CMP
TARGET PRICE
INVESTMENT
HORIZON
RECOMMENDATION
DATE
Rs.170
Rs.195-200
Medium term
BUY
12/01/2011
COMPANY DESCRIPTION
 ITC Ltd (ITC) was incorporated on August 24, 1910, under the name Imperial
Tobacco Company of India Ltd. to make cigarettes and tobacco.
 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.
 The company is rapidly gaining market share even in its nascent businesses of
Packaged Foods & Confectionery, Branded Apparel, Personal Care and
Stationery.
 ITC is largest Agri products exporter from India. Latest initiatives taken by
company has paid well for its growth, Company diversified into cloths retailing,
agri products, Body and Hair care segments, which will augment its top line and
bottom line in future.
 ITC is rated among the World's Best Big Companies, Asia's 'Fab 50' and the
World's Most Reputable Companies by Forbes magazine, among India's Most
Respected Companies by Business World and among India's Most Valuable
Companies by Business Today. ITC ranks among India's `10 Most Valuable
(Company) Brands', in a study conducted by Brand Finance and published by the
Economic Times. ITC also ranks among Asia's 50 best performing companies
compiled by Business Week.
CFS RESEARCH
BUSINESS AREA
FMCG
Cigrattes
Cigars
Foods
Paper Boards
& Packaging
& Paper Boards
and speciality
papers
Packaging
Lifestyle
retailing
Personal Care
Education and
stationery
Safety matches
Agarbattis
ITC BRANDS
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Agri Business
Hotels
Information
Technology
Banking
&
Financial
Services
Agri
ITC
commodities and Welcomgroup
rural services
e-choupal
ITC Maurya
Sheraton
Leaf Tobacco
Retail,
manufacturing,
engineering
services
Spices
Travel
&
Hospitality
Agri Inputs
ITC SUBSIDIARIES
ITC Infotech
Surya Nepal private Limited
Landbase
King Maker Marketing Inc., USA
Technico Pty Limited, Australia
Russell Credit Limited
Wimco Limited
Srinivasa Resorts Limited
Fortune Park Hotels Limited
Bay Islands Hotels Limited
Gold Flake Corporation Limited
JOINT VENTURES
Maharaja Heritage Resorts Ltd.
ITC Filtrona
ASSOCIATE COMPANIES
Gujarat Hotels Ltd.
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International Travel House
SHAREHOLDING PATTERN as on 30/09/2010
0
11.59
50.26
38.15
Promoters
Institutions
Overseas corporate bodies+ Others
Public
REVENUE STRUCTURE
18%
50%
21%
25%
4%
Paper Board_Packaging
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FMCG(others)
Agribusiness
Hotels
FMCG(Cigarettes)
RECENT QUARTER PERFORMANCE
ITC posted a good rise of 23.45% in its net profit for the quarter ended September 2010,
at Rs. 1246.74 crore as compared to Rs.1009.91 crore posted in September 2009. Total
income has increased by 16.85% from Rs 4404.95 crore for the quarter ended September
30, 2009 to Rs 5147.18 crore for the current quarter. The company reported a good
20.55% increase in operating profit to Rs.1999.38 crore as compared to Rs.1658.56 crore
of corresponding quarter previous year. ITC's total expenditure rose 16.25% to
Rs 3272.29 crore from Rs 2814.83 crore, largely driven by a 23.10% jump in raw
material costs to Rs 1,789.30 crore in the quarter and Purchase of traded goods cost rose
53.53 % to 275.06 crore. Employee costs for the period rose 7.93% to Rs 261.18 crore.
QUARTERLY ANALYSIS
Shares held
Net Sales
Total
Expenditure
PBIDT
(Excl
OI)
PAT
PBIDTM%
(Excl OI)
PBIDTM%
PATM%
EPS (INR)
201009 201006
5147.2 4847.3
3272.3 3210.3
201003 200912
5131.6 4580.2
3513.7 2872.5
200909
4405.0
2814.8
(Rs. in crores)
200906 200903 200812
4197.8 3985.9 3858.7
2810.5 2687.6 2480.6
1874.9
1637.1
1618.0
1707.6
1590.1
1387.3
1298.3
1378.0
1246.7
36.43
1070.3
33.77
1028.2
31.53
1144.2
37.28
1009.9
36.1
878.7
33.05
809.0
32.57
903.2
35.71
38.84
24.22
1.62
35.8
22.08
2.8
32.68
20.04
2.69
40.76
24.98
3.01
37.65
22.93
2.67
35.13
20.93
2.33
33.88
20.3
2.14
38.24
23.41
2.39
SEGMENT WISE GROWTH
Segment wise, net revenue from FMCG as on whole increased by 17.72 % to Rs 3,605.72
crore from Rs 3063.02 crore of which Cigarettes net revenue was up by 15.93% to Rs
2550.11 crore from Rs 2199.69 crore. Net revenue from Hotels segment improved by
20.05% to Rs 208.94 crore from Rs 174.04 crore. Agri Business net revenue showed
increment of 21.52% to Rs 1249.62 crore from Rs 1028.28 crore in the same quarter last
year. Revenue from the Paperboard, paper & packaging segment increased by 16.29% to
Rs 919.29 crore from Rs 790.38 crore.
