26 July 2013
1QFY14 Results Update | Sector:
Consumer
ITC
BSE SENSEX
19,805
Bloomberg
Equity Shares (m)
52-Week Range (INR)
1, 6, 12 Rel. Per (%)
S&P CNX
5,908
ITC IN
7,738.1
380/248
6/21/23
CMP: INR359
TP: INR385
Neutral
M.Cap. (INR b) / (USD b) 2,776/47.0
Financials & Valuation (INR Billion)
Y/E MAR
Net Sales
EBITDA
Adj PAT
Adj.EPS
(INR)
Gr. (%)
BV/Sh.(INR)
RoE (%)
RoCE (%)
P/E (x)
P/BV (X)
2013 2014E 2015E
296.1
106.3
74.2
9.5
64.2
26.2
37.8
47.8
37.8
13.7
337.5
124.9
86.0
11.0
15.9
28.9
39.9
51.9
32.6
12.4
387.9
143.0
100.2
12.8
16.6
31.9
42.2
54.3
28.0
11.2
Margin expansion in Cigarettes drove overall EBITDA outperformance
ITC’s 1QFY14 revenues grew 10.3% to INR74.1b (est.INR76.9b), EBITDA grew 17.5% to
INR27.9b (est.INR27.7b), and PAT grew 18.1% to INR18.9b (est.INR18.4b). ITC
continues to deliver on its high teens Cigarette EBIT and PAT growth. Higher than
expected EBITDA despite lower sales growth was owing to sharp 110bp margin
expansion in Cigarettes, driven by higher price, better mix and cost containment
(segmental costs declined 7%, as the base quarter had higher promotional spends to
drive 64mm foray). EBITDA margin expanded 230bp to 37.7% (est 36%). Higher than
estimated other income (up 20%) resulted in PAT being 3% ahead of our estimate.
Segment-wise performance
Cigarette volumes declined ~2% (v/s our estimate of 1.5% decline).
Other FMCG sales grew 18%, lower than the recent trend of mid-20s, but higher
than peers. Other FMCG reported a loss of INR189m at the EBIT level.
Agri business revenues grew 29%, but margins declined 100bp.
Hotels continued to suffer from weak macros and higher room inventory – 7.5%
revenue growth, 65% EBIT decline.
Paper segment revenue grew 9.6%; EBIT declined 5% due to higher input costs.
Risk-reward unfavorable at current valuations; downgrading to Neutral
ITC’s consistent high-teens earnings growth, despite lower than expected sales, once
again demonstrates the resilience of its business model. We are upgrading our
estimate 0.5-2%. While our conviction on ITC’s business model remains undiminished,
at current valuations (34x FY14E and 28.5x FY15E EPS), we believe risk-reward is
unfavorable and downgrade our rating to Neutral, with a revised target price of
INR385 (30x FY15E EPS). ITC’s predictable high-teens earnings CAGR is well reflected
in current valuations, in our view. Continued preference for quality defensives in a
weak and uncertain macro environment is the key risk.
Gautam Duggad
(Gautam.Duggad@MotilalOswal.com); +91 22 3982 5404
Investors are advised to refer through disclosures made at the end of the Research Report.

