fy18 ar: government remained the bigger...

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The GST Council’s (perhaps unintentional?) u-turn on cigarette taxation immediately post

GST rollout ensured that government retained a lion’s share of ITC’s value-addition. Over the

past 5 years, 73% of the total value-added by ITC accrued to the government (‘value-added’

defined as the value created by the economic activities of the company and its employees).

ITC contributed a cumulative INR 1.5tn (USD 23bn) to the Exchequer over the past 5 years

(FY14-18) during which period its own profits were just INR477bn (USD 7.3bn) - share of the

government in the value-added by ITC is 3.5x the amount that accrued to the providers of

capital. Taking the cigarettes business alone, for every rupee of profit that the cigarettes

business earned in FY18, the government made 3.6x. From a CF perspective, ITC managed a

20% growth in cashflow from operations (pre-exceptional basis) despite a mere 6.8%

growth in operating profit - a large part of this delta was due to timing of payout of GST

liabilities vs excise, as reflected in higher ‘statutory liabilities’ in Mar’18 BS. We find risk-

reward favourable with stock trading at c.50% discount to consumer peers.

For every rupee of profit that the cigarette business makes, the government earns 3.6x:

Cigarette taxation regime remained harsh in FY18 as the GST Council, against its earlier

promise of keeping cigarette taxes neutral, hiked it in excess of 13% (19% for Kings-

sized) which, coupled with a 6% hike in excise in Budget 2017, increased indirect tax

incidence by c.20%. ITC’s cigarettes segment’s indirect taxes outflow rose 12% in FY18

vs a mere 7% LTL growth in cigarette revenue; the consequence of the sharp rise in taxes

was an estimated c.3% decline in cigarette volumes and a mere c.5% growth in post-tax

profits, even as government’s earnings from the segment continued to grow at double-

digit (+11.7%, as per our workings). Over a 3-year period, government’s earnings from

the cigarettes business (currently at USD 4.6bn p.a.) grew at 9% CAGR while ITC’s own

profits grew just 4-5% p.a. The equation, though, is more normal when seen from a

longer-term (8-year) perspective – both grew at c.13% CAGR. The sharp rise in cigarette

taxes has led to a proliferation of illegal cigarettes in India volumes of which, as per the

company, has grown at 4.8% CAGR since FY11 compared to 5% p.a. decline in legal

cigarettes during the same period. The company estimates an annual loss of INR 130bn

(USD 2bn p.a.) to the Exchequer on this count. Taxes on cigarettes remained effectively

about 50x higher than on other tobacco products.

ITC reported a 24% growth in cashflow from operations and 37% growth in FCFF in

FY18: ITC’s operating cashflow grew 20% in FY18 ex exceptional items - significantly

ahead of 6.8% growth in EBITDA, 5.3% growth in adjusted net profit. This was led in

large part by INR17bn working capital release most of which was helped by higher

outstanding statutory liabilities as GST dues are payable in the following month while

excise used to be settled in the same month itself. Adjusting for this transition benefit,

operating CF growth was c.8% - closer to growth in profits. Capex outflow declined 9%

YoY which drove a 37% growth in reported FCFF; 15% on normalised basis, as per our

workings. Segmentally, the largest share of capex was on Hotels – a business with just

2.6% ROCE (pre-tax) vs ITC’s overall segment ROCE of 64% (pre-tax). Net annual

accretion of INR54bn to ITC’s net cashpool (INR 259bn at Mar’18 – USD 4bn) was the

highest ever and ITC’s net-cash now stands at c.62% of its net sales (2nd

only to GSK in

the sector) – implying a scope for hike in payout ratio from present c.67% level.

Richard Liu [email protected] | Tel: (91 22) 66303064

Vicky Punjabi [email protected] | Tel: (91 22) 66303065

Recommendation and Price Target

Current Reco. BUY

Previous Reco. BUY

Current Price Target (12M) 335

Upside/(Downside) 25.9%

Previous Price Target 335

Change 0.0%

Key Data – ITC IN

Current Market Price INR263

Market cap (bn) INR3,206/US$46.7

Free Float 54%

Shares in issue (mn) 12,023.3

Diluted share (mn) 12,240.9

3-mon avg daily val (mn) INR2,661/US$38.8

52-week range 368/250

Sensex/Nifty 35,217/10,671

INR/US$ 68.6

Price Performance % 1M 6M 12M

Absolute -3.5 0.2 -15.9

Relative* -4.3 -3.5 -26.1

* To the BSE Sensex

ITC | BUY

29 June 2018 India | Consumer | Company Update

FY18 AR: Government remained the bigger beneficiary

Financial Summary (INR mn) Y/E March FY16A* FY17A FY18A FY19E FY20E

Net Sales 390,507 417,230 421,237 462,906 515,757

Sales growth (%) 1.6 6.8 1.0 9.9 11.4

EBITDA 144,509 154,359 164,830 183,232 208,500

EBITDA (%) 36.6 36.6 38.8 39.3 40.1

Adjusted net profit 93,429 102,884 108,301 121,597 137,752

EPS (INR) 7.7 8.5 8.9 9.9 11.2

EPS growth (%) -3.6 9.4 4.8 11.9 12.9

ROIC (%) 41.0 37.0 37.9 38.0 38.4

ROE (%) 25.1 23.1 21.9 22.0 22.7

PE (x) 34.2 31.3 29.9 26.7 23.6

Price/Book Value (x) 7.5 6.9 6.2 5.6 5.1

EV/EBITDA (x) 21.1 19.4 18.0 16.1 14.1

Dividend Yield 2.1 1.8 1.9 2.2 2.5

Source: Company data, JM Financial. Note: Valuations as of 27/Jun/2018

https://euromoney.com/brokers

http://jmflresearch.com/JMnew/JMCRM/analystreports/pdf/TeamJM-Flyer_1June2018.pdf

ITC 29 June 2018


For every rupee of profit that ITC’s cigarettes business makes, government earns 3.6x (INR mn) Exhibit 1.

