Industry CMP Recommendation Targets Time Horizon Report

FMCG Rs. 274 BUY Rs. 314-340 5 Quarters Q3FY19 Result Update

Quarterly Highlight:

During Q3FY19 ITC’s Revenue grew by 15% YoY and 1.4% QoQ to Rs. 114.31bn, while Net Profit came at 32.09bn
(4% YoY). Company’s bottom line had benefited from an exceptional gain of Rs 4.13bn in the same quarter last
HDFC Scrip Code ITCLTD year. Excluding tax write-back in the year-ago period, net profit rose by 14%.
BSE Code 500875
NSE Code
Cigarette (cig) revenues grew by 9.6% (exp. 8.5%) driven by 7 year high volume growth of ~7.5% (exp. 6%; -4%
ITC
in 3QFY18). Although cig. EBIT growth was a tad bit slower at 8.8% owing to high cost tobacco lead and higher
Bloomberg ITC
imports for capsules (switch cig.) Cig. volumes are now recovering with 3 consecutive quarters of positive growth
CMP as on 5 Feb ’19 274 given a stable tax environment. We expect 5/3/3.5% vol. growth in FY19E/20E/21E.
Equity Capital (Rs Cr) 1224
Face Value (Rs) 1 Non-Cigarettes portfolio also delivered a 16 quarter high revenue growth of 17% led by Agri and Paper. FMCG
Equity O/S (Cr) 1224 underlying revenue growth (ex-retail) was higher at 13-14% (HUL at 13%) vs. reported growth of 11.5%. The co.
is undergoing a restructuring drive in its retail segment (eg. John players store count at ~100 stores vs. ~450
Market Cap (Rs Cr) 336125
earlier) which impacted segment growth. Revenue of Hotel business grew by 12%, Agribusiness grew by 25.7%
Book Value (Rs) 43
and Paper grew by 20.5%.
Avg. 52 Week Vol 124112
52 Week High 22
322.7 Outlook:
52 Week Low 250.5
On 10th December 2018, we had Recommended ITC Buy in the range of Rs. 274 - 253 (making or avg price Rs.
Red Flag 220
263.5) for the successive targets of Rs. 314 and 340 for the frame of 4-6 Quarters.

Shareholding Pattern (%) We believe ITC is a relatively safe stock to accumulate during volatile times such as the present. It is coming off six
Institutions 55 years of cigarette volume decline and poised to deliver 11% earnings growth over FY18-21E.
Non Institutions 44.8
At 24x FY20E EPS, ITC trades at an unfair discount of ~40% to the sector and provides a good entry point. After
Other 0.2
analysing the Recent Q3FY19 result the view and rational remain intact for the company.

PCG Risk Rating* Yellow We believe ITC can outperform hereon, driven by (1) Recovery in rural consumption which accounts for 2/3 of
* Refer Rating explanation smokers, many of whom are upgrading themselves from Beedis (2) Expectation of a stable tax environment (7-8%
FUNDAMENTAL ANALYST annual hikes) as the catch-up with global tax rates is largely done (3) Favourable base and (4) A clamp down on
Nisha Shankhala the illicit trade and (5) Rising contribution from FMCG Business. In such a scenario, ITC can deliver mid-single digit
nishaben.shankhala@hdfcsec.com volume growth over FY18-21E. Our 8% revenue CAGR estimate over FY18-21E looks reasonable vs. 10%/9% CAGR
in last 10/5 years.

Note: We have attached the Pick of the week detailed report at the bottom of the report.

Page 1
 Q3FY19 Result Update
ITC Ltd Feb 05, 2019

FINANCIAL SUMMARY:
(Rs mn) 3QFY19 3QFY18 YoY (%) 2QFY19 QoQ (%) FY17 FY18 FY19E FY20E FY21E
Net Revenue 1,14,313 99,522 14.9 1,12,725 1.4 4,28,036 4,34,489 4,82,107 5,33,211 5,90,555
EBITDA 43,258 39,045 10.8 42,060 2.8 1,54,359 1,64,830 1,85,050 2,04,200 2,25,681
APAT 32,091 28,202 13.8 29,547 8.6 1,04,772 1,12,202 1,25,247 1,38,091 1,52,221
EPS (Rs) 2.6 2.3 13.3 2.4 8.6 8.6 9.2 10.2 11.3 12.4
P/E (x) 31.9 29.8 26.9 24.3 22.1
EV/EBITDA (x) 20.5 19 17 15.2 13.6
Core RoCE (%) 36.4 37.2 38.1 38.6 40.1

