,307.99 17,615.3 20,393.66 21,182.42

Less: Interest Expense 536 243 509 307

Profit Before Tax 148,506 160,204 169,464 191,921

Less: Provision for Tax 53,582 55,491 57,618 65,253

Less: Minority Interest (84) (60) (62) (69)

Reported Profit 95,009 104,772 111,908 126,737

Adjusted Profit 95,009 104,772 111,908 126,737

Shares o /s (mn) 12,040 12,147 12,147 12,147

Adjusted Basic EPS 7.9 8.6 9.2 10.4

Diluted shares o/s (mn) 12,108 12,179 12,147 12,147

Adjusted Diluted EPS 7.8 8.6 9.2 10.4

Adjusted Cash EPS 8.8 9.6 10.1 11.4

Dividend per share (DPS) 5.7 5.6 5.0 5.7

Dividend Payout Ratio(%) 86.1 78.1 65.0 65.0

Common size metrics


Materials costs 34.6 37.5 38.9 37.9

Staff costs 8.8 8.5 8.0 8.1

Ad. & sales costs 2.3 1.9 2.0 2.2

Other expenses 17.4 16.1 14.9 14.7

EBITDA margins 36.9 36.1 36.2 37.1

EBIT margins 34.1 33.4 33.7 34.7

Net Profit margins 24.2 24.5 25.2 25.8

Growth ratios (%)


Revenues 1.0 9.2 3.9 11.1

EBITDA 1.8 6.8 4.1 13.6

PBT 3.4 7.9 5.8 13.3

Adjusted Profit (1.7) 10.3 6.8 13.3

EPS (1.9) 9.6 7.1 13.3

Key Assumptions


Macro

GDP(Y-o-Y %) 7.9 6.6 7.1 7.7

Inflation (Avg) 4.9 4.5 4.0 4.5

Repo rate (exit rate) 6.8 6.3 5.8 5.8

USD/INR (Avg) 65.5 67.1 66.0 66.0

Company

Revenue growth (Y-o-Y %)

Cigs-Volume growth (dom) (8.5) 1.5 (4.0) (2.0)

Cigs-Price change (dom) 15.9 9.3 10.0 9.0

FMCG sales growth (dom) 7.7 8.1 11.2 14.9

Hotel sales growth (dom) 8.5 4.2 8.0 10.0

Agri sales growth (dom) (22.6) 21.8 5.0 10.0

Paper sales growth (dom) 5.9 (0.7) 6.0 10.0

Overall growth (%) 1.0 9.2 3.9 11.1

Cig margin (dom) 38.2 39.0 39.0 39.0

FMCG margin (dom) 0.6 0.4 1.0 2.0

Hotel margin (dom) 4.8 9.0 10.0 10.0

Agri margin (dom) 21.3 18.5 18.5 18.5

Paper margin (dom) 23.6 25.0 24.0 24.0

EBITDA margin assumpn

COGS as % of sales 34.6 37.5 38.9 37.9

A&P as % of sales 2.3 1.9 2.0 2.2

Employee cost (% of rev) 8.8 8.5 8.0 8.1

Financial assumptions

Tax rate (%) 36.1 34.6 34.0 34.0

Capex (INR mn) 10,529 19,337 16,701 25,000

Debtor days 18 19 18 18

Inventory days 239 203 230 230

Payable days 60 57 60 60

Cash conversion cycle 197 165 188 188

Dep. (% gross block) 4.6 6.8 5.7 5.2

Dividend payout 86.1 78.1 65.0 65.0

Yield on cash 10.6 11.0 12.0 11.5


Consumer Goods

Peer comparison valuation

Market cap Diluted P/E (X) EV / EBITDA (X) ROAE (%)

Name (USD mn) FY18E FY19E FY18E FY19E FY18E FY19E

ITC 50,429 29.2 25.8 19.5 17.0 23.0 24.0

Colgate 4,421 44.9 37.4 27.4 23.2 46.7 48.6

Dabur 8,744 41.2 34.4 35.5 29.3 26.3 27.2

Emami 4,340 72.9 49.2 35.3 27.7 20.9 27.2

Hindustan Unilever 41,926 51.2 43.9 35.1 30.0 75.7 81.1

Nestle Ltd 10,627 57.3 45.8 32.2 26.3 38.4 44.1

Source: Edelweiss research

Cash flow metrics


Operating cash flow 97,990 106,273 106,977 129,494

Investing cash flow (39,208) (32,509) (16,866) (25,000)

Financing cash flow (56,125) (73,010) (73,349) (82,786)

Net cash Flow 2,657 754 16,762 21,708

Capex (11,813) (19,337) (16,701) (25,000)

Dividend paid (51,327) (69,941) (72,740) (82,379)