ITC
Sales below estimates: FMCG and Agri outperform
1QFY14 revenues grew
10.5% to INR 74.1b (est INR 76.9b), led by 18% sales
growth in Non-Cig FMCG, 7.1% increase in Cigarettes and 29% growth in Agri
business.
Cigarette volumes declined ~2% but margins expanded 130bps to 32.6% (on net
sales basis, margins expanded 590bps to 63.4%).
Gross margins declined 30bp due to shift in mix in favor of Non-Cig FMCG and
Agri business.
EBITDA
posted 18% YoY growth to INR27.9b (est INR27.7b). Staff costs and
other expenses declined 30bp and 220bp, respectively driving 230bps EBITDA
margin expansion to 37.4%.
Adj. PAT posted 18.1% growth to INR18.9b
(est. INR18.9b) and came in 3%
ahead of estimates driven by higher than estimated other income which grew
20% YoY to INR2b.
Segmental performance
1QFY12
Sales (INR m)
Cigarettes
FMCG - Others
Hotels
Agri business
Paper and packaging
Sales growth (YoY)
Cigarettes
FMCG - Others
Hotels
Agri business
Paper and packaging
Volume growth (YoY)
Cigarettes
EBIT (INR m)
Cigarettes
FMCG - Others
Hotels
Agri business
Paper and packaging
EBIT growth (YoY)
Cigarettes
FMCG - Others
Hotels
Agri business
Paper and packaging
EBIT Margin (%)
Cigarettes
FMCG - Others
Hotels
Agri business
Paper and packaging
28,736
11,978
2,305
17,071
9,596
15.7
19.6
9.8
26.5
20.9
8.0
15,767
-763
513
1,571
2,270
20.8
-14.5
33.2
27.7
20.4
54.9
-6.4
22.3
9.2
23.7
2QFY12
29,681
13,407
2,111
14,345
10,054
16.4
27.0
1.1
12.8
9.4
7.5
17,289
-559
434
2,388
2,897
18.6
-16.4
9.0
15.0
17.9
58.2
-4.2
20.6
16.6
28.8
3QFY12
32,328
13,707
2,787
11,394
9,784
16.6
24.4
-1.0
9.8
11.5
5.0
18,442
-468
1,017
1,417
2,243
20.3
-36.4
14.8
9.7
17.2
57.0
-3.4
36.5
12.4
22.9
4QFY12
32,499
16,165
2,858
14,142
9,799
17.4
23.2
-4.8
30.7
6.9
5.0
17,579
-167
829
1,056
1,958
19.5
-75.4
-16.8
5.8
1.1
54.1
-1.0
29.0
7.5
20.0
1QFY13
33,042
14,731
2,324
16,914
10,587
15.0
23.0
0.8
-0.9
10.3
1.5
18,998
-388
262
1,714
2,647
20.5
-49.1
-48.9
9.1
16.6
57.5
-2.6
11.3
10.1
25.0
2QFY13
33,852
16,908
2,170
20,239
10,590
14.0
26.1
2.8
41.1
5.3
0.5
20,802
-303
153
2,597
2,825
20.3
-45.8
-64.8
8.8
-2.5
61.4
-1.8
7.1
12.8
26.7
3QFY13
36,574
17,827
3,095
16,310
10,616
13.1
30.1
11.0
43.1
8.5
1.5
22,336
-240
555
1,726
2,286
21.1
-48.8
-45.5
21.9
1.9
61.1
-1.3
17.9
10.6
21.5
4QFY13
36,232
20,362
3,155
18,545
10,575
11.5
26.0
10.4
31.1
7.9
2.5
21,124
119
406
1,275
1,881
20.2
-171.2
-51.0
20.8
-3.9
1QFY14
35,374
17,447
2,499
21,890
11,631
7.1
18.4
7.5
29.4
9.9
-2.0
22,417
-189
89
1,993
2,516
18.0
-51.3
-65.9
16.3
-5.0
58.3
63.4
0.6
-1.1
12.9
3.6
6.9
9.1
17.8
21.6
Source: Company, MOSL
26 July 2013
2