Source: Company, JM Financial

Distribution of value-added and contribution to Exchequer (INR mn) Exhibit 2.


20+ years cigarette volume history Exhibit 3.


Rs mn FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 YoY 3yr cagr 8yr cagr

Cig VAT (estimated) 22,716 28,011 36,556 49,953 62,271 68,809 78,940 80,124 21,356

Cig Excise 79,619 92,539 99,260 120,172 136,204 136,478 148,625 157,714 46,325

Cig GST (estimated) / Other taxes 198,638

Estd Income Tax on Cig EBIT 16,089 18,422 21,501 25,680 31,343 35,884 42,416 43,353 46,666

Total taxes from Cig (A) 118,423 138,972 157,317 195,805 229,819 241,171 269,981 281,191 312,986 11.3% 9.1% 12.9%

Reported Cig EBIT - Parent 49,381 57,668 69,077 83,259 98,580 111,963 117,524 125,139 133,408 6.6% 6.0% 13.2%

Tax rate 32.6% 31.9% 31.1% 30.8% 31.8% 32.1% 36.1% 34.6% 35.0%

Tax Estd on Cig Profit 16,089 18,422 21,501 25,680 31,343 35,884 42,416 43,353 46,666

Cig estimated PAT (B) 33,292 39,245 47,576 57,580 67,237 76,078 75,108 81,786 86,742 6.1% 4.5% 12.7%

Cig Taxes / Cig PAT (A/B) 3.6 3.5 3.3 3.4 3.4 3.2 3.6 3.4 3.6

Rs mn FY13 FY14 FY15 FY16 FY17 FY18

PAT net of ESOP costs 70,574 83,790 90,783 93,284 102,009 107,840

YoY 18.7% 8.3% 2.8% 9.4% 5.7%

Incremental profit 13,216 6,993 2,501 8,725 5,831

Total Value-Added during the year 305,300 352,550 379,720 410,590 435,680 462,960

YoY 15.5% 7.7% 8.1% 6.1% 6.3%

Incremental value-added 47,250 27,170 30,870 25,090 27,280

1) Share of Exchequer 223,430 256,690 275,460 307,420 320,750 337,910

YoY 14.9% 7.3% 11.6% 4.3% 5.3%

Incremental contribution 33,260 18,770 31,960 13,330 17,160

2) Estd Share of Employees 17,480 20,146 23,095 23,316 24,443 24,875

YoY 15.3% 14.6% 1.0% 4.8% 1.8%

Incremental share 2,666 2,949 221 1,127 432

3) Estd Share of Capital Providers 64,390 75,714 81,165 79,854 90,487 100,175

YoY 17.6% 7.2% -1.6% 13.3% 10.7%

Incremental share 11,324 5,451 -1,311 10,633 9,689

Constitutes 73% of value-added

Incremental contr to Exchequer of INR 17bn vs profit

growth of INR 5.8bn in FY18

20%

12%

0%

-1%

-2%

1%

-8%

4%3%

7%8%

7%

-1%

-3%

7%

-3%

6%

2%

-3%

-10%-8%

-1%-3%

-12%

-5%

2%

9%

16%

23%

FY96 FY98 FY00 FY02 FY04 FY06 FY08 FY10 FY12 FY14 FY16 FY18

Cig Vol Growth %

FY18 cig volumes lower vs 13-year ago level

ITC 29 June 2018


ROCE impacted by higher capital expenditure in lower ROCE businesses like Hotels Exhibit 4.and Paperboard.


Higher statutory liabilities (on GST transition) and lower inventories helped drive a reduction in net working capital (INR mn) Exhibit 5.

FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18

Inventory 57,348 64,269 75,221 82,552 85,869 91,294 81,862 75,845

No of days' sale 94 90 88 86 82 85 72 66

Receivables 10,867 12,002 13,958 24,392 19,821 19,172 24,743 26,823

No of days' sale 18 17 16 25 19 18 22 23

Other Current Assets 963 1,371 6,241 10,960 4,067 5,534 6,571 12,995

% of sales 0% 1% 2% 3% 1% 1% 2% 3%

Loans & Advances 16,393 15,803 17,759 22,451 21,341 36,432 44,075 46,680

% of sales 7% 6% 6% 6% 6% 9% 11% 11%

Current Liabilities & Provisions 48,207 51,803 55,691 60,407 60,464 67,029 71,604 94,168

No of days' expenses 167 154 135 133 121 135 132 176

Net Working Capital (ex-cash) 37,364 41,641 57,487 79,949 70,634 85,402 85,646 68,175

% of sales 17% 16% 18% 23% 18% 22% 21% 16%


Components of capital employed (INR bn) Exhibit 6.