Profitability and efficiency ratios


ROAE (%) 25.3 23.4 23.0 24.0

ROACE (%) 39.6 35.7 34.9 36.4

Inventory Days 246 203 230 230

Debtors Days 18 19 18 18

Payable Days 64 57 60 60

Cash Conversion Cycle 200 165 188 188

Current Ratio 4.4 4.2 4.6 4.8

Adjusted Debt/Equity - - - -

Interest Coverage Ratio 249.5 587.8 293.9 556.8

Operating ratios


Total Asset Turnover 1.0 0.9 0.9 0.9

Fixed Asset Turnover 2.6 2.8 2.6 2.7

Equity Turnover 1.0 1.0 0.9 0.9

Valuation parameters


Adj. Diluted EPS (INR) 7.8 8.6 9.2 10.4

Y-o-Y growth (%) (1.9) 9.6 7.1 13.3

Adjusted Cash EPS (INR) 8.8 9.6 10.1 11.4

Diluted P/E (x) 34.3 31.3 29.2 25.8

P/B (x) 7.6 7.1 6.5 6.0

EV / Sales (x) 8.0 7.3 7.0 6.3

EV / EBITDA (x) 21.6 20.4 19.5 17.0

Dividend Yield (%) 2.1 2.1 1.9 2.1

Balance sheet (INR mn)

As on 31st March FY16 FY17 FY18E FY19E

Share capital 8,047 12,147 12,147 12,147

Reserves & Surplus 418,748 451,982 491,150 535,508

Shareholders' funds 426,795 464,129 503,297 547,655

Minority Interest 2,609 2,947 2,885 2,817

Short term borrowings 571 273 213 154

Long term borrowings 267 184 144 104

Total Borrowings 838 457 357 257

Long Term Liabilities 1,863 2,174 2,174 2,174

Def. Tax Liability (net) 18,395 18,338 18,338 18,338

Sources of funds 450,500 488,046 527,052 571,241

Gross Block 160,039 179,376 209,376 234,376

Net Block 144,594 152,623 171,708 185,170

Capital work in progress 25,597 37,299 24,000 24,000

Intangible Assets 6,473 6,312 6,312 6,312

Total Fixed Assets 176,664 196,234 202,020 215,482

Non current investments 51,258 66,940 66,940 66,940

Cash and Equivalents 126,851 132,998 149,760 171,468

Inventories 91,294 87,412 108,672 117,624

Sundry Debtors 19,172 24,743 21,696 24,098

Loans & Advances 210 153 153 153

Other Current Assets 51,065 50,504 50,504 50,504

Current Assets (ex cash) 161,741 162,812 181,025 192,379

Trade payable 23,393 26,593 28,349 30,684

Other Current Liab 42,621 44,344 44,344 44,344

Total Current Liab 66,013 70,937 72,693 75,028

Net Curr Assets-ex cash 95,728 91,875 108,332 117,351

Uses of funds 450,500 488,046 527,052 571,241

BVPS (INR) 35.2 38.1 41.4 45.1

Free cash flow (INR mn)


Reported Profit 95,009 104,772 111,908 126,737

Add: Depreciation 10,774 11,528 11,079 11,538

Interest (Net of Tax) 343 159 336 203

Others (5,365) (10,630) 112 38

Less: Changes in WC 2,770 (444) 16,458 9,018

Operating cash flow 97,990 106,273 106,978 129,496

Less: Capex 11,813 19,337 16,701 25,000

Free Cash Flow 86,178 86,937 90,277 104,496


ITC

Insider Trades

Reporting Data Acquired / Seller B/S Qty Traded

19 May 2017 Rajeev Pathak Sell 25000.00

19 May 2017 D. M. Hazarika Sell 15000.00

04 May 2017 G. Vijaya Kumar Sell 30000.00

03 May 2017 Barun Kar Sell 17000.00

03 May 2017 A. Madhusudhana Rao Sell 32345.00

*in last one year

Bulk Deals Data Acquired / Seller B/S Qty Traded Price

07 Feb 2017 Lic A/C Lic Allocation Contra Fund Buy 80840763 275.85

07 Feb 2017 Administrator Of The Specified Undertaking Of The Uti-1964 Sell 80840763 275.85

07 Feb 2017 Administrator Of The Specified Undertaking Of The Unit Trus Sell 80840763 275.85

07 Feb 2017 Uti Admnstr Of The Specified Undertaking Of Uti-Unit Schm 64 Sell 80840763 275.85

07 Feb 2017 Life Insurance Corporation (Scheme 5) Buy 80840763 275.85

07 Feb 2017 Life Insurance Corporation Of India Ltd Buy 80840763 275.85

*in last one year

Holding – Top10 Perc. Holding Perc. Holding

Tobacco manufacturer 24.45 Life insurance corp 16.22

Unit trust of india 9.05 Myddleton invest coy 3.99

General insurance co 1.75 New india assurance 1.66

Standard life aberde 1.51 Oriental insurance c 1.33

Gic private limited 1.31 Rothmans intl enterp 1.27

*in last one year

Additional Data

Directors Data Yogesh Chander Deveshwar Chairman Nakul Anand Executive Director

Sanjiv Puri CEO and Executive Director R Tandon Executive Director

Zafir Alam Non-Executive Director Sunil Behari Mathur Non-Executive Director

Pillappakkam Bahukutumbi Ramanujam Non-Executive Director Sahibzada Syed Habib-ur-Rehman Non-Executive Director