ITC
Cigarette volumes decline ~2%; 130bp margin expansion
1QFY14 cigarette volumes declined 2%
due to 15% plus price hikes post budget.
Gross Cig gross sales were up 13.5% to INR68.8b, while net sales grew 7.1% to
INR35.4b. Excise duties went up 21% YoY however base quarter has shift in
excise duty from ad-valorem to specific excise duty (CY12 budget had
introduced ad-valorem duty structure, and later reverted to specific duty
regime)
EBIT Margin expanded 130bp to 32.6%
on back of price increases, cost
containment as promotion spends were higher in base quarter owing to 64mm
foray and continued mix improvement. On net sales basis, EBIT margins
expanded 590bp YoY to 63.4%. Segment expenses have declined 7% YoY for
Cigarettes.
Thus, Cigarette EBIT posted 18% YoY growth, in line with the trend of 18-20%
but lowest in last 9 quarters.
64mm cigarette continues to gain share and is now ~4-5% of portfolio. ITC has
introduced three new offerings under 64mm segment during the quarter- 'Flake
Galaxy', 'Flake Liberty' & 'Silk Cut Virginia'
We maintain our 1.5-2% volume growth estimates in cigarettes for FY14E as a)
consumers get used to higher prices and b) we expect 64mm segment to gain
further traction and market share for ITC led by new launches in 64mm
portfolio.
EBIT grows solid 18%
EBIT margins expand 130bps
Cig volumes decline 2%
Source: Company, MOSL
FMCG: sales growth comes off but still remains robust vis-à-vis
competitors
FMCG sales up 18.4% to INR17.4b led by high single digit volume growth while
FMCG business posted EBIT loss of INR189m. We note that sales growth has
come off from the recent mid 20’s but it still remains robust given the backdrop
of slowdown in processed foods as well moderating volume growth for other
FMCG peers.
Volume growth stood at high single digits, lower vs. recent mid teens delivery,
Incremental EBIT margins stood at 7.3%.
While quarterly fluctuations in EBIT can’t be ruled out, we model for positive
annual EBIT in FY14. However, if ITC enters new HPC/Foods categories, as
speculated by media (Oral Care, Dairy, Chocolate etc), annual EBIT breakeven
can be pushed back.
3
26 July 2013

ITC
18% sales growth is lower vs. recent trend
Segment reports loss
Source: Company, MOSL
Source: Company, MOSL
Paper and paperboard: 7.9% sales growth; margin contraction of
220bp due to higher raw material costs
Paper and Paperboard business sales were up 9.6% to INR12.4b driven by new
capacity addition. ITC recently commissioned paperboard machine at
Bhadrachalam
with a capacity of over 1 lakh tonnes
RM cost inflation in Wood and Coal dragged margins by 360bp to 21.4%.
Paper margins declined 340bp; higher RM impacts margins
EBIT Margins (%)
28.8
23.7
20.9
9.4
1QFY12
11.5
3QFY12
6.9
10.3
1QFY13
3QFY13
1QFY14
22.9
20.0
5.3
25.0
Sales growth (%)
26.7
21.5
8.5
17.8
7.9
21.6
9.9
Source: Company, MOSL
Agri business: Sales growth robust in leaf tobacco; margins suffer
on account of higher leaf tobacco sales
Agri Business sales were up 29.4% to INR21.9b (4QFY12 INR14.1b), ahead of
expectations, driven by strong performance of Leaf Tobacco and Wheat exports
with better realizations.
EBIT margin declined 100bp to 9.1%.
26 July 2013
4

ITC
Agri contributed ~30% of net revenues
Revenue up 29% driven by Leaf Tobacco
Source: Company, MOSL
Source: Company, MOSL
Hotels: Remains weak; margins lowest in 8 years due to
gestation cost of Chennai property
Hotel revenues grew 7.5% at INR2.5b, impacted by weak macro economic
conditions, slowdown in tourist flow and higher room supply. Occupancies were
flat YoY (early 60’s) while ARR’s declined marginally.
EBIT declined 65% and margins contracted sharply by 770bp to 3.6% impacted
by gestations costs associated with the recently commissioned Chennai property
in Sep’12.
Construction of Kolkatta and Gurgaon properties progressing as per plan.
Hotel margins at 8 year low
Hotels remain weak
Source: Company, MOSL
Source: Company, MOSL
Change in earning estimate
Modest earning changes to reflect higher other income and EBITDA beat.
Change in estimates
Old
Sales
EBITDA
PAT
FY14E
339,273
125,257
84,211
FY15E
389,752
144,739
99,954
FY14E
337,490
124,918
85,993
New
FY15E
387,921
142,983
100,232
Change (%)
FY14E
FY15E
-0.5
-0.5
-0.3
-1.2
2.1
0.3
Source: MOSL
26 July 2013
5