33.7%

35.3%35.7%

36.9% 37.5%38.2%

38.5%

40.5%

45.5%

48.5%49.5%

48.1%

46.0%

37.9%

34.3%33.1%

1.351.37 1.39

1.31

1.22

0.99

0.89

0.82

0.7

0.8

0.9

1.0

1.1

1.2

1.3

1.4

1.5

20%

25%

30%

35%

40%

45%

50%


EBIT margin % (incl other income) ROCE % - pre-tax Asset Turnover - x (RHS)

Ind-AS

Fall in return metrics under Ind-AS due to impact of ESOPexpenses and non-recognition of proposed dividend pending shareholders' approval.

124 142 160 180 177 196 220

83 98 108 148187 205 260

42 57 8071

85 86 68

-43 -51 -59 -61-1 -2 -1

-20%

0%

20%

40%

60%

80%

100%

FY12 FY13 FY14 FY15 FY16 FY17 FY18

Net fixed assets Cash & Cash Eqv Net Working Cap (excl cash) Others

Proposed Dividend not recognised as liability under Ind-AS

ITC 29 June 2018


Cash flow movement during the year (INR bn) Exhibit 7.

Source: JM Financial, Company

Cash flow from operations rises sharply due to working Exhibit 8.capital release (INR bn)


We estimate normalised operating cashflow growth for FY18 to be c.8% vs Exhibit 9.reported growth of 24%


Available year-end cash/liquid surplus (INR bn) Exhibit 10.


Payout trend (INR bn) Exhibit 11.


205

132

15

62

260

50

100

150

200

250

300

350

Mar 2017 balance Cash from operations Cash used ininvestments

Cash used infinancing

Mar 2018 balance

35.0

44.6

55.162.6

71.0 73.4

98.4 98.0106.3

131.7

17.5

32.2

40.2 38.5

44.7 44.9

65.574.6 75.6

103.7

0

22

44

66

88

110

132

FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18

Net cash generated from operating activities - INR bn Free cash flow - INR bn

24%

4%

12%

8%

0%

3%

6%

9%

12%

15%

18%

21%

24%

27%

FY18 Reported Op CFgrowth

Exceptional Item Wcap savings from GSTtransition

Normalised FY18 Op CFgrowth

71.882.2

97.1105.3

145.7

186.6

205.0

259.4

50

100

150

200

250

300


Cash & Liquid Surplus (Net) - INR bn

37.840.9

48.555.7

60.3

63.0

69.4

75.8

22.3

19.3

0

17

34

51

68

85


Dividend Payout - INR bn

Spe

cial

Div

iden

d

Special Dividend

ITC 29 June 2018


Guide to key subsidiaries (INR mn) Exhibit 12.

Subsidiary ITC's

holding Nature of business Turnover Net Profit

FY16 FY17 FY18 YoY % FY16 FY17 FY18 YoY %

Russell Credit 100% Investment arm 706 597 825 38% 450 342 638 86%

Srinivasa Resorts 68% Hotels 543 544 584 7% -17 -15 5 NM

ITC Infotech India Ltd 100% IT 9,613 9,362 10,203 9% 882 179 277 55%

ITC Infotech UK 100% IT 2,978 2,993 3,917 31% 70 95 117 24%

ITC Infotech USA 100% IT 5,679 5,925 5,713 -4% 91 85 126 49%

Surya Nepal 59% Cigarettes - Nepal 15,541 17,993 20,054 11% 3,933 4,603 5,381 17%

Fortune Park Hotels 100% Hotels 289 295 276 -7% 62 24 19 -21%

Technico Agri 100% Agriculture 1,004 1,486 820 -45% 158 145 -141 NM


Incremental EBITDA contributed by subsidiaries (INR mn) Exhibit 13.


A&P spends (INR mn) Exhibit 14.


2,8032,561

3,612

5,468

5,971

7,281 7,362

8,579

9,420

4.3%

3.3%

3.9%

4.9%

4.6%

5.1% 5.1%

5.6%5.7%

2%

4%

6%

8%

1,500

3,000

4,500

6,000

7,500

9,000

10,500

FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18

Incremental Ebitda from Subs INR mn Subsidiaries' Contribution to Consol EBITDA

4,042

5,324 5,422

6,546

7,059

8,342 8,258

7,415

8,949

8,107

9,022

2.8%

3.2%

2.8%2.9%

2.7%

2.7% 2.4%

1.9%

2.3%

1.9% 2.0%

2%

2%

3%

3%

4%

1,000

3,000

5,000

7,000

9,000

11,000

FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18

Advertisement & Sales Promotion - INR mn A&P - % of sales

ITC 29 June 2018


Turnover trends- Foods, other non-cigarettes FMCG (INR bn) Exhibit 15.

Key Commentaries on non-cig FMCG businesses:

- ITC’s non-cigarette FMCG business grew 11.3% on comparable basis

in FY18. Reported growth was lower at 7.8% due to GST related

accounting adjustments.

- The Foods business, which constitutes c.77% of non-cig FMCG,

reported 8% growth in FY18. We estimate comparable growth to also

be of the order of c.11%.

