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March19,2012
Rising advalorem component will test the pricing power: While ITC enjoys
absolute market dominance in Cigarette with strong pricing power and has
demonstrated consistent growth in Cig profits (Cig EBIT posted 16.8% CAGR in
FY06-11 vs. 1.5% in volumes), rising ad-valorem component in taxes can restrict
steady margin expansion trend (Cig EBIT margins expanded every single year post
FY04 from 21.8% to 29% in FY11). VAT (also an ad-valorem component) rate has
effectively moved up to ~18.5% and with some key state budgets remaining, VAT
moving to ~20% by March 2013 looks imminent. Given its pricing power and
addictive nature of Cig, we see little difficulty in ITC passing through the prices, as
in the past, albeit, with lower volumes.
Gautam Duggad
gautamduggad@plindia.com
+91-22-66322233
Rating
Price
Target Price
Implied Upside
Sensex
Nifty
BUY
Rs221
Rs240
8.6%
17,273
5,257
(PricesasonMarch19,2012)
Tradingdata
Market Cap. (Rs bn)
Shares o/s (m)
3M Avg. Daily value (Rs m)
Majorshareholders
Promoters
Foreign
Domestic Inst.
Public & Other
StockPerformance
(%)
1M
6M
Absolute
7.3
12.9
Relative
12.9
9.7
HowwedifferfromConsensus
EPS(Rs)
PL
Cons.
2013
9.3
9.2
2014
11.0
10.8
1,672.6
7,738.1
1773.6
0.00%
16.31%
34.78%
48.91%
12M
32.4
35.8
%Diff.
0.6
1.4
PricePerformance(RIC:ITC.BO,BB:ITCIN)
Source:Bloomberg
Mar-12
Jan-12
Nov-11
Sep-11
Jul-11
May-11
Mar-11
(Rs)
230
220
210
200
190
180
170
160
150
Keyfinancials(Y/eMarch)
Revenues (Rs m)
Growth(%)
EBITDA (Rs m)
PAT (Rs m)
EPS (Rs)
Growth(%)
Net DPS (Rs)
Profitability&Valuation
EBITDAmargin(%)
RoE(%)
RoCE(%)
EV / sales (x)
EV / EBITDA (x)
PE (x)
P / BV (x)
Netdividendyield(%)
2011
222,737
16.4
74,077
50,083
6.5
20.3
4.5
2012
259,347
16.4
87,154
59,967
7.7
19.7
4.7
2013E
292,837
12.9
103,624
72,013
9.3
20.1
5.5
2014E
335,875
14.7
121,518
84,803
11.0
17.8
6.4
2011
33.3
32.4
32.5
7.4
22.2
34.1
10.4
2.0
2012
33.6
34.4
34.1
6.3
18.8
28.5
9.3
2.1
2013E
35.4
37.0
36.7
5.6
15.7
23.7
8.3
2.5
2014E
36.2
39.0
38.6
4.8
13.3
20.1
7.4
2.9
Source:CompanyData;PLResearch
Prabhudas Lilladher Pvt. Ltd. and/or its associates (the 'Firm') does and/or seeks to do business with companies covered in its research reports. As a result investors should be aware that
the Firm may have a conflict of interest that could affect the objectivity of the report. Investors should consider this report as only a single factor in making their investment decision.