ITC
Valuation and view: Downgrade to Neutral with a revised TP of INR385
ITC’s consistent high teen’s earnings growth despite sales miss once again
demonstrates the resilience of its business model.
Minor changes in our estimates to account for the higher other income and
revise earnings up ~1-1.5%.
ITC’s re-rating was driven by a) best earning visibility with little risks on
predictability, as demonstrated in 1Q14 b) improving pay-out ratio c) insulation
from the usual risks facing consumer sector viz. moderation in volumes in HPC
categories, inflation in RM, rising competitive intensity and c) market’s
willingness to pay premium multiples for quality defensives in an uncertain and
volatile macro environment.
Our conviction on ITC’s business model remains undiminished, however, at
current valuations (34x FY14E and 28.5x FY15E), we believe risk reward is
unfavorable and downgrade our rating to Neutral with a revised TP of INR 380
(30x FY15e).
While all of the aforementioned factors responsible for re-rating still hold, it is
well reflected in current valuations in our view. Even at the ascribed higher
earnings multiple, we see limited upside to our target price. Thus, we look for
better entry opportunities/multiples.
Continued preference for quality defensives in a weak and uncertain macro
environment constitute key upside risk.
ITC P/B chart
ITC P/E band
26 July 2013
6

ITC
ITC: an investment profile
Company description
ITC 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 and
Processed 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.
Recent developments
ITC entered into Deodorants category with the
launch of its brand Engage.
It launched 3 offerings in 64mm segment.
Valuation and view
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.
Our EPS estimates stand at INR11 for FY14 and
INR12.8 for FY15.
The stock trades at 32.6x FY14E EPS and 28x FY15E
EPS. Downgrade to Neutral with a revised target
price of INR385.
Sector view
Key investment risks
Taxation related risks though Excise and VAT hikes
for FY14 are announced.
Lower than expected Cig volume growth.
Sector stance remains cautious with preference for
companies with high earnings visibility and low
competitive intensity.
Lagged impact of GDP slowdown is reflecting in the
sector with moderation in volume growth.
Relatively we prefer Dabur and ITC.
Comparative valuations
P/E (x)
P/BV (x)
EV/Sales (x)
EV/EBITDA (x)
FY14E
FY15E
FY14E
FY15E
FY14E
FY15E
FY14E
FY15E
ITC
32.6
28.0
21.2
18.3
7.8
6.8
12.4
11.2
HUL
40.4
36.9
24.9
21.2
4.8
4.2
29.9
25.7
NESTLE
42
34
22.2
17.7
5.5
4.5
24.7
20.4
EPS: MOSL forecast v/s consensus (INR)
MOSL
Forecast
FY14
FY15
11.0
12.8
Consensus
Forecast
11.2
13.3
Variation
(%)
-1.7
-3.3
Target price and recommendation
Current
Price (INR)
359
Target
Price (INR)
385
Upside
(%)
7.3
Reco.
Neutral
Shareholding pattern (%)
June-13
Promoter
Domestic Inst
Foreign
Others
0.0
33.4
51.1
15.5
Mar-12
0.0
33.7
50.2
16.1
June-12
0.0
34.3
49.1
16.6
Stock performance (1-year)
26 July 2013
7