- The non-cigarette FMCG segment notched up a combined consumer

spends of nearly INR160bn p.a. (US$2.5bn):

- Aashirvaad and Sunfeast are INR40bn+ and INR35bn+ respectively

- Bingo! crossed INR20bn, Classmate and Yippee! are INR10bn+

each. Vivel (Personal care), Mangaldeep (Incense sticks) and

Candyman (Confectionery) are each in excess of INR5bn.

- Aashirvaad is No.1 in branded atta, Sunfeast is no.1 in premium

cream biscuits, Bingo! is No.1 in bridges segment of snack foods,

YiPPee! is No.2 in Noodles, Engage is no.2 in deodorants and

Fiama is no.2 in shower gels.


SG&A trends (INR bn) Exhibit 16.

FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY13-18 CAGR FY18 YOY

Staff Cost 19.35 21.46 25.04 27.72 34.41 36.32 37.61 8.5% 3.6%

YoY growth % 13.3% 10.9% 16.7% 10.7% 24.1% 5.5% 3.6%

A&P 7.06 8.34 8.26 7.42 8.95 8.11 9.02 1.6% 11.3%

YoY growth % 7.8% 18.2% -1.0% -10.2% 20.7% -9.4% 11.3%

Other Exp 50.30 53.55 58.53 63.47 68.37 68.49 64.47 3.8% -5.9%

YoY growth % 14.8% 6.5% 9.3% 8.4% 7.7% 0.2% -5.9%

SG&A 76.71 83.35 91.83 98.61 111.73 112.92 111.11 5.0% -1.6%

YoY growth % 13.7% 8.6% 10.2% 7.4% 13.3% 1.1% -1.6%


Capex spends in Hotel segment doubled in FY18 Exhibit 17.(INR bn)


NWC release in FY18 was mostly attributable to higher Exhibit 18.outstanding statutory liabilities as GST dues are payable in the

following month (INR mn)


23.2

28.9

37.1

47.2

57.2

64.1

71.0

80.4

86.7

13.416.1

18.523.2 24.2

26.4 26.5 25.0 26.9

0

13

26

39

52

65

78

91


Foods Turnover - INR bn Other FMCG Businesses Turnover - INR bn

6.1

7.2

9.8

2.11.5

2.6

8.1

3.8

1.3

3.5

2.6

11.6

4.7

1.6

5.6

1.0

8.49.2

0.9

9.1

0

3

6

9

12

Cigarettes FMCG-Others Hotels Agri Paper

FY15 FY16 FY17 FY18

Spent on construction of luxury hotels at Hyderabad, Kolkata and Ahmedabad

848

-807

5,726

11,009

18,444

-312

2,770

-444

-17,364-20,000

-10,000

0

10,000

20,000


Net Working Capital Changes - Incr/(Decr) - INR mn

Overheads declined in FY18 vs 5%

CAGR over FY13-18.

ITC 29 June 2018


FY18 cigarette volumes lower vs 13-year ago level Exhibit 19.


Avg cig sales realisation (INR) Exhibit 20.


Segment-wise RoCE trends

Segment RoCE trend: Total consolidated Exhibit 21.


Segment RoCE trend: Cigarettes Exhibit 22.


Segment RoCE trend: Non-cig FMCG Exhibit 23.


Segment RoCE trend: Hotels Exhibit 24.


8178

8482

8788

85

77

71 7068

50

60

70

80

90

FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18

Cigarette volume - bn sticks

FY18 cig vol lower vs 13-year ago level

2.2 2.32.8

3.0

3.5

4.1

4.8

5.76.0

6.6

1.0

2.0

3.0

4.0

5.0

6.0

7.0

FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18

Gross sales per stick - Blended - INR

54%

59%60% 60% 60% 60%

61%

64%

35%

40%

45%

50%

55%

60%

65%


Total Segment ROCE (Consolidated) - Pre-tax

189%200%

189%178%

185%

205%

226%

289%

120%

180%

240%

300%


Segment ROCE - Cigarettes - Pre-tax Increase led by margin expansion and decline in cap employed`

-18%

-11%

-4%

0%1% 1%

0%

3%

-20%

-15%

-10%

-5%

0%

5%


Segment ROCE - Non-Cig FMCG - Pre-tax

11%

9%

4%4%

1% 1%

2% 3%

0%

3%

6%

9%

12%


Segment ROCE - Hotels - Pre-tax

ITC 29 June 2018


Segment RoCE trend: Agri business Exhibit 25.


Segment RoCE trend: Paperboards Exhibit 26.


Segment-wise annual topline and margin trends

Cigarettes segment – revenue growth and EBIT margin trends Exhibit 27.


Non-cig FMCG segment- revenue growth and EBIT trends Exhibit 28.