Year to March (Rs mn) 3QFY19 3QFY18 YoY (%) 2QFY19 QoQ (%) 9MFY19 9MFY18 YoY (%)
Segmental Revenues
Cigarettes* 50,734 46,292 9.6 50,261 0.9 1,52,270 1,79,576 9.7*
FMCG 32,010 28,718 11.5 31,604 1.3 92,314 82,768 11.5
Hotels 4,519 4,044 11.7 3,626 24.6 11,557 10,095 14.5
Agribusiness 19,246 15,309 25.7 22,197 -13.3 72,956 62,594 16.6
Paperboards, Paper & Packaging 15,425 12,796 20.5 14,245 8.3 43,228 39,488 9.5
Total 1,21,933 1,07,159 13.8 1,21,932 0 3,72,325 3,74,520 -1
Less: Inter-segment revenue 8,532 8,631 -1.2 10,983 -22 40,752 42,009 -3
Total 1,13,402 98,527 15.1 1,10,949 2.2 3,31,573 3,32,511 -0.3
Segmental EBIT
Cigarettes* 35,577 32,693 8.8 35,791 -0.6 1,06,951 98,351 8.7
FMCG 767 470 63.1 585 31.2 1,852 729 154.1
Hotels 603 548 10.1 156 287.5 891 643 38.5
Agribusiness 1,988 2,333 -14.8 2,361 -15.8 6,294 7,247 -13.1
Paperboards, Paper & Packaging 3,321 2,683 23.8 3,109 6.8 9,387 7,997 17
Total 42,256 38,726 9.1 42,001 0.6 1,25,375 1,14,967 9
Less:
(a) Interest Cost & Bank Charges 56 240 -76.6 135 -58.4 586 634 -7.5
(b) Other Un-allocable Expenses -6,013 -7,810 -23 -1,826 229.3 -9,792 -10,852 -10
PBT 48,212 46,296 4.1 43,691 10.3 1,33,951 1,25,185 7

1|Page
 Q3FY19 Result Update
ITC Ltd Feb 05, 2019

Rating Chart

R Reco Price
HIGH
E Reco Date band Target
T 10-Dec-18 274-253 314-340
U MEDIUM
R
N LOW
LOW MEDIUM HIGH
RISK

Ratings Explanation:

RATING Risk - Return BEAR CASE BASE CASE BULL CASE

IF RISKS MANIFEST
IF INVESTMENT
PRICE CAN FALL 15%
IF RISKS MANIFEST RATIONALE
LOW RISK - LOW & IF INVESTMENT
BLUE PRICE CAN FALL FRUCTFIES PRICE
RETURN STOCKS RATIONALE
20% OR MORE CAN RISE BY 20% OR
FRUCTFIES PRICE
MORE
CAN RISE BY 15%
IF RISKS MANIFEST
IF INVESTMENT
PRICE CAN FALL 20%
MEDIUM RISK - IF RISKS MANIFEST RATIONALE
& IF INVESTMENT
YELLOW HIGH RETURN PRICE CAN FALL FRUCTFIES PRICE
RATIONALE
STOCKS 35% OR MORE CAN RISE BY 35% OR
FRUCTFIES PRICE
MORE
CAN RISE BY 30%
IF RISKS MANIFEST
IF INVESTMENT
PRICE CAN FALL 30%
IF RISKS MANIFEST RATIONALE
HIGH RISK - HIGH & IF INVESTMENT
RED PRICE CAN FALL FRUCTFIES PRICE
RETURN STOCKS RATIONALE
50% OR MORE CAN RISE BY 50%
FRUCTFIES PRICE
OR MORE
CAN RISE BY 30%

2|Page
 Q3FY19 Result Update
ITC Ltd Feb 05, 2019

Close Price
340

320

300

280

260

240

220

200

16-Jan-18

16-Oct-18

08-Jan-19
29-Jan-19
20-Mar-18

01-May-18
22-May-18

14-Aug-18

06-Nov-18
27-Nov-18
05-Dec-17
26-Dec-17

06-Feb-18
27-Feb-18

10-Apr-18

12-Jun-18
03-Jul-18
24-Jul-18

04-Sep-18
25-Sep-18

18-Dec-18
Rating Definition:

Buy: Stock is expected to gain by 10% or more in the next 1 Year.

Sell: Stock is expected to decline by 10% or more in the next 1 Year.

3|Page
 Q3FY19 Result Update
ITC Ltd Feb 05, 2019

Disclosure:
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4|Page
 DATE 10th Dec 2018

Creating World Class Indian Brands

ITC looks to expand food portfolio to boost Sustainable growth in cigarettes business in
spite so many challenges
revenues from FMCG
ITC
Limited
Hotels: Pursuing an ‘asset right’ strategy Paper: On the path to recovery

INDUSTRY ADD ON DIPS TO

FMCG Rs. 274 - 253

CMP SEQUENTIAL TARGETS

Rs. 274 Rs. 314 - 340

RECOMMEND TIME HORIZON

ed ed
Buy at CMP and add on declines 4 - 6 quarters

Red Flag: Rs. 220

Page 2
 Company Profile:
ITC Ltd is market leader in cigarettes in India. Apart from cigarettes, it has a diversified presence in
Hotels, Paperboards & Specialty Papers, Packaging, Agri-Business, Packaged Foods & Confectionery,
HDFC Scrip Code ITCLTD Information Technology, Branded Apparel, Personal Care, Stationery, Safety Matches and other FMCG
products.
BSE Code 500875
NSE Code ITC ITC has the largest market share in the cigarette business with iconic brands like “Gold Flake”,”Kings
Bloomberg ITC Classic” etc and this segment is the major source of company’s revenue. It operates hotels under 4
brand names. ITC has 25 mother brands in FMCG segment with an annual consumer spend of nearly Rs.
CMP Dec 7 2018 274 16000 Cr. Its FMCG products reaches every second household in India. Its brand names include Sunfeast
Equity Capital (Cr) 1224 (Biscuits), Bingo (Snacks), Yippee (Noodles), Aashirvaad (Flour) and company is constantly expanding
Face Value (Rs) 1 its product portfolio under the personal care segment (soaps, shampoos, deo, talc etc.). ITC's wholly
owned Information Technology subsidiary, ITC Infotech India, provides IT services and solutions to
Eq- Share O/S( Cr) 1224
leading global customers.
Market Cap(Rs Cr) 3,35,637
Book Value (Rs) 43 Investment rationale:
Avg.52 Wk Volume 12411222 • Creating world class Indian brands.
• Sustainable growth in cigarettes business in spite so many challenges.
52 Week High 322.7 • ITC looks to expand food portfolio to boost revenues from FMCG.
52 Week Low 250.5 • Long Term Potential of Personal Care Products.
• Hotels: Pursuing an ‘asset right’ strategy.
Red Flag Price Level 220 • Paper: On the path to recovery.