Please refer to important disclosures and disclaimers at the end of the report
CompanyUpdate
Changeinexcisedutystructure
ITC
Exhibit1:
Excisedutychangesovertheyears(ExciseDuty/1,000sticks)
FY05
FY06
>85mm
1,780
1,960
75-85mm
1,450
1,595
70-75mm
1,090
670
Filter
<70mm
FY07
FY08
FY09
FY10
FY11
FY12
2,060
2,163
2,163
2,163
2,363
2,363
2,363+5% of MRP
1,675
1,759
1,759
1,759
1,959
1,959
1,959+5% of MRP
1,200
1,260
1,323
1,323
1,323
1,473
1,473
1,473+5% of MRP
740
780
819
819
819
969
969
969+5% of MRP
669
669
669+5% of MRP
60-70mm
450
495
<60mm
135
150
520
546
1,323
1,323
1,473
1,473
160
168
819
819
669
669
FY13
Source:CompanyData,PLResearch
Exhibit2: FY13budgetresultedineffective15%exciseincreaseforITC
Existingbase
Newstructure
Averagestickeconomics(Rs)
structure(FY12e) withoutpricehikes
MRP
3.38
3.38
%change
0.0%
Trade margin
0.31
0.31
0.0%
VAT (18%)
0.47
0.47
0.0%
Gross ASP
2.60
2.60
0.0%
Excise
1.14
1.31
14.8%
Net ASP
1.46
1.29
11.6%
Costs
0.65
0.806
31.0%
55.4%
44.0%
50.5%
Source:CompanyData,PLResearch
Exhibit3:
For18%VAT,12%pricehikerequiredtogrowCigEBITby15%
7%pricehike
10%pricehike
3.61
Trade margin
0.33
0.34
0.35
0.35
VAT (18%)
0.50
0.51
0.52
0.53
Gross ASP
2.78
7%
2.86
Excise
1.32
15.8%
1.33
1.33
1.33
Net ASP
1.46
1.53
1.58
1.60
Costs
0.65
0.65
0.65
0.65
0.81
0%
3.72
0.88
10%
10%
9%
3.79
13%pricehike
MRP
7%
12%pricehike
2.91
0.93
12%
12%
15%
3.82
2.94
0.95
29.0%
30.8%
31.9%
32.4%
55.4%
57.5%
58.8%
59.5%
47.6%
46.5%
45.8%
45.4%
13%
13%
18%
Source:CompanyData,PLResearch
ITC
Exhibit4:
For19%VAT,13%pricehikerequiredfor15%CigEBITgrowth
8%pricehike
11%pricehike
3.64
Trade margin
0.33
0.34
0.35
0.35
VAT (19%)
0.53
0.54
0.55
0.56
Gross ASP
2.782
7%
3.75
11%
2.860
10%
3.81
14%pricehike
MRP
Excise
8%
13%pricehike
2.912
13%
12%
3.85
2.938
1.33
1.33
1.33
1.34
Net ASP
1.4558
1.5287
1.5773
1.6016
Costs
0.6500
0.6500
0.6500
0.6500
0.8058
29.0%
30.7%
31.8%
32.4%
55.4%
57.5%
58.8%
59.4%
47.7%
46.6%
45.8%
45.5%
0%
0.8787
9%
0.9273
15%
14%
13%
0.9516
18%
Source:CompanyData,PLResearch
Exhibit5:
For20%VAT,14%pricehikerequiredfor15%CigEBITgrowth
9%pricehike
12%pricehike
3.67
Trade margin
0.33
0.34
0.35
0.35
VAT (20%)
0.56
0.57
0.58
0.59
Gross ASP
2.782
7%
3.78
12%
2.860
10%
3.84
15%pricehike
MRP
Excise
9%
14%pricehike
2.912
14%
12%
3.88
2.938
1.33
1.33
1.34
1.34
Net ASP
1.4544
1.5272
1.5758
1.6001
Costs
0.6500
0.6500
0.6500
0.6500
0.8044
0%
0.8772
9%
0.9258
15%
0.9501
28.9%
30.7%
31.8%
32.3%
55.3%
57.4%
58.8%
59.4%
47.7%
46.6%
45.9%
45.5%
15%
13%
18%
Source:CompanyData,PLResearch
Exhibit6:
SOTP
Cigarettes
FMCG-Others (EV/Sales)
Hotels
Multiple(EV/EBITDA)
EBITDA(FY13E)
ContributiontovalueofITC(Rsm)
(Rs/share)
15
89,593
1,325,979
174
72,155
144,311
19
15
5,917
88,749
12
Agri business
7,671
61,369
Paper
15,328
122,623
16
90,318
12
1,833,349
240
Source:PLResearch
ITC
IncomeStatement(Rsm)
Y/eMarch
2011
NetRevenue
Raw Material Expenses
Gross Profit
Employee Cost
Other Expenses
EBITDA
Depr. & Amortization
Net Interest
Other Income
ProfitbeforeTax
Total Tax
ProfitafterTax
Ex-Od items / Min. Int.
Adj.PAT
Avg.SharesO/S(m)
EPS(Rs.)