35%37%

45% 47%

42%41%

36%31%

0%

10%

20%

30%

40%

50%


Segment ROCE - Agribusinesses - Pre-tax

22%

23%

21%

17% 17%17%

17%18%

12%

15%

18%

21%

24%


Segment ROCE - Paperboards & Pkg - Pre-tax

15.0%14.4%

12.1%

16.8%

12.1%

4.7%

6.9%

5.3%

6.9%

0%

3%

6%

9%

12%

15%

18%


Cigarettes sales growth %

52%54%

56%

59%

63%

66% 66%67%

72%

40%

50%

60%

70%

80%


Cigarettes segment EBIT margin %

21%

23% 24%

26%

16%

11%

8% 8% 8%

0%

5%

10%

15%

20%

25%

30%


FMCG Sales Growth %

FMCG now a INR160bn+ segment at consumer spends level; the portfolio comprises of 2 INR35bn+ brands and 3 INR10bn+ brands

-3,803

-3,315

-2,151

-889

120 312

887262

1,705

-5,000

-4,000

-3,000

-2,000

-1,000

0

1,000

2,000


FMCG EBIT - INR mn

FMCG EBITDA at INR4.7bn (4.2% margin)

ITC 29 June 2018


Hotels segment- revenue growth and EBIT margin trends Exhibit 29.


Agribusiness segment- revenue growth and EBIT margin trends Exhibit 30.


Paperboards, paper and packaging segment – revenue growth and EBIT margin trends Exhibit 31.


-10.5%

9.1%

0.8%

6.0%5.2% 4.9%

8.2%

4.2%

5.7%

-15%

-10%

-5%

0%

5%

10%


Hotels sales growth %

24%

27% 27%

13% 12%

4% 5%

8%10%

0%

8%

16%

24%

32%

40%


Hotels segment EBIT margin %

0.4%

22.9%

20.0%

26.4%

7.7% 8.1%

-11.0%

10.9%

-2.7%

-15%

-6%

3%

12%

21%

30%


Agri sales growth %Lower leaf tobacco output on

drought in AP in 2016, stronger INR and limited trading

opportunities in other commodities impacted sales.

12%12%

11%

10%

11% 11%

13%

11%

10%

6%

8%

10%

12%

14%


Agri segment EBIT margin %

14.6%13.4%

12.6%

9.1%

14.7%

2.2%0.9% 0.7%

-2.1%-4%

0%

4%

8%

12%

16%

20%


Paperboards sales growth %

21%

22%23%

21%

17%

17% 17%

18%

20%

12%

16%

20%

24%


Paperboards segment EBIT margin %

Margin improved on benign input costs and in-house manufacturing of pulp.

ITC 29 June 2018


ITC one-year forward PE band Exhibit 32.


0

80

160

240

320

400

Jun-08 Jun-09 Jun-10 Jun-11 Jun-12 Jun-13 Jun-14 Jun-15 Jun-16 Jun-17 Jun-18

22x

29x

36x

15x

ITC 29 June 2018


Financial Tables (Consolidated)

Profit & Loss Statement (INR mn) Balance Sheet (INR mn)

Y/E March FY16A* FY17A FY18A FY19E FY20E Y/E March FY16A* FY17A FY18A FY19E FY20E

Net sales 390,507 417,230 421,237 462,906 515,757 Shareholders' Fund 426,795 464,129 525,101 577,963 637,634

Sales Growth 1.6% 6.8% 1.0% 9.9% 11.4% Share capital 8,047 12,147 12,204 12,241 12,278

Other operational income 3,879 4,166 3,260 3,583 3,992 Reserves & Surplus 418,748 451,982 512,897 565,722 625,356

Total Revenue 394,386 421,395 424,498 466,489 519,749 Preference Share Capital 0 0 0 0 0

Cost of Goods Sold/Op. Exp. 138,150 154,121 148,563 166,205 185,656 Minority Interest 2,609 2,947 3,345 5,446 7,685

Personnel cost 34,410 36,317 37,609 41,190 45,738 Total Loans 838 457 359 359 359

Other expenses 77,318 76,598 73,496 75,862 79,854 Def. Tax Liab / Assets (-) 18,395 18,338 18,750 17,978 17,105

EBITDA 144,509 154,359 164,830 183,232 208,500 Total - Equity & Liab 448,637 485,872 547,555 601,747 662,783

EBITDA Margin 36.6% 36.6% 38.8% 39.3% 40.1% Net Fixed Assets 176,664 196,234 220,323 236,584 251,854

EBITDA Growth (%) 1.8% 6.8% 6.8% 11.2% 13.8% Gross Fixed Assets 161,757 180,944 199,197 229,286 260,231

Depn & Amort 10,774 11,528 12,363 13,828 15,675 Intangible Assets 0 0 0 0 0

EBIT 133,735 142,831 152,467 169,404 192,825 Less: Depn. & Amort. 10,691 22,010 33,957 47,785 63,460

Other Income 15,308 17,615 18,319 21,256 22,884 Capital WIP 25,597 37,299 55,083 55,083 55,083

Finance Cost 536 243 899 942 998 Investments 117,476 175,814 220,529 246,992 276,631

PBT before Excep & Forex 148,507 160,204 169,886 189,719 214,711 Current Assets 222,374 186,936 201,557 206,790 231,718

Excep & forex Inc/Loss(-) 0 0 4,129 0 0 Inventories 91,294 81,862 75,845 88,777 100,325

PBT 148,507 160,204 174,015 189,719 214,711 Sundry Debtors 19,172 24,743 26,823 28,535 31,793

Taxes 53,582 55,491 59,164 66,104 74,812 Cash & Bank Balances 69,943 29,686 39,215 24,671 27,393

Extraordinary Inc/Loss(-) 0 0 4,129 0 0 Loans & Advances 36,432 44,075 46,680 41,662 46,418