Concerns:
PCG Risk Rating * Yellow
• High Taxes on Cigarettes, changes in government policy towards the industry.
Shareholding Pattern % (Sep 30, 18) • Illegal Cigarette’s share is rising.
• Free Trade Agreement on the Import of Paper.
Institutions 54.96 • Cyclicality of the Industry.
Non Institutions 44.86
Custodian 0.18 View and valuation:
Total 100.0
At 24x FY20E EPS, ITC trades at an unfair discount of ~35% to the sector and provides a good entry
FUNDAMENTAL ANALYST point. We recommend Buy at CMP of Rs. 274 and add on dips to Rs. 253 for the sequential price targets
Nisha Sankhala of Rs. 314 (27.8x FY20E) and Rs. 340 (30x FY20E) for 4 to 6 Quarters.
nishaben.shankhala@hdfcsec.com

Page 3
Key Highlights
 With more than a century old lineage -
ITC has created world class brands for
Indian Consumers. It has a diversified
presence in FMCG, Cigarettes, Paper,
Hotel, IT, Branded Apparel and Agri-
Business.
 Within a relatively short span of time,
ITC has built 25 mother brands in
FMCG segments with an annual
consumer spending of nearly Rs.
16,000 Cr. Today, ITC’s FMCG products
reach every 2nd household in India.
 Our structural take on cigarette market
is that the tax increase will not be as
sharp on cigarette in the coming years
as it was in the last 5 years and current
higher tax will help organized players
in fetching market share from illegal
imported illegal cigarettes.
 ITC is trying hard to shed its cigarette-
maker tag by focusing more on its
FMCG segment. Management has
guided to achieve Rs 1 lakh Cr
revenues from FMCG segment by
FY2030.
 We recommend Buy at CMP of Rs. 274
and add on dips to Rs. 253 for the
sequential price targets of Rs. 314
(27.8x FY20E) and Rs. 340 (30x FY20E)
for 4 to 6 Quarters.
Company profile:
ITC Ltd is one of India's foremost private sector companies. ITC has a diversified presence in Cigarettes,
Hotels, Paperboards & Specialty Papers, Packaging, Agri-Business, Packaged Foods & Confectionery,
Information Technology, Branded Apparel, Personal Care, Stationery, Safety Matches and other FMCG
products.
ITC has the largest market share in the cigarette business with iconic brands like “Gold Flake”,”Kings
Classic” and this segment is the major source of company’s revenue. It operates hotels under 4 brand
names. ITC has 25 mother brands in FMCG segment with an annual consumer spend of nearly Rs. 16000
Cr. Its FMCG products reaches every second household in India. Brand names includes like Sunfeast
(Biscuits), Bingo (Chips), Yippee (Noodles), Aashirvaad (Flour) and is constantly expanding its product
portfolio under the personal care segment (soaps, shampoos, deo, talc etc). ITC's wholly owned
Information Technology subsidiary, ITC Infotech India Ltd, provides IT services and solutions to leading
global customers.
Business Segments:
1. FMCG:
• Cigarettes: ITC is the market leader in cigarettes in India. With its wide range of invaluable brands.
ITC's highly popular portfolio of brands includes Insignia, India Kings, Classic, Gold Flake, American Club,
Navy Cut, Players, Scissors, Capstan, Berkeley, Bristol, Flake, Silk Cut, Duke & Royal. ITC's cigarettes are
manufactured in state-of-the-art factories at Bengaluru, Munger, Saharanpur, Kolkata and Pune.
• Food: ITC's Branded Packaged Foods business is one of the fastest growing foods businesses in India,
driven by the market standing and consumer franchise of its popular brands - Aashirvaad, Bingo!
Sunfeast, Fabelle, Sunbean, Yippee! Kitchens of India, B Natural, ITC Master Chef, Farmland, mint-o,
Candyman and GumOn. The Foods business is today represented in multiple categories in the market -
Staples, Spices, Biscuits, Confectionery & Gums, Snacks, Noodles & Pasta, Beverages, Dairy, Ready to
Eat Meals, Chocolate, Coffee and Frozen Foods.
• Personal Care: ITC forayed into the Personal Care business in July 2005. ITC's Personal Care portfolio
under the 'Essenza Di Wills', 'Fiama', 'Vivel', 'Engage', 'Savlon', 'Charmis', 'Shower to Shower' and
'Superia' brands have received encouraging consumer response and is being progressively extended
nationally. The product formulations use internationally recognised safe ingredients, subjected to the
highest standards of safety and performance.
Page 4
• Education & Stationery: ITC made its entry to the education and stationery business with its Paperkraft brand in the premium segment in
2002; and later expanded into the popular segment with its Classmate brand in 2003. By 2007, Classmate became the largest Notebook brand
in the country. Together, Classmate and Paperkraft offer a range of products in the Education & Stationery space to the discerning consumer,
providing unrivalled value in terms of product & price.

