EQUITY RESEARCH REPORT: ITC

DATE: 13/06/2014

INDUSTRY: FMCG BSE code: 500875 NSE code: ITC Current Price: Rs 332.60 Target Price: Rs380 52 week high/low: Rs380/281

CALL: BUY

An Overview on FMCG Sector

The fast-moving consumer goods (FMCG) sector is an important contributor to

Indias GDP and it is the fourth largest sector of the Indian economy. The Indian

FMCG sector has a market size of `2 trillion with rural India contributing to one third

of the sectors revenues.

The Indian FMCG sector is highly fragmented, volume driven and characterized by

low margins. The sector has a strong MNC presence, well established distribution

network and high competition between organized and unorganized players. FMCG

products are branded while players incur heavy advertising, marketing, packaging

and distribution costs.

Industry Facts

The Indian FMCG industry represents nearly 2.5% of the countrys GDP.

The industry has tripled in size in past 10 years and has grown at ~17%CAGR in the

last 5 years driven by rising income levels, increasing urbanisation, strong rural

demand and favourable demographic trends.

The sector accounted for 1.9% of the nations total FDI inflows in April 2000-

September 2012. Cumulative FDI inflows into

India from April 2000 to April 2013 in the food processing sector stood at `9,000.3

crore, accounting for 0.96% of overall FDI inflows while the soaps, cosmetics and

toiletries, accounting for 0.32% of overall FDI at `3,115.5 crore.

Food products and personal care together make up two-third of the sectors

revenues.

Industry Facts

The Indian FMCG industry represents nearly 2.5% of the countrys GDP.

The industry has tripled in size in past 10 years and has grown at ~17%CAGR in the

last 5 years driven by rising income levels, increasing urbanisation, strong rural

demand and favourable demographic trends.

The sector accounted for 1.9% of the nations total FDI inflows in April 2000-

September 2012. Cumulative FDI inflows into

India from April 2000 to April 2013 in the food processing sector stood at `9,000.3

crore, accounting for 0.96% of overall FDI inflows while the soaps, cosmetics and

toiletries, accounting for 0.32% of overall FDI at `3,115.5 crore.

Food products and personal care together make up two-third of the sectors

revenues.

Rural India accounts for more than 700 mn consumers or 70% of the Indian

population and accounts for 50% of the total FMCG market. With changing lifestyle

and increasing consumer demand, the Indian FMCG market is expected to cross $80

bn by 2026 in towns with population of up to 10 lakh.

India's labor cost is amongst the lowest in the world, after China & Indonesia, giving

it a competitive advantage over other countries.

Unilever Plc's $5.4 billion bid for a 23% stake in Hindustan Unilever is the largest Asia

Pacific cross border inbound merger and acquisition (M&A) deal so far in FY14 and is

the fifth largest India Inbound M&A transaction on record till date.

Excise duty on cigarette has been increased in the Union Budget for 2013-14, which

would hit major industrial conglomerates like ITC, VST Industries in the short term.

Opportunities in FMCG Sector

Untapped rural market

India is one of the worlds biggest producers of a number of FMCG products but the

countrys exports account for a very small proportion of the overall output.

Food-processing Industry: With 200 mn people expected to shift to processed and

packaged food, India needs around USD 30 bn of investment in the food processing

industry.

Key Concerns for the sector

High inflation

Rising cost of inputs

Emergence of private labels

Counterfeits and pass-offs

Rupee depreciation may hit margins of companies

Infrastructure bottlenecks

History

ITC was incorporated on August 24, 1910 under the name Imperial Tobacco

Company of India Limited. As the Company's ownership progressively Indianised, the name

of the Company was changed from Imperial Tobacco Company of India Limited to India

Tobacco Company Limited in 1970 and then to I.T.C. Limited in 1974. In recognition of the

Company's multi-business portfolio encompassing a wide range of businesses - Fast Moving

Consumer Goods comprising Foods, Personal Care, Cigarettes and Cigars, Branded Apparel,

Education and Stationery Products, Incense Sticks and Safety Matches, Hotels, Paperboards

& Specialty Papers, Packaging, Agri-Business and Information Technology - the full stops in

the Company's name Ire removed effective September 18, 2001. The Company now stands

rechristened 'ITC Limited, where ITC is today no longer an acronym or an initialised form.

Key Members

Chairman - Y C Deveshwar

Executive Directors - Nakul Anan

- P V Dhobale

- K N Grant

Timeline

1925: Packaging and Printing: Backward Integration

1975: Entry into the Hospitality Sector - A 'Ilcom' Move

1979: Paperboards & Specialty Papers - Development of a Backward Area

1985: Nepal Subsidiary - First Steps beyond National Borders

1990: Paperboards & Specialty Papers - Consolidation and Expansion

1990: Agri Business - Strengthening Farmer Linkages

2002: Education & Stationery Products - Offering the Greenest products

2000: Lifestyle Retailing - Premium Offerings

2000: Information Technology - Business Friendly Solutions

2001: Branded Packaged Foods - Delighting Millions of Households

2002: Agarbattis & Safety Matches - Supporting the Small and Cottage Sector

2005: Personal Care Products - Expert Solutions for Discerning Consumers

2010: Expanding the Tobacco Portfolio

Company Information

ITC Limited Date of Listing (NSE) : 23-Aug-1995

Face Value : 1.00

ISIN : INE154A01025

Industry : CIGARETTES

Constituent Indices : CNX CONSUMPTION,CNX NIFTY,CNX FMCG INDEX,CNX 500,CNX

100,CNX 200

Issued Cap. : 7949470840(shares) as on 17-Apr-2014

Free Float Market Cap. : 195514.39(Cr)

Impact Cost: 0.04 as on Mar-2014

Financials

P/E 33.29

Book Value 28.08

Dividend(%) 525.25%

EPS 10.61

P/C 30.37

Price/Book 12.58

Dividend Yield 1.49%

Peer Comparison FMCG

ITC Technicals

Analyst Recommends

ITC being a scrip from a defensive sector is always a safe bet for conservative

investors.

Through technicals I can infer its a range bound scrip.

I see ITC as an evergreen stock due to its diverse portfolio.

The revenue target for ITC is 1Lac crore by 2020 which is more than three times of

present numbers (Consolidated figures)

I recommend buy on dips, at 335 levels with a target price of Rs.380.

Sunay Kumat Equity Research Head Vriddhi Research 3.0