Assoc. Profit/Min. Int.(-) 1,480 1,818 2,139 2,018 2,147 Other Current Assets 5,534 6,571 12,995 23,145 25,788

Reported Net profit 93,445 102,894 112,712 121,597 137,752 Current Liab. & Prov. 67,877 73,111 94,853 88,619 97,421

Adjusted Net Profit 93,429 102,884 108,301 121,597 137,752 Current Liabilities 64,961 69,408 92,034 85,365 93,801

Net Margin (%) 23.7% 24.4% 25.5% 26.1% 26.5% Provisions & Others 2,916 3,703 2,820 3,254 3,620

Diluted share capital (mn) 12,071 12,147 12,204 12,241 12,278 Net Current Assets 154,497 113,825 106,704 118,171 134,297

Diluted EPS (INR) 7.7 8.5 8.9 9.9 11.2 Total – Assets 448,637 485,872 547,555 601,747 662,783

Diluted EPS Growth -3.6% 9.4% 4.8% 11.9% 12.9% Source: Company, JM Financial

Total Dividend + tax 82,326 69,447 75,772 85,118 99,181

Dividend Per Share (Rs) 5.7 4.7 5.1 5.7 6.7


(*) Financials for FY16 growth shown in above table impacted by Ind-AS transition. FY16 LTL Sales, EBITDA and EPS grew 1.6%,6% and 2.2%

Cash Flow Statement (INR mn) Dupont Analysis

Y/E March FY16A* FY17A FY18A FY19E FY20E Y/E March FY16A* FY17A FY18A FY19E FY20E

Profit before Tax 148,507 160,204 174,015 189,719 214,711 Net Margin 23.7% 24.4% 25.5% 26.1% 26.5%

Depn. & Amort. 10,774 11,528 12,363 13,828 15,675 Asset Turnover (x) 1.0 0.9 0.8 0.8 0.8

Net Interest Exp. / Inc. (-) -14,772 -17,372 -17,420 -20,315 -21,886 Leverage Factor (x) 1.1 1.0 1.0 1.0 1.0

Inc (-) / Dec in WCap. -2,770 444 17,364 -26,069 -13,503 RoE 25.1% 23.1% 21.9% 22.0% 22.7%

Others 7,030 6,386 5,368 -2,790 -3,020 Key Ratios

Taxes Paid -50,778 -54,916 -59,996 -66,045 -74,714 Y/E March FY16A* FY17A FY18A FY19E FY20E

Operating Cash Flow 97,990 106,273 131,694 88,328 117,263 BV/Share (INR) 35.4 38.2 43.0 47.2 51.9

Capex -23,402 -30,715 -27,985 -30,089 -30,945 ROIC 41.0% 37.0% 37.9% 38.0% 38.4%

Free Cash Flow 74,589 75,558 103,709 58,239 86,318 ROE 25.1% 23.1% 21.9% 22.0% 22.7%

Inc (-) / Dec in Investments -23,803 -10,749 -50,814 -26,463 -29,639 Net Debt/Equity (x) -0.4 -0.4 -0.5 -0.5 -0.5

Others 7,997 8,955 7,660 21,256 22,884 P/E (x) 34.4 31.4 30.0 26.8 23.7

Investing Cash Flow -39,208 -32,509 -71,139 -35,296 -37,701 P/B (x) 7.5 7.0 6.2 5.6 5.1

Inc / Dec (-) in Capital 5,317 10,670 9,128 7,037 7,037 EV/EBITDA (x) 21.2 19.5 18.1 16.2 14.1

Dividend + Tax thereon -61,254 -83,330 -70,884 -75,772 -85,118 EV/Sales (x) 7.8 7.2 7.1 6.4 5.7

Inc / Dec (-) in Loans 64 -95 31 0 0 Debtor days 18 21 23 22 22

Others -252 -255 -486 1,160 1,241 Inventory days 84 71 65 69 70

Financing Cash Flow -56,125 -73,010 -62,211 -67,575 -76,840 Creditor days 95 95 129 110 110

Inc / Dec (-) in Cash 2,657 754 -1,656 -14,543 2,722 Source: Company, JM Financial

Opening Cash Balance 67,286 28,932 40,871 39,215 24,671

Closing Cash Balance 69,943 29,685 39,215 24,671 27,393


ITC 29 June 2018


History of Earnings Estimate and Target Price

Date Recommendation Target Price % Chg.

21-Jul-16 Hold 265

24-Oct-16 Hold 265 0.0

26-Oct-16 Hold 265 0.0

3-Nov-16 Hold 265 0.0

14-Dec-16 Hold 265 0.0

27-Jan-17 Hold 275 3.8

1-Feb-17 Hold 285 3.6

16-Mar-17 Hold 285 0.0

21-May-17 BUY 340 19.3

26-May-17 BUY 340 0.0

30-Jun-17 BUY 350 2.9

2-Jul-17 BUY 375 7.1

27-Jul-17 BUY 315 -16.0

27-Oct-17 BUY 315 0.0

19-Jan-18 BUY 325 3.2

16-May-18 BUY 335 3.1

Recommendation History

H H H HH HHH H HH H

BB BB

B B B B

0

50

100

150

200

250

300

350

400

Jun-15 Nov-15 Apr-16 Sep-16 Feb-17 Jul-17 Dec-17 May-18

ITC

Target Price ITC

ITC 29 June 2018


APPENDIX I

JM Financial Inst itut ional Secur it ies Limited ( fo rmer l y known as JM F inanc ia l Secur i t i e s L im i ted)

Corporate Identity Number: U67100MH2017PLC296081 Member of BSE Ltd., National Stock Exchange of India Ltd. and Metropolitan Stock Exchange of India Ltd.