ITC
Financials and valuation
Income statement
Y/E March
Net Sales
Change (%)
EBITDA
EBITDA Margin (%)
Depreciation
EBIT
Interest
Other Income
Extraordinary items
PBT
Tax
Tax Rate (%)
Reported PAT
Adjusted PAT
Change (%)
Min. Int. & Assoc. Share
Adj Cons PAT
2012
248.0
17.2
72.0
28.6
7.0
65.1
0.8
8.3
0.0
72.5
27.4
37.7
45.2
45.2
-9.4
0.0
45.2
2013
296.1
19.4
106.3
35.5
8.0
98.3
0.9
9.4
0.0
106.8
32.7
30.6
74.2
74.2
64.2
0.0
74.2
(INR Billion)
2014E
337.5
14.0
124.9
36.6
8.8
116.1
0.8
10.9
0.0
126.3
40.3
31.9
86.0
86.0
15.9
0.0
86.0
2015E
387.9
14.9
143.0
36.4
9.6
133.4
0.8
12.0
0.0
144.6
44.4
30.7
100.2
100.2
16.6
0.0
100.2
Ratios
Y/E March
Basic (INR)
EPS
Cash EPS
Book Value
DPS
Payout (incl. Div. Tax.)
Valuation (x)
P/E
Cash P/E
Price / Book Value
EV/EBITDA
EV/Sales
Dividend Yield (%)
Profitability Ratios (%)
RoE
RoCE
Turnover Ratios (%)
Asset Turnover (x)
Debtors (days)
Inventory (days)
Wkg Capital (days)
Leverage Ratios (%)
Debt/Equity (x)
2012
5.8
6.7
24.0
4.5
90.5
62.1
53.8
15.0
38.6
11.1
1.3
26.1
35.6
1.4
14.3
81.8
-5.8
0.0
2013
9.5
10.5
26.2
6.2
76.2
37.8
34.2
13.7
26.1
9.3
1.7
37.8
47.8
1.5
16.7
91.6
-8.3
0.0
2014E
11.0
12.1
28.9
7.1
76.1
32.6
29.6
12.4
22.2
8.1
2.0
39.9
51.9
1.5
16.8
89.8
-11.6
0.0
2015E
12.8
14.0
31.9
8.3
76.1
28.0
25.6
11.2
19.4
7.1
2.3
42.2
54.3
1.6
16.8
88.5
-14.3
0.0
Balance sheet
Y/E March
Share Capital
Reserves
Net Worth
Debt
Deferred Tax
Total Capital Employed
Gross Fixed Assets
Less: Acc Depreciation
Net Fixed Assets
Capital WIP
Investments
Current Assets
Inventory
Debtors
Cash & Bank
Loans & Adv, Others
Curr Liabs & Provns
Curr. Liabilities
Provisions
Net Current Assets
Total Assets
2012
7.8
180.1
187.9
0.9
8.7
197.6
138.0
48.2
89.8
22.7
60.8
107.9
56.4
9.9
28.2
13.5
83.7
8.9
35.2
24.2
197.6
2013
7.8
197.9
205.7
0.9
7.8
214.5
153.0
56.2
96.8
10.0
84.3
136.4
75.1
13.7
30.2
17.4
113.0
9.4
48.3
23.4
214.5
(INR Billion)
2014E
2015E
7.8
7.8
218.5
242.5
226.3
250.3
0.9
0.9
7.2
6.5
234.4
257.7
168.0
183.0
65.0
74.6
103.0
108.4
10.0
10.0
99.0
118.2
152.1
170.7
84.0
95.2
15.7
18.1
33.2
36.5
19.1
20.9
129.7
149.6
10.8
12.5
55.9
65.2
22.4
21.1
234.4
257.7
E: MOSL Estimates
Cash flow statement
Y/E March
OP/(Loss) before Tax
Depreciation
Others
Interest
Direct Taxes Paid
(Inc)/Dec in Wkg Cap
CF from Op. Activity
(Inc)/Dec in FA & CWIP
(Pur)/Sale of Invt
Others
CF from Inv. Activity
Inc/(Dec) in Net Worth
Inc / (Dec) in Debt
Interest Paid
Divd Paid (incl Tax)
CF from Fin. Activity
Inc/(Dec) in Cash
Add: Opening Balance
Closing Balance
2012
89.0
10.0
0.0
-7.5
27.4
-1.0
63.1
-19.7
-5.3
0.0
-25.0
7.6
-0.1
7.5
-34.4
-32.4
5.8
22.4
28.2
2013
106.8
7.9
0.0
-8.5
32.7
-20.6
52.9
-2.3
-23.4
0.0
-25.7
0.0
0.0
8.5
-35.2
-25.2
2.0
28.2
30.2
(INR Billion)
2014E
126.3
8.8
0.0
-10.1
40.3
-10.7
73.9
-15.0
-14.8
0.0
-29.8
0.0
0.0
10.1
-48.3
-41.1
3.0
30.2
33.2
2015E
144.6
9.6
0.0
-11.2
44.4
-14.5
84.0
-15.0
-19.1
0.0
-34.1
0.0
0.0
11.2
-55.9
-46.6
3.3
33.2
36.5
26 July 2013
8

ITC
NOTES
26 July 2013
9

Disclosures
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ITC
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Disclosure of Interest Statement
1. Analyst ownership of the stock
2. Group/Directors ownership of the stock
3. Broking relationship with company covered
4. Investment Banking relationship with company covered
ITC LTD
No
No
No
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Kadambari Balachandran
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For Singapore
Motilal Oswal Securities Ltd
26 July 2013
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