Meera Shankar Non-Executive Director Suryakant Balkrishna Mainak Non-Executive Director

S Banerjee Non-Executive Director Nirupama Rao Non-Executive Director

A Duggal Non-Executive Director

Auditors - Deloitte Haskins & Sells, Kolkata

*as per last annual report


Company Absolute

reco

Relative

reco

Relative

risk

Company Absolute

reco

Relative

reco

Relative

Risk

Asian Paints BUY SO M Bajaj Corp HOLD SU H

Berger Paints BUY SO L Britannia Industries BUY SO L

Colgate HOLD SP M Dabur BUY SO M

Emami BUY SO H GlaxoSmithKline Consumer

Healthcare

HOLD SU M

Godrej Consumer BUY SO H Hindustan Unilever HOLD SP L

ITC HOLD SP M Marico BUY SO M

Nestle Ltd HOLD SP L Pidilite Industries BUY SO M

United Spirits HOLD SP H

RATING & INTERPRETATION

ABSOLUTE RATING

Ratings Expected absolute returns over 12 months

Buy More than 15%

Hold Between 15% and - 5%

Reduce Less than -5%

RELATIVE RETURNS RATING

Ratings Criteria

Sector Outperformer (SO) Stock return > 1.25 x Sector return

Sector Performer (SP) Stock return > 0.75 x Sector return

Stock return < 1.25 x Sector return

Sector Underperformer (SU) Stock return < 0.75 x Sector return

Sector return is market cap weighted average return for the coverage universe

within the sector

RELATIVE RISK RATING

Ratings Criteria

Low (L) Bottom 1/3rd percentile in the sector

Medium (M) Middle 1/3rd percentile in the sector

High (H) Top 1/3rd percentile in the sector

Risk ratings are based on Edelweiss risk model

SECTOR RATING

Ratings Criteria

Overweight (OW) Sector return > 1.25 x Nifty return

Equalweight (EW) Sector return > 0.75 x Nifty return

Sector return < 1.25 x Nifty return

Underweight (UW) Sector return < 0.75 x Nifty return


ITC

Edelweiss Securities Limited, Edelweiss House, off C.S.T. Road, Kalina, Mumbai – 400 098.

Board: (91-22) 4009 4400, Email: [email protected]

Aditya Narain

Head of Research

[email protected]

Coverage group(s) of stocks by primary analyst(s): Consumer Goods

Asian Paints, Bajaj Corp, Berger Paints, Britannia Industries, Colgate, Dabur, Godrej Consumer, Emami, Hindustan Unilever, ITC, Marico, Nestle Ltd, Pidilite Industries, GlaxoSmithKline Consumer Healthcare, United Spirits

Distribution of Ratings / Market Cap

Edelweiss Research Coverage Universe

Rating Distribution* 161 67 11 240 * 1stocks under review

Market Cap (INR) 156 62 11

Date Company Title Price (INR) Recos

Recent Research

27-Oct-17 United Spirits Uncertainties behind; brighter prospects ahead; Result Update

3,026 Buy

26-Oct-17 Emami Volumes recover; outlook promising; Result Update

1,171 Buy

25-Oct-17 Hindustan Unilever

Volumes recover; sustained cost cuts boost margins; Result Update

1,272 Hold

> 50bn Between 10bn and 50 bn < 10bn

Buy Hold Reduce Total

Rating Interpretation

Buy appreciate more than 15% over a 12-month period

Hold appreciate up to 15% over a 12-month period

Reduce depreciate more than 5% over a 12-month period

Rating Expected to

-

149

297

446

594

743

Jan

-14

Feb

-14

Mar

-14

Ap

r-1

4

May

-14

Jun

-14

Jul-

14

Au

g-1

4

Sep

-14

Oct

-14

No

v-1

4

De

c-1

4

(IN

R)

One year price chart

200

230

260

290

320

350

Oct

-16

No

v-1

6

De

c-1

6

Jan

-17

Feb

-17

Mar

-17

Ap

r-1

7

May

-17

Jun

-17

Jul-

17

Au

g-1

7

Sep

-17

Oct

-17

(IN

R)

ITC


Consumer Goods

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ITC

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Consumer Goods

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