CFS RESEARCH
30.00%
27%
25.00%
21.52%
20.00%
20.05%
16.29%
15.93%
Growth
15.00%
10.00%
5.00%
0.00%
PaperBoard&Pckg FMCG(Other)
Agribusiness
Hotel
FMG(Cigarettes)
ANNUAL REVIEW
(Rs. in crores)
201003
Description
200603
200703
200803
200903
No. of Months
Net Sales
12
9790.5
12
12164.3
12
13947.5
12
15611.9
12
18153.2
24.25
14.66
11.93
16.28
12506.1
8200.5
4305.7
18.86
3942.7
3926.7
2700.0
20.78
3062.9
14571.1
9523.1
5048.0
17.24
4609.6
4571.8
3120.1
15.56
3558.6
16156.9
10734.1
5422.8
7.42
4873.4
4825.7
3263.6
4.6
3813.0
18776.2
12061.9
6714.3
23.82
6105.6
6015.3
4061.0
24.43
4669.7
Growth%
Total Income
Total Expenditure
PBIDT
Growth%
PBIT
PBT
PAT
Growth%
Cash Profit
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10080.5
6457.8
3622.6
3245.3
3224.2
2235.4
2567.7
PEER GROUP COMPARISON
Company
Net Sales PBIDT
PAT
PBIDTM%
PATM%
ROCE%
ROE%
Golden
Tobacco
Godfrey
Phillips
VST
Industries
ITC
86.47
4.21
-11.34
2.80
-7.55
1.46
-24.40
1383.87
208.21
118.38
7.98
4.54
24.04
19
471.47
115.84
62.05
10.29
5.51
35.75
25.92
18153.19
6714.30
4061
25.57
15.46
43.65
29.33
ITC SWOT ANALYSIS
 STRENGTHS
ITC is a diversified company trading in a number of business sectors including cigarettes,
hotels, paper, agriculture, packaged foods and confectionary, branded apparel, personal
care, greetings cards, Information Technology, safety matches, incense sticks(Agarbattis)
and stationery. Company’s institutional strengths – deep understanding of the Indian
consumer, strong Trademarks, deep and wide distribution network, agri-sourcing skills,
packaging know-how and cuisine expertise – will continue to rapidly grow the new
FMCG businesses.
 WEAKNESS
Although ITC is a diversified company trading in a number of business sectors such as
FMCG, Hotels, IT, safety matches, incense sticks, stationery etc., yet it does not have
presence in many important sectors such as Insurance, Telecom, financial services when
compared to other conglomerates like the Bharti group, Tata and the Ambani’s.
ITC is a local company and does not have a large portfolio of exports in either products
or services. This makes the company weak in terms of being able to leverage global
opportunities.
 OPPORTUNITIES
ITC’s Brand equity makes it successful in most sectors. ITC has been moving into new
and emerging sectors including Information Technology, supporting business solutions.
“e-Choupal” is a community of practice that links rural Indian farmers using the Internet.
It is also an ambitious project that has a goal of reaching 10 million farmers in 100,000
CFS RESEARCH
villages. It has already benefited 4 million farmers in 40000 villages. This platform
provides ITC an opportunity to ride the rural growth .
 THREATS
Risks and concerns
The obvious threat is from competition, both domestic and international. The laws of
economics dictate that if competitors see that there is a solid profit to be made in an
emerging consumer society then ultimately new products and services will be made
available. Global companies will see India as an exciting opportunity for themselves to
find new market segments for their own offerings. This will put ITC under constant and
sustained competitive pressure from international offerings. Government policies through
higher excise duties on tobacco, restrictions on advertisements, Health campaigns related
to a complete a ban on tobacco is a serious threat for the company as Tobacco and allied
products account for about 50% of the company’s turnover.
INVESTMENT RATIONALE
 Improvement in overall business scenario
All segments of ITC such as cigarettes, the other FMCG group, paperboards and
packaging, agri business and hotels have grown very well in last one year. Recovery
posted by major economies of the world in general and BRIC nation in particular also
supported the good show posted by ITC.