CashFlowAbstract(Rsm)
Y/eMarch
C/F from Operations
C/F from Investing
C/F from Financing
Inc. / Dec. in Cash
Opening Cash
Closing Cash
FCFF
FCFE
KeyFinancialMetrics
Y/eMarch
Growth
Revenue (%)
EBITDA (%)
PAT (%)
EPS (%)
222,737
81,184
141,553
17,240
50,236
74,077
6,991
502
7,765
74,349
23,655
50,694
611
50,083
7,738.1
6.5
292,837
105,345
187,493
22,256
61,613
103,624
7,852
329
9,503
104,946
32,932
72,013
72,013
7,738.1
9.3
335,875
125,334
210,541
22,841
66,181
121,518
8,602
299
10,893
123,511
38,707
84,804
1
84,803
7,738.1
11.0
2014E
44,897
(7,958)
(29,903)
7,036
58,941
66,128
43,169
43,308
54,517
(7,954)
(40,912)
5,651
66,128
71,779
46,830
46,730
65,681
(9,015)
(49,310)
7,357
71,779
79,136
58,371
58,271
79,843
(9,776)
(57,939)
12,128
79,136
91,264
72,146
72,046
2011
2012
2013E
2014E
16.4
17.1
20.3
20.3
16.4
17.7
19.7
19.7
12.9
18.9
20.1
20.1
14.7
17.3
17.8
17.8
35.4
24.6
36.7
37.0
36.2
25.2
38.6
39.0
(0.4)
65
(0.4)
51
23.7
8.3
15.7
5.6
20.1
7.4
13.3
4.8
31.4
9.1
4.5
80.9
31.3
8.8
4.4
85.0
33.3
22.5
32.5
32.4
33.6
23.1
34.1
34.4
(0.4)
72
BalanceSheetAbstract(Rsm)
Y/eMarch
2011
2012
2013E
2014E
164,621
1,246
9,520
175,386
105,118
6,819
63,317
66,128
85,357
88,168
132
175,386
183,799
1,146
9,730
194,674
113,742
7,319
73,482
71,779
100,759
99,056
132
194,674
205,151
1,046
9,976
216,173
123,907
7,819
84,315
79,136
114,877
109,697
132
216,173
230,246
946
10,266
241,458
135,474
8,319
97,533
91,264
130,673
124,404
132
241,458
QuarterlyFinancials(Rsm)
Y/eMarch
Q4FY11
Shareholder's Funds
Total Debt
Other Liabilities
TotalLiabilities
Net Fixed Assets
Goodwill
Investments
Net Current Assets
Cash&Equivalents
OtherCurrentAssets
CurrentLiabilities
Other Assets
TotalAssets
Q1FY12
Q2FY12
Q3FY12
58,363
17,891
30.7
1,642
140
2,259
18,368
5,553
12,815
12,815
57,675
18,834
32.7
1,665
165
2,366
19,370
6,043
13,327
13,327
59,742
21,080
35.3
1,701
142
2,918
22,155
7,012
15,143
15,143
61,954
23,287
37.6
1,739
157
3,375
24,767
7,757
17,010
17,010
2011
2012
2013E
2014E
6.0
7.3
16.4
17.7
(2,533)
(1.0)
13.0
16.1
16.8
(1,679)
6.0
8.0
15.8
16.8
320
NetRevenue
EBITDA
%ofrevenue
Depr. & Amortization
Net Interest
Other Income
ProfitbeforeTax
Total Tax
ProfitafterTax
Adj.PAT
KeyOperatingMetrics
Y/eMarch
(0.4)
70
34.1
10.4
22.2
7.4
EarningsQuality
259,347
96,204
163,143
19,840
56,149
87,154
7,225
359
8,395
87,966
27,999
59,967
59,967
7,738.1
7.7
2013E
Valuation
PER (x)
P / B (x)
EV / EBITDA (x)
EV / Sales (x)
2014E
2012
BalanceSheet
Net Debt : Equity
Net Wrkng Cap. (days)
2013E
2011
Profitability
EBITDA Margin (%)
PAT Margin (%)
RoCE (%)
RoE (%)
2012
28.5
9.3
18.8
6.3
31.8
9.5
4.6
77.9
ITC
55.7%
60%
%ofTotalCoverage
50%
40%
30%
20%
25.0%
17.1%
10%
2.1%
0%
Buy
Accumulate
Reduce
PLsRecommendationNomenclature
Sell
BUY
Accumulate
Reduce
Sell
TradingBuy
TradingSell
NotRated(NR)
UnderReview(UR)
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