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growth drivers for ITC

ITC Ltd, for the first quarter ended June 30, 2007, recorded a 20% growth in profit after tax (PAT) Rs 783 crore, up from Rs 652 crore in the corresponding quarter of last year. Net sales for the quarter under review at Rs 3,325 crore was up 16.7%. Y C Deveshwar, chairman of the company, said the first quarter growth in both net turnover and PAT was driven by the non-cigarette business, which grew by 18%. He said the key growth drivers had been the continued scale-up of the food business, higher agri-business revenues and a healthy performance by the hotels business. The company's revenue from its 75 hotels increased 11% to Rs 221 crore in the quarter. Revenue from its agricultural business rose 28% to Rs 1,420 crore in the quarter. Explaining the key strategy to further grow the FMCG businesses through a Greenfield approach and brand building, especially in businesses like foods and hotels, Deveshwar said that the company intended to build three deluxe hotels - one in Bangalore, one in Chennai on Anna Salai (slated to emerge as the largest luxury class hotel in the country when completed) and one in Ahmedabad. He said ITC was not keen to enter modern retail in the mid segment (shopping malls) now, as in the opinion of the company the real estate market was still not reasonable. He said the company was already present in the top-end premium and lower-end (rural malls) of the retail spectrum. "For now, we have decided to play the role of a wholesaler, selling our products through other retailers. We are also looking at the possibility of working with the cart-pushers, branding their carts with the Choupal Fresh brand," Deveshwar said. Problems in land acquisition and getting requisite permissions for projects were becoming a roadblock, he said. "We earlier announced plans to invest Rs 1,500 crore in West Bengal. We envisaged setting up experimental farms, food processing units and logistics infrastructure, but so far we have not got the land," Deveshwar said.

Buy ITC; Target -Growth drivers in place; Rs229:: RBS ITC Growth drivers in place We believe the growth opportunity in all of ITCs businesses remains exciting; ITC has made aggressive investment plans to sustain the 17.2% PAT CAGR it has seen in the last 10 years. Investment in its paper and hotel businesses should be largely funded by its own cash flows. Buy, target price Rs229.

Cigarette business outlook intact despite recent tax hikes Recent VAT increases in three states Rajasthan (20% to 40%), Gujarat (13.5% to 20%) and J&K (12.5% to 20%) have not materially increased ITCs weighted average VAT incidence, which we estimate at around 15.5% because these states are not significant contributors to ITCs overall cigarette volume. In terms of cigarette sales, ITCs key states are Tamil Nadu, Karnataka, Maharashtra and West Bengal Tamil Nadu and West Bengal will announce new budgets in a few months after state government elections. The current VAT duty structure will migrate into a GST (Goods & Services Tax) structure next year, which we expect to be governed centrally and consist of a uniform tax levy. ITC preparing for sustained growth in all businesses Despite the launch of new brands such as Marlboro, ITCs cigarette business continues to dominate the domestic market, based on a combination of attractive price points and new product offerings. The companys paper manufacturing division plans to increase its 0.5mmt pa capacity by 0.1mmt within 12-18 months and to add an incremental 0.2mmt pa of greenfield capacity to its existing facility in Andhra Pradesh. Meanwhile, the hotel division is working to increase its number of five-star rooms from 3,000 to 4,000 via the launch of the Grand Chola property in Chennai by end-FY12 and the Kolkata expansion by end-FY13. ITC is also working to launch new hotels in Hyderabad, Ahmadabad, Gurgaon and Delhi. We raise our estimates by 1-4% and our TP to Rs229 We raise our three-stage DCF-based target price to Rs229 as we nudge up our earnings estimates and increase our capex forecast. We see little risk to ITCs growth due to its strong competitive position and growth potential in its key business areas of cigarettes, paper and hotels. Growth drivers intact ITCs diversified growth strategy has delivered an overall PAT CAGR of 17.2% for the past 10 years vs its cigarette businesss EBIT CAGR of 13% in the same period. Thus, its noncigarette businesses have driven growth, and we see this trend continuing. ITCs non-cigarette business including paper, agribusiness and hotels have delivered an overall PAT CAGR of 17.2% over the last 10 years, much higher than its core cigarette businesss 13% EBIT CAGR for the same period. In our view, the companys most significant achievement in the last 10 years has been the turnaround of its hotel business. While its division other FMCG businesses is currently losing money due to the initial gestation period for many of the businesses, we believe the division has the potential to contribute to overall profitability in the next 5-10 years Hotel and paper businesses funding their own growth While the paper and hotel businesses used cash generated by the cigarette business to fund their initial investments, both have generated enough cash flow to fund their own growth for the past seven years. Going forward, we expect both to fund the majority of their capex via internal cash generation.

Packaged foods: ITCs packaged food sales increased 25% to R2,890 crore, with volume growth for the year at 9.1%. Wheat flour and sugar prices increased by 10% and 12%, respectively, for ITC. The company entered the noodles category through the launch of Sunfeast Yippee!, for which it has received encouraging response thus far. Its biscuits business posted significant growth, especially at the value-added end, with the company launching several new variants. ITC expects foods to post robust growth in FY12 despite inflationary pressures.

Personal care: ITC continues to launch new products under its soap and shampoo brands. Vivel and Superia soaps and shampoos have together reached an estimated 99 million households so far. The company entered fairness creams through Vivel Activ Fair and also launched a line of shower gels and bathing bars under the Fiama Di Wills brand. Production of personal care products was 45% higher in FY11.

Porter's 5 Force Model-Cigar Industry

Porters Five Force Model Analysis For Indian Cigarette Industry 1. Threats of New Entrants=LOW New Product differentiation Very Tough already cigarettes at different price points, flavors, brand images Access to distribution channel is tough big & established players are present (e.g. ITC) Capital requirement is very high for a pan India launching; Local launch can not catch up scale Cant use Economies of scale Government policy high tax, no TV/Radio Ads 2. Bargaining Power of Suppliers=LOW Many inputs are required but in small amount paper, tobacco, filter There are many small scale, unorganized suppliers Cigarette companies are big and have direct access to distribution channel and addicted buyers. Suppliers dont have much control over smokers. 3. Bargaining Power of Buyers=LOW Addicted customers even after knowing harms people cant leave it Smoking has lot of symbolic and emotional values attached with it Product quality not much important to smokers Research shows most people cannot differentiate among the brands in a blind taste Low switching costs in terms of price 4. Threat of Substitute Product=LOW Herbal Cigarettes (e.g. Nirdosh) were launched but did not become popular (no emotional value) Nicotine patch is another substitute but again no comparison with cigarettes in terms of popularity and usage

5. Competitive Rivalry in the Industry=HIGH Many competing players: ITC, Godfrey Philips, VST, GTC etc - see chart below Price competition continues Advertisement for cigarettes is now prohibited in India Replacement for ads event sponsorships and sales promotions All making new product launches