 Opportunities arising out from FMCG and personal care business
As a natural hedge against the maturing pattern of its FMCG( Tobacco) based product
line, ITC has ventured into other categories of FMCG products such as Fast food items
( BINGO, SUNFEAST) and personal hygiene products such as bathing soap and hair
shampoos. Given the inherently essential nature of the products, the whole FMCG sector
is more or less immune to recessionary pressures. Robust GDP growth, opening up of
rural markets, increased income in rural areas, growing urbanization along with evolving
consumer lifestyles and buying behaviors will be the main drivers of the growth in the
FMCG sector.
 Opportunities arising from the rural business
With the presence of 12.2% of the world population in the villages of India, the Indian
rural FMCG market is something no one can overlook. Increased focus on farm sector
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will boost rural incomes, hence providing better growth prospects to the FMCG
companies. ITC is having good presence in rural India owing to its ‘e-Choupal’ initiative.
Such positive development will certainly help the company in rapid expansion.
 Emphasis on Research & Development, Quality and Product development
The Company’s R&D strategy is anchored on the development and speedy
commercialization of globally competitive products, processes and technologies through
best-in-class research interventions backed by world-class infrastructure. ITC is utilizing
its R&D hubs for developing new products for the Company's Branded Packaged Foods
and Personal Care businesses. Beside these, R&D hub also has evaluated and introduced
several new varieties of tobacco and eucalyptus that are targeted at increasing the genetic
and trait diversities in these crops.
LATEST UPDATES
 ITC Welcomgroup to invest $2 Billion to double room inventory
ITC-Welcomgroup, the second largest hotel chain in the country and a division of ITC
Ltd., plans to invest over $2 billion (around Rs.9000 crore) in the next 2-3 years to
double its room inventory across the country. The company has been pursuing an
aggressive investment-led growth strategy adding large properties to its portfolio of super
luxury hotels. In the near term 2 ITC Luxury Collection Hotels are planned- a 600 room
hotel in Chennai and a 400 room hotel in Kolkata. Though the focus will be on such
super premium hotels, ITC will develop properties across its four categories- Luxury
hotels, Business class hotels, Budget hotels and heritage properties. Hence the growth
will be across all the segments of the entire portfolio. Going forward, ITC Welcomgroup
also foresees a steep increase in business induced tourism in the country.
 Chennai Hotels likely to be commissioned in FY11-12
ITC’s 600-room hotel in Chennai is on track to be launched in the last quarter of the
current calender year. This would add 20% Capacity to ITC’s current luxury inventory of
3300 rooms.
 Tobacco procured for FY12 consumption at 10% YoY Lower price, positive for
cigarette EBIT Margins
ITC has largely completed the tobacco procurement for FY12 cigarette consumption, and
the prices of the procured tobacco has been 10% lower YoY. This is in contrast to
20-40% annual increase in tobacco prices that were seen in FY 09 and FY10. Hence, the
CFS RESEARCH
swing from a 20-40% increase in this cost to a 10% decline will provide a comfortable
cushion to cigarette EBIT Margin.
 FMCG (Other) segment continues to see improvement
The company is clearly focusing on improving foods’ profitability with price
hikes/grammage (measure of paper weight) cuts of 5-7% taken a few months ago.
Moreover, ITC’s mid to premium end biscuits is growing strongly largely driven by
advertising investments. In personal care, ITC is consolidating its market share gains in
FY10 in soaps and shampoo and gradually extending distribution of its fairness across
India.
RECOMMENDATION: “BUY ITC LTD.”
The company’s thrust on larger investments towards increasing the scale of the other
businesses (such as non-cigarette FMCG, hotel, and paper, paperboard and packaging
businesses) provide greater visibility of the strong earnings growth in the long run. We
expect that robust sales growth in cigarette segment, impressive performance by Hotels
and FMCG (Others) will drive the company’s topline. With the economy back on the
growth path, and the consumer sentiment improving consequently, the fast moving
consumer goods industry looks poised for a happy, healthy and prosperous year ahead. At
current market price of Rs.170, the stock trades at 15.9 times its FY10EPS of Rs.10.64,
and we expect the company to trade at 16 times its FY2011E EPS of Rs.12.50 and thus,
we maintain a “BUY” rating for a potential upside of 14-17% and investors entering at
this stage with a medium term view can see the stock at levels of Rs.195-200.
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prior permission. The information provided in the research documents is from publicly available
data and other sources, which we believe, are reliable. Efforts are made to try and ensure
accuracy of data. Investors should not solely rely on the information contained in the research
documents and must make investment decisions based on their own investment objectives, risk
profile and financial position.
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RESEARCH DESK
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