SEBI Registration Nos.: Stock Broker - INZ000163434, Research Analyst – INH000000610 Registered Office: 7th Floor, Cnergy, Appasaheb Marathe Marg, Prabhadevi, Mumbai 400 025, India.

Board: +9122 6630 3030 | Fax: +91 22 6630 3488 | Email: [email protected] | www.jmfl.com

Compliance Officer: Mr. Sunny Shah | Tel: +91 22 6630 3383 | Email: [email protected]

Definition of ratings

Rating Meaning

Buy Total expected returns of more than 15%. Total expected return includes dividend yields.

Hold Price expected to move in the range of 10% downside to 15% upside from the current market price.

Sell Price expected to move downwards by more than 10%

Research Analyst(s) Certification The Research Analyst(s), with respect to each issuer and its securities covered by them in this research report, certify that: All of the views expressed in this research report accurately reflect his or her or their personal views about all of the issuers and their securities; and No part of his or her or their compensation was, is, or will be directly or indirectly related to the specific recommendations or views expressed in this research report. Important Disclosures This research report has been prepared by JM Financial Institutional Securities Limited (JM Financial Institutional Securities) to provide information about the

company(ies) and sector(s), if any, covered in the report and may be distributed by it and/or its associates solely for the purpose of information of the select

recipient of this report. This report and/or any part thereof, may not be duplicated in any form and/or reproduced or redistributed without the prior written

consent of JM Financial Institutional Securities. This report has been prepared independent of the companies covered herein.

JM Financial Institutional Securities is registered with the Securities and Exchange Board of India (SEBI) as a Research Analyst and a Stock Broker having trading

memberships of the BSE Ltd. (BSE), National Stock Exchange of India Ltd. (NSE) and Metropolitan Stock Exchange of India Ltd. (MSEI). No material disciplinary

action has been taken by SEBI against JM Financial Institutional Securities in the past two financial years which may impact the investment decision making of

the investor.

JM Financial Institutional Securities renders stock broking services primarily to institutional investors and provides the research services to its institutional

clients/investors. JM Financial Institutional Securities and its associates are part of a multi-service, integrated investment banking, investment management,

brokerage and financing group. JM Financial Institutional Securities and/or its associates might have provided or may provide services in respect of managing

offerings of securities, corporate finance, investment banking, mergers & acquisitions, broking, financing or any other advisory services to the company(ies)

covered herein. JM Financial Institutional Securities and/or its associates might have received during the past twelve months or may receive compensation from

the company(ies) mentioned in this report for rendering any of the above services.

JM Financial Institutional Securities and/or its associates, their directors and employees may; (a) from time to time, have a long or short position in, and buy or

sell the securities of the company(ies) mentioned herein or (b) be engaged in any other transaction involving such securities and earn brokerage or other

compensation or act as a market maker in the financial instruments of the company(ies) covered under this report or (c) act as an advisor or lender/borrower to,

or may have any financial interest in, such company(ies) or (d) considering the nature of business/activities that JM Financial Institutional Securities is engaged

in, it may have potential conflict of interest at the time of publication of this report on the subject company(ies).

Neither JM Financial Institutional Securities nor its associates or the Research Analyst(s) named in this report or his/her relatives individually own one per cent or

more securities of the company(ies) covered under this report, at the relevant date as specified in the SEBI (Research Analysts) Regulations, 2014.

The Research Analyst(s) principally responsible for the preparation of this research report and members of their household are prohibited from buying or selling

debt or equity securities, including but not limited to any option, right, warrant, future, long or short position issued by company(ies) covered under this report.

The Research Analyst(s) principally responsible for the preparation of this research report or their relatives (as defined under SEBI (Research Analysts)

Regulations, 2014); (a) do not have any financial interest in the company(ies) covered under this report or (b) did not receive any compensation from the

company(ies) covered under this report, or from any third party, in connection with this report or (c) do not have any other material conflict of interest at the

time of publication of this report. Research Analyst(s) are not serving as an officer, director or employee of the company(ies) covered under this report.

While reasonable care has been taken in the preparation of this report, it does not purport to be a complete description of the securities, markets or

developments referred to herein, and JM Financial Institutional Securities does not warrant its accuracy or completeness. JM Financial Institutional Securities

may not be in any way responsible for any loss or damage that may arise to any person from any inadvertent error in the information contained in this report.

This report is provided for information only and is not an investment advice and must not alone be taken as the basis for an investment decision.

ITC 29 June 2018


The investment discussed or views expressed or recommendations/opinions given herein may not be suitable for all investors. The user assumes the entire risk

of any use made of this information. The information contained herein may be changed without notice and JM Financial Institutional Securities reserves the

right to make modifications and alterations to this statement as they may deem fit from time to time.

This report is neither an offer nor solicitation of an offer to buy and/or sell any securities mentioned herein and/or not an official confirmation of any

transaction.