• Lifestyle & Retailing: ITC's Lifestyle Retailing Business Division has established a nationwide retailing presence through Wills Lifestyle & John
Players. Wills Lifestyle presents a premium fashion wardrobe for men and women, offering a tempting choice of Crisp Contemporary formals,
Stylist suave Casuals, evening wear & designer wear. John Players embodies the spirit of the modern youth that is playful, fashionable and cool.

• Safety Matches: ITC's range of Safety Matches includes popular brands like Aim, Ship and Homelites. With differentiated product features
and innovative value additions, these brands effectively address the needs of different consumer segments. ITC also exports safety matches to
various markets. The acquisition of Wimco, a subsidiary of ITC has consolidated the market standing of the Company's Matches business
through synergy benefits.

• Agarbattis: As a part of ITC's business strategy of creating multiple drivers of growth in the FMCG sector, the company commenced
marketing Agarbattis (Incense Sticks) sourced from small-scale and cottage units in 2003. ITC is no. 1 player in the Dhoop industry with Brand
name of Mangaldeep (Cycle).

2. Hotels:

ITC entered the hotels business in 1975 with the acquisition of a hotel in Chennai, which was then rechristened ITC Chola. Since then the ITC-
Welcome group brand has become synonymous with Indian hospitality. It operates hotels under 4 brand names: ITC Hotels, Welcome Hotel,
Fortune and Welcome Heritage. With over 108 hotels in more than 74 destinations ITC Hotels is one of the leaders in the hospitality business in
India.

3. Paperboard & Speciality Papers:

ITC's Paperboards and Specialty Papers Division is India's largest, technologically advanced and most eco-friendly, paper and paperboards
business. The business caters to a wide spectrum of packaging, graphic, communication, writing, printing and specialty paper requirements
through its four world-class manufacturing units.

4. Packaging:

ITC's Packaging & Printing Business is the country's largest convertor of paperboard into packaging. It converts paper and paperboard into a
variety of value-added packaging solutions for the food & beverage, personal products, cigarette, liquor, cellular phone and IT packaging
industries. It has also entered the Flexibles and Corrugated Cartons business. The Division, which was set up in 1925 as a strategic backward
integration for ITC's Cigarettes business, is today India's most sophisticated packaging house.

Page 5
 5. Agri Business:

ITC's Agri Business is the country's second largest exporter of agri-products. The Leaf Tobacco business' partnership with the farmer is also
almost 100 years old. ITC is the largest buyer, processor and exporter of leaf tobaccos in India - creating a global benchmark as the single
largest integrated source of quality tobaccos. It is also currently focusing on exports and domestic trading of:

Feed Ingredients (Soyameal), Food Grains (Wheat & Wheat Flour, Rice, Pulses, Barley & Maize), Marine Products (Shrimps and Prawns),
Processed Fruits and Coffee.

6. Information Technology:

ITC Infotech is a specialized global technology services provider, led by Business and Technology Consulting. The company caters to enterprises
in Supply Chain based industries (CPG, Retail, Manufacturing, Hi-Tech) and Services (Banking, Financial Services and Insurance, Healthcare,
Airline, Hospitality) through a combination of traditional and newer business models, as a long-term sustainable partner.

Investment Rationales:

Creating World class Indian Brands

ITC was incorporated on August 24, 1910 under the name Imperial Tobacco Company of India Ltd. With more than a century old history ITC has
created world class brands for Indian Consumers.

ITC is the market leader in cigarettes in India. With its wide range of invaluable brands. ITC's highly popular portfolio of brands includes
Insignia, India Kings, Classic, Gold Flake, American Club, Navy Cut, Players, Scissors, Capstan, Berkeley, Bristol, Flake, Silk Cut, Duke & Royal.

Within a relatively short span of time, ITC has built 25 mother brands in FMCG segments, many of which are market leaders in their segments.
This vibrant portfolio of brands represents an annual consumer spend of nearly Rs. 16,000 Cr today. Today, ITC’s FMCG products are very much
familiar across India.

In terms of annual consumer spend, Aashirvaad is over Rs. 4000 Crs, Sunfeast over Rs. 3500 Crs, Bingo! Over Rs. 2000 Crs, Classmate &
YiPPee! are over Rs.1000 Crs each and Vivel, Mangaldeep & Candyman are over Rs. 500 Crs each. ITC’s FMCG brands have achieved impressive
market standing in a relatively short span of time. Today, many of ITC’s products have assumed market leadership – Aashirvaad is No. 1 in
Branded Atta, Sunfeast is No. 1 in Premium Cream Biscuits, Bingo! is No. 1 in the Bridges segment of Snack Foods, Classmate is No. 1 in
Notebooks. Other ITC brands are also gaining significant consumer franchise – YiPPee! is No. 2 in Noodles, Engage is No. 2 in Deodorants and
Mangaldeep is No. 2 in Agarbattis and No. 1 in the Dhoop segment.

Page 6
ITC Brand Portfolio:

ITC Brand Names:

Page 7
Cigarettes revenue continues to grow in spite so many challenges

Time and time again the concern on ITC has been around tax hikes and its impact on the cigarette business. All challenges aside, the company
has been able to deliver ~10% cigarette revenue CAGR in the last 10 years despite muted volume growth. This reflects ITC’s pricing power and
leadership position.

The legal cigarette industry, has been reeling under the cumulative impact of steep increase in taxation over the last five years and intense
regulatory pressures. The tax incidence on cigarettes, after cognising for the latest increase in Cess rates, has nearly trebled over the last six
years, on a comparable basis. Consequently, cigarette taxes remain, effectively, about 50 times higher than on other tobacco products.

The legal cigarette industry contributes more than 87% of tax revenue from the tobacco sector. It is estimated that the cumulative drop in
farmer earnings is in excess of Rs.3450 Cr. over the last three years, i.e., an average loss in earnings of over Rs.1150 Cr per year. The greater
portion of tobacco consumption in the country (estimated at about 89%) is outside the tax net. This means, the government is expected to
curb the illegal imports, which is likely to benefit ITC as this will result is price equality between domestic legal and imported illegal cigarettes,
and ITC is the largest domestic player. ITC is the market leader in the Cigarettes industry in India across all geographies and segments with
state of the art manufacturing facilities and world class product portfolio. Overall cigarette consumption in India is pretty low as compared to
that across the globe. Annual per capita adult cigarette consumption in India is approx. 1/9th of the global average. Although India accounts for
17% of world population, its share of world cigarette consumption is just 1.8%. This shows the tremendous opportunity available in this
industry. The high taxes and the reducing margins will hurt the farmers and the company in the near term, but cigarettes consumption for India
is definitely expected to rise in the future.

Our structural take on cigarette market is that the tax increase will not be as sharp on cigarette in the coming years as it was in the last 5
years and current higher tax will help organized players in fetching market share from illegal imported illegal cigarettes.

ITC looks to expand food portfolio to boost revenues from FMCG

ITC is trying hard to shed its cigarette-maker tag by focusing more on its FMCG segment. ITC is looking to expand products portfolio in its food
division to achieve the vision of Rs 1 lakh Cr revenues from FMCG segment by FY2030. The food category, which drives the fast moving
consumer durable industry, is expected to contribute around 60-65% of its turnover by 2030.

Management has guided that company will boost revenue in the segment by strengthening existing categories and venturing into newer ones.
In order to achieve this target, ITC is also looking to acquire products, which are currently not in its portfolio and planning to launch 30-40 new
products each year.

Currently, the revenues generated from ITC's foods business, is below Rs 9,000 Cr although consumer spend is in excess of Rs 12,000 Cr, with
the difference due to seller discounts offered by the company.

Page 8
The company has recently ventured into centre-filled snacks under Mad Angles, Bounce Mini biscuit, Dark Fantasy Jelly fills cake and chicken
instant noodles under Yippee etc.

ITC is looking at the dairy space as well. It also has huge market and company will be launching dairy beverages in the medium term. In the
snack category also there are many areas where company haven't started operating in like health space, where it can spread wings.

Company is exploring to ways to tie up with e-commerce players to use them as channel partners and make the new products reach to all
parts of India. ITC has tied up with Bigbasket and plans more tie ups in the coming years.

Long Term Potential of Personal Care Products

ITC’s Personal Care Products Business delivered robust performance and enhanced its market standing during last year against a backdrop of
significant disruption to trade and supply chain following the roll out of GST. This was driven largely by sustained focus on innovation, product
mix enrichment, expansion of distribution reach, proactive cost management and enhancing supply chain responsiveness.

‘Engage’ is the market leader in the women’s segment and at No. 2 position overall. ‘Savlon’ hand wash is the fastest growing brand in the
market in its segment. In the body wash segment, the ‘Fiama’ range of shower gels is the fastest growing and the second largest brand
nationally. Now, ITC has also launched moisturising skin creams under the ‘Charmis’ brand and is planning to strengthen its skincare
portfolio. This rapidly growing portfolio of products across various segments put ITC in a strong position to command the market and reach to
a wider customer base, leveraging its brand name.

ITC’s manufacturing facility in the North East, which was commissioned in March last year, has already achieved 90% capacity utilisation. This
has led to strengthening the supply chain and has enabled efficient servicing of proximal markets in the North East. There is immense
potential in the personal care space in the long-term given the low levels of per capita consumption currently, rising disposable incomes,
increasing urbanisation and growing consumer preference for enhanced personal grooming and ITC is very well positioned to seize the
emerging opportunities.

Hotels: Pursuing an ‘asset right’ strategy

ITC hotels is India’s second largest hotel chain with around 108 hotels at 74 destinations. Company’s Hotels business remains amongst the
fastest growing hospitality chains in the country with four distinct brands – ‘ITC Hotel’ in the Luxury segment, ‘WelcomHotel’ in the Upper-
Upscale segment, ‘Fortune’ in the Mid-market to Upscale segment and ‘WelcomHeritage’ in the Leisure & Heritage segment.

Current projects underway for the company includes ITC Hotel at Kolkata and Ahmedabad while WelcomHotels at Bhubaneswar, Guntur and
Amritsar.

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The hotel industry is coming out of a deep lull after the 2007-08 peak where ARRs and occupancy rates were at life time highs. Room supply
in the last decade has moderated as the industry looked to match demand. In the recent years, F&B segment became increasingly important
to the industry in the backdrop of low occupancy rates. As a major blow, F&B was impacted in FY18 owing to the highway ban on liquor. We
also observed that EBIT margins have fallen ~41% from the peak of FY08 to ~10% in FY18. While EBITDA margins during the same period
declined from 47% to 22% in FY18 (higher rooms with lower occupancy rates / ARR).

With a turn in the business cycle for the hotel industry hereon, we expect ITC’s hotel business to get higher ARRs and to enjoy occupancy
rates leading to expansion in EBITDA margins.

ITC is now looking to adopt an ‘asset right’ strategy with higher share of management contracts (50% revenue mix in the next few years vs.
40% currently). Higher share of management contracts coupled with turn in business cycle should drive expansion in RoCE.