This report is not directed or intended for distribution to, or use by any person or entity who is a citizen or resident of or located in any locality, state, country

or other jurisdiction, where such distribution, publication, availability or use would be contrary to law, regulation or which would subject JM Financial

Institutional Securities and/or its affiliated company(ies) to any registration or licensing requirement within such jurisdiction. The securities described herein may

or may not be eligible for sale in all jurisdictions or to a certain category of investors. Persons in whose possession this report may come, are required to inform

themselves of and to observe such restrictions.

Persons who receive this report from JM Financial Singapore Pte Ltd may contact Mr. Ruchir Jhunjhunwala ([email protected]) on +65 6422 1888

in respect of any matters arising from, or in connection with, this report.

Additional disclosure only for U.S. persons: JM Financial Institutional Securities has entered into an agreement with JM Financial Securities, Inc. ("JM Financial

Securities"), a U.S. registered broker-dealer and member of the Financial Industry Regulatory Authority ("FINRA") in order to conduct certain business in the

United States in reliance on the exemption from U.S. broker-dealer registration provided by Rule 15a-6, promulgated under the U.S. Securities Exchange Act of

1934 (the "Exchange Act"), as amended, and as interpreted by the staff of the U.S. Securities and Exchange Commission ("SEC") (together "Rule 15a-6").

This research report is distributed in the United States by JM Financial Securities in compliance with Rule 15a-6, and as a "third party research report" for

purposes of FINRA Rule 2241. In compliance with Rule 15a-6(a)(3) this research report is distributed only to "major U.S. institutional investors" as defined in

Rule 15a-6 and is not intended for use by any person or entity that is not a major U.S. institutional investor. If you have received a copy of this research report

and are not a major U.S. institutional investor, you are instructed not to read, rely on, or reproduce the contents hereof, and to destroy this research or return it

to JM Financial Institutional Securities or to JM Financial Securities.

This research report is a product of JM Financial Institutional Securities, which is the employer of the research analyst(s) solely responsible for its content. The

research analyst(s) preparing this research report is/are resident outside the United States and are not associated persons or employees of any U.S. registered

broker-dealer. Therefore, the analyst(s) are not subject to supervision by a U.S. broker-dealer, or otherwise required to satisfy the regulatory licensing

requirements of FINRA and may not be subject to the Rule 2241 restrictions on communications with a subject company, public appearances and trading

securities held by a research analyst account.

JM Financial Institutional Securities only accepts orders from major U.S. institutional investors. Pursuant to its agreement with JM Financial Institutional

Securities, JM Financial Securities effects the transactions for major U.S. institutional investors. Major U.S. institutional investors may place orders with JM

Financial Institutional Securities directly, or through JM Financial Securities, in the securities discussed in this research report.

Additional disclosure only for U.K. persons: Neither JM Financial Institutional Securities nor any of its affiliates is authorised in the United Kingdom (U.K.) by the

Financial Conduct Authority. As a result, this report is for distribution only to persons who (i) have professional experience in matters relating to investments

falling within Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 (as amended, the "Financial Promotion Order"), (ii)

are persons falling within Article 49(2)(a) to (d) ("high net worth companies, unincorporated associations etc.") of the Financial Promotion Order, (iii) are

outside the United Kingdom, or (iv) are persons to whom an invitation or inducement to engage in investment activity (within the meaning of section 21 of the

Financial Services and Markets Act 2000) in connection with the matters to which this report relates may otherwise lawfully be communicated or caused to be

communicated (all such persons together being referred to as "relevant persons"). This report is directed only at relevant persons and must not be acted on or

relied on by persons who are not relevant persons. Any investment or investment activity to which this report relates is avai lable only to relevant persons and

will be engaged in only with relevant persons.

Additional disclosure only for Canadian persons: This report is not, and under no circumstances is to be construed as, an advertisement or a public offering of

the securities described herein in Canada or any province or territory thereof. Under no circumstances is this report to be construed as an offer to sell securities

or as a solicitation of an offer to buy securities in any jurisdiction of Canada. Any offer or sale of the securities described herein in Canada will be made only

under an exemption from the requirements to file a prospectus with the relevant Canadian securities regulators and only by a dealer properly registered under

applicable securities laws or, alternatively, pursuant to an exemption from the registration requirement in the relevant province or territory of Canada in which

such offer or sale is made. This report is not, and under no circumstances is it to be construed as, a prospectus or an offering memorandum. No securities

commission or similar regulatory authority in Canada has reviewed or in any way passed upon these materials, the information contained herein or the merits

of the securities described herein and any representation to the contrary is an offence. If you are located in Canada, this report has been made available to you

based on your representation that you are an “accredited investor” as such term is defined in National Instrument 45-106 Prospectus Exemptions and a

“permitted client” as such term is defined in National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations. Under

no circumstances is the information contained herein to be construed as investment advice in any province or territory of Canada nor should it be construed as

being tailored to the needs of the recipient. Canadian recipients are advised that JM Financial Securities, Inc., JM Financial Institutional Securities Limited, their

affiliates and authorized agents are not responsible for, nor do they accept, any liability whatsoever for any direct or consequential loss arising from any use of

this research report or the information contained herein.

fy18 ar: government remained the bigger...

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