Paper: On the path to recovery

ITC’s Paperboard and Paper business contributes 86% of the segment while rest is led by printed materials. Paper business is also a strategic
move for backward integration of the cigarette business. A large portion of this business is being consumed internally.

In recent years, ITC’s paper business was impacted owing to slowdown in end user industries such as FMCG (incl. cigarettes), liquor and
pharmaceuticals coupled with cheaper imports. On the brighter side, benign input costs, greater use of in-house pulp vs. imports and richer
product mix continued to drive EBIT growth.

As per ITC, outlook for Paperboard industry (48% of industry) is expected to see 7.5% CAGR for the next 5 years. Within paperboards (ITC
holds leadership position), value-added paperboards is expected to grow at 10.5% CAGR driven by growth in FMCG, Pharma and F&B
industries.

We expect with better growth from FMCG and other end user industry, ITC’s paper business can sustain low double digit revenue growth.
Operating leverage and higher contribution from the value-added products would further improve the margin profile of this business.

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View and valuation:
We believe ITC is a relatively safe stock to accumulate during volatile times such as the present. It is coming off six years of cigarette volume
decline and poised to deliver 11% earnings growth over FY18-21E.

The nagging concern on ITC has been punitive tax hikes on cigarettes. Still, ITC has delivered ~10% cigarette revenue CAGR over FY10-18
(FMCG sector delivered 13%), despite continuous volume cracks over FY12-18. So, this reflects ITC’s pricing power. After many years, volume
growth has come back in 1HFY19 around 3.5%.

We believe ITC can outperform hereon, driven by (1) Recovery in rural consumption which accounts for 2/3 of smokers, many of whom are
upgrading themselves from Beedis (2) Expectation of a stable tax environment (7-8% annual hikes) as the catch-up with global tax rates is
largely done (3) Favourable base and (4) A clamp down on the illicit trade and (5) Rising contribution from FMCG Business. In such a scenario,
ITC can deliver mid-single digit volume growth over FY18-21E. Our 8% revenue CAGR estimate over FY18-21E looks reasonable vs. 10%/9%
CAGR in last 10/5 years.

At 24x FY20E EPS, ITC trades at an unfair discount of ~35% to the sector and provides a good entry point. We recommend Buy at CMP of Rs.
274 and add on dips to Rs. 253 for the sequential price targets of Rs. 314 (27.8x FY20E) and Rs. 340 (30x FY20E) over the 4 to 6 Quarters.

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Quarterly Segmental:

Year to March (Rs mn) 2QFY19 2QFY18 YoY (%) 1QFY19 QoQ (%) 1HFY19 1HFY18 YoY (%)
Segmental Revenues
Cigarettes* 50,261 45,542 10.4 51,276 (2.0) 101,537 133,284 (23.8)
FMCG 31,604 28,041 12.7 28,700 10.1 60,304 54,050 11.6
Hotels 3,626 3,002 20.8 3,413 6.2 7,038 6,051 16.3
Agribusiness 22,197 19,680 12.8 31,513 (29.6) 53,710 47,285 13.6
Paperboards, Paper & Packaging 14,245 13,094 8.8 13,558 5.1 27,803 26,692 4.2
Total 121,932 109,359 11.5 128,460 (5.1) 250,392 267,362 (6.3)
Less: Inter-segment revenue 10,983 12,597 (12.8) 21,238 (48.3) 32,220 33,378 (3.5)
Total 110,949 96,762 14.7 107,222 3.5 218,171 233,984 (6.8)
Segmental EBIT
Cigarettes* 35,791 32,917 8.7 35,584 0.6 71,375 65,658 8.7
FMCG 585 205 185.3 501 16.6 1,086 259 318.9
Hotels 156 42 267.0 132 17.7 288 96 201.4
Agribusiness 2,361 2,562 (7.9) 1,945 21.4 4,306 4,913 (12.4)
Paperboards, Paper & Packaging 3,109 2,742 13.4 2,957 5.2 6,066 5,315 14.1
Total 42,001 38,468 9.2 41,119 2.1 83,120 76,241 9.0
Less:
(a) Interest Cost & Bank Charges 135 290 (53.4) 73 83.9 530 394 34.6
(b) Other Un-allocable Expenses (1,826) (1,265) 44.3 (1,954) (6.6) (3,779) (3,042) 24.2
PBT 43,691 39,443 10.8 42,999 1.6 85,739 78,889 8.7
Capital Employed
Cigarettes 38,469 39,733 (3.2) 32,113 19.8 38,469 39,733 (3.2)
FMCG 63,884 59,952 6.6 67,115 (4.8) 63,884 59,952 6.6
Hotels 51,928 48,770 6.5 50,921 2.0 51,928 48,770 6.5
Agribusiness 23,733 17,314 37.1 25,610 (7.3) 23,733 17,314 37.1
Paperboards, Paper & Packaging 61,078 60,252 1.4 60,970 0.2 61,078 60,252 1.4
Total 239,092 226,020 5.8 236,729 1.0 239,092 226,020 5.8
Unallocated corporate assets 264,404 219,726 20.3 307,725 (14.1) 264,404 219,726 20.3
Total capital employed 503,496 445,746 13.0 544,455 (7.5) 503,496 445,746 13.0

Source: Company, HDFC sec Research

Page 12
Revenue Mix %(FY18) Revenue Growth

700 12

Paper, 600 10
10.7% 500
8
Agribusiness, 400
Cigarettes 6
16.5% 300
, 46.8% 4
200
Hotels,
2.9% Others 2
100
FMCG,
23.1% 0 0
FY17 FY18 FY19E FY20E FY21E

Net Revenues (Rs. Bn) Growth (%)

Source: Company, HDFC sec Research Source: Company, HDFC sec Research

Margin to susutain around current levels Net Profit is expected to grow at 11% CAGR over
FY18-21E
250 38.5
180 12
200 38
160 11
37.5 140
150 10
120
37 100 9
100 80 8
36.5
60
7
50 36 40
20 6
0 35.5 0 5
FY17 FY18 FY19E FY20E FY21E FY17 FY18 FY19E FY20E FY21E
EBITDA (Rs. Bn) EBITDA Margin% PAT (Rs. Bn) Growth (%)

Source: Company, HDFC sec Research Source: Company, HDFC sec Research

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Income Statement Balance Sheet
(Rs mn) FY17 FY18 FY19E FY20E FY21E (Rs mn) FY17 FY18 FY19E FY20E FY21E
Net Revenues 428,036 434,489 477,791 528,886 587,486 SOURCES OF FUNDS
Growth (%) 9.2 1.5 10.0 10.7 11.1 Share Capital - Equity 12,147 12,204 12,242 12,242 12,242
Material Expenses 160,492 158,555 172,005 189,341 208,557 Reserves 451,982 512,897 562,074 616,016 677,093
Employee Expense 36,317 37,609 40,973 45,420 50,401 Total Shareholders' Funds 464,129 525,101 574,316 628,258 689,335
ASP Expense 8,107 9,041 10,511 12,164 13,512 Minority Interest 2,947 3,345 3,258 3,157 3,042
Distribution Expense 8,560 9,041 10,511 12,164 14,100 Long Term Debt 184 115 115 115 115
Other Expenses 60,201 55,414 61,112 67,997 75,816 Short Term Debt 191 174 191 210 231
EBITDA 154,359 164,830 182,679 201,800 225,100 Total Debt 375 289 306 325 346
EBITDA Growth (%) 6.8 6.8 10.8 10.5 11.5 Net Deferred Taxes 18,333 18,749 19,000 19,271 19,564
EBITDA Margin 36.1 37.9 38.2 38.2 38.3 Other non current liabilities 2,174 2,596 2,596 2,596 2,596
Depreciation 11,528 12,363 13,256 14,678 16,356 TOTAL SOURCES OF FUNDS 487,959 550,080 599,476 653,608 714,884
EBIT 142,831 152,467 169,423 187,122 208,744 APPLICATION OF FUNDS
Other Income (Including EO) 17,615 18,319 20,379 22,823 25,603 Net Block 157,778 163,907 183,950 208,872 233,017
Interest 243 899 805 855 909 CWIP 49,180 77,353 78,353 67,153 58,194
PBT 160,204 174,016 188,997 209,090 233,438 Goodwill 2,314 2,314 2,314 2,314 2,314
Total Tax 55,491 59,164 64,259 71,091 79,369 LT Loans & Advances 20,849 21,014 22,895 24,952 27,200
RPAT 104,772 114,927 124,825 138,100 154,185 Total Non-current Assets 230,120 264,587 287,512 303,291 320,724
Exceptional Gain/(loss) - 2,725 - - - Inventories 81,161 74,951 79,755 85,971 92,728
Adjusted PAT 104,772 112,202 124,825 138,100 154,185 Debtors 24,743 26,823 28,667 31,204 34,662
APAT Growth (%) 10.3 7.1 11.3 10.6 11.6 Other Expenses 17,471 26,523 27,849 29,241 30,704
Adjusted EPS (Rs) 8.6 9.2 10.2 11.3 12.6 Cash & Equivalents 205,488 249,525 263,021 299,862 341,667
EPS Growth (%) 9.6 6.6 10.9 10.6 11.6 Total Current Assets 328,863 377,821 399,293 446,280 499,760
Source: Company, HDFC sec Research Creditors 26,593 34,962 33,180 36,728 40,798
Other Current Liabilities &Provns 44,430 57,367 54,149 59,234 64,803
Total Current Liabilities 71,023 92,328 87,329 95,963 105,601
Net Current Assets 257,839 285,493 311,964 350,317 394,160
TOTAL APPLICATION OF FUNDS 487,960 550,080 599,476 653,608 714,884
Source: Company, HDFC sec Research

Page 14
 Key Ratios
Cash Flow Statement FY17 FY18 FY19E FY20E FY21E
(Rsmn) FY17 FY18 FY19E FY20E FY21E PROFITABILITY (%)
Reported PBT 160,263 174,091 188,997 209,090 233,438 GPM 62.5 63.5 64.0 64.2 64.5
Non-operating & EO Items (2,257) (3,379) - - - EBITDA Margin 36.1 37.9 38.2 38.2 38.3
Interest Expenses (8,789) (8,748) (9,614) (10,398) (11,244) EBIT Margin 33.4 35.1 35.5 35.4 35.5
Depreciation 11,528 12,363 13,256 14,678 16,356 APAT Margin 24.5 25.8 26.1 26.1 26.2
Working Capital Change 444 17,364 (14,856) (3,568) (4,286) RoE 23.5 22.7 22.7 23.0 23.4
Tax Paid (54,916) (59,996) (64,008) (70,820) (79,076) RoCE 23.4 22.6 22.7 22.9 23.4
OPERATING CASH FLOW ( a ) 106,273 131,694 113,775 138,983 155,188 EFFICIENCY
Capex (30,715) (27,985) (34,299) (28,401) (31,541) Fixed Asset Turnover (x) 0.6 0.6 0.7 0.7 0.7
Free Cash Flow (FCF) 75,558 103,709 79,475 110,582 123,647 Inventory (days) 69.2 63.0 60.9 59.3 57.6
Investments (10,749) (50,814) (15,000) (15,000) (15,000) Debtors (days) 21.1 22.5 21.9 21.5 21.5
Non-operating Income 8,955 7,660 10,457 11,253 12,153 Payables (days) 22.7 29.4 25.3 25.3 25.3
INVESTING CASH FLOW ( b ) (32,509) (71,139) (38,842) (32,148) (34,388) Cash Conversion Cycle (days) 44.6 30.2 37.4 34.8 32.6
Debt Issuance/(Repaid) (132) 24 17 19 21 Net D/E (x) (0.4) (0.5) (0.5) (0.5) (0.5)
Interest Expenses (255) (486) (805) (855) (909) Interest Coverage (x) 587.8 169.6 210.4 218.9 229.7
FCFE 75,171 103,247 78,687 109,746 122,759 PER SHARE DATA (Rs)
Share Capital Issuance 10,670 9,128 38 (0) (0) EPS 8.6 9.2 10.2 11.3 12.6
Dividend (83,330) (70,884) (75,647) (84,158) (93,108) CEPS 9.6 10.2 11.3 12.5 13.9
Others 37 8 - - - Dividend 4.7 5.2 5.7 6.3 7.1
FINANCING CASH FLOW ( c ) (73,010) (62,211) (76,398) (84,993) (93,996) Book Value 38.2 43.0 46.9 51.3 56.3
NET CASH FLOW (a+b+c) 754 (1,656) (1,465) 21,841 26,805 VALUATION
EO Items, Others 33,403 (978) - - - P/E (x) 32 29.9 27 24.3 21.8
Closing Cash & Equivalents 29,674 28,996 27,493 49,334 76,139 P/BV (x) 7.2 6.4 5.9 5.4 4.9
Source: Company, HDFC sec Research EV/EBITDA (x) 20.8 19.3 17.4 15.6 13.8
EV/Revenues (x) 7.5 7.3 6.6 5.9 5.3
Dividend Yield (%) 1.7 1.9 2.1 2.3 2.6
Source: Company, HDFC sec Research

Page 15
 Ratings Chart

R HIGH
E
T
U MEDIUM
R
N LOW
LOW MEDIUM HIGH
RISK

Ratings Explanation:

RATING Risk - Return BEAR CASE BASE CASE BULL CASE

IF RISKS MANIFEST PRICE CAN
IF INVESTMENT RATIONALE
LOW RISK - LOW RETURN IF RISKS MANIFEST PRICE FALL 15% & IF INVESTMENT
BLUE FRUCTFIES PRICE CAN RISE BY
STOCKS CAN FALL 20% OR MORE RATIONALE FRUCTFIES PRICE
20% OR MORE
CAN RISE BY 15%
IF RISKS MANIFEST PRICE CAN
IF INVESTMENT RATIONALE
MEDIUM RISK - HIGH IF RISKS MANIFEST PRICE FALL 20% & IF INVESTMENT
YELLOW FRUCTFIES PRICE CAN RISE BY
RETURN STOCKS CAN FALL 35% OR MORE RATIONALE FRUCTFIES PRICE
35% OR MORE
CAN RISE BY 30%
IF RISKS MANIFEST PRICE CAN
IF INVESTMENT RATIONALE
HIGH RISK - HIGH RETURN IF RISKS MANIFEST PRICE FALL 30% & IF INVESTMENT
RED FRUCTFIES PRICE CAN RISE BY
STOCKS CAN FALL 50% OR MORE RATIONALE FRUCTFIES PRICE
50% OR MORE
CAN RISE BY 30%

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 Close Price
360

340

320

300

280

260

240

220

07-Jan-18
07-Oct-17

07-May-18

07-Oct-18
07-Jun-17

07-Aug-17

07-Nov-17

07-Apr-18

07-Jun-18

07-Aug-18

07-Nov-18
07-Jul-17

07-Mar-18
07-Sep-17

07-Dec-17

07-Jul-18
07-Feb-18

07-Sep-18

07-Dec-18
Rating Definition:

Buy: Stock is expected to gain by 10% or more in the next 1 Year.

Sell: Stock is expected to decline by 10% or more in the next 1 Year.

# Explanation of Red-flag Price level: If stock prices starts sustaining below red-flag level, the premise of the investment needs to be reviewed. Risk
averse investors should exit the stock and preserve capital. The downside of following red-flag level is that if the price decline turns out to be
temporary and if it recovers subsequently you won’t be able to participate in the gains.

Page 17
Fundamental Research Analyst: Nisha Sankhala (nishaben.shankhala@hdfcsec.com)

HDFC securities Limited, I Think Techno Campus, Building - B, "Alpha", Office Floor 8, Near Kanjurmarg Station, Opp. Crompton Greaves, Kanjurmarg (East), Mumbai 400 042 Phone: (022) 3075 3400 Fax: (022) 2496 5066
Website: www.hdfcsec.com Email:hdfcsecretailresearch@hdfcsec.com.
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Disclosure:
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HDFC Securities Limited (HSL) is a SEBI Registered Research Analyst having registration no. INH000002475.

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