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Edelweiss Securities Limited
The 6% YoY dip in ITC’s Q2FY18 cigarette volumes came bang in line with our estimate, while 7.2%, 3.6% and 5.6% YoY revenue, EBITDA and PAT growth, respectively, was marginally ahead. To counter the GST rate, the company effected price hikes of ~10-11% YoY. Underlying FMCG sales grew 10% YoY with food and personal care segments performing well on revenue as well as margin fronts; retail, however, remained muted (similar to performance of other retailers). The tax hike effected in GST regime is likely to continue to impact cigarette volumes (as has been the case historically). Maintain ‘HOLD’.
Cigarette volumes decline; FMCG sustains good run
Cigarette volumes declined 6% YoY on a base of 3% growth. This was expected
considering the hike in effective tax rate in GST regime. In order to offset higher GST
rate, ITC has hiked prices ~10-11% YoY. While volumes were comparatively better for
64mm portfolio (contributes ~38% to overall sales), premium portfolio is facing some
stress. Underlying sales of the FMCG segment jumped 10% YoY with profitability
improvement driven by enhanced scale, improved realisation and mix enrichment.
Rest of the businesses: Soft
Hotel’s performance was impacted by highway liquor ban and renovation work at ITC
Maurya & ITC Maratha properties. Room revenue however grew at a healthy pace on
account of increase in ARRs. Agri business remained subdued owing to limited trading
opportunities in agri commodities and shortage of leaf tobacco. Profitability was
impacted by steep increase in leaf farm prices and adverse crop quality. Paperboards,
Paper & Packaging segment registered a robust growth of 18% YoY driven by richer
product mix and structural cost saving initiatives. Improvement in profitability was also
aided by benign input costs.
Outlook and valuations: Uncertainty looms; maintain ‘HOLD’
With per capita consumption 1/18th China’s, the cigarette opportunity in India remains
attractive over the long term. However, the high GST rate will pressurise volumes due
to resultant price hikes. We maintain ‘HOLD/SP’ and value ITC on SOTP on FY19E to
arrive at target price of INR307. The stock is currently trading at 25.8x FY19E EPS.
RESULT UPDATE
ITC Cigarette volumes soft; FMCG holds fort
COMPANYNAME
EDELWEISS 4D RATINGS
Absolute Rating HOLD
Rating Relative to Sector Performer
Risk Rating Relative to Sector Medium
Sector Relative to Market Underweight
MARKET DATA (R: ITC.BO, B: ITC IN)
CMP : INR 269
Target Price : INR 307
52-week range (INR) : 368 / 222
Share in issue (mn) : 12,180.3
M cap (INR bn/USD mn) : 3,281 / 50,429
Avg. Daily Vol.BSE/NSE(‘000) : 12,981.8
SHARE HOLDING PATTERN (%)
Current Q1FY18 Q4FY17
Promoters *
- - -
MF's, FI's & BK’s 36.3 35.8 35.7
FII's 19.1 20.0 20.0
Others 44.6 44.2 44.2
* Promoters pledged shares (% of share in issue)
: NIL
PRICE PERFORMANCE (%)
Stock Nifty
EW FMCG Index
1 month 4.2 6.0 5.1
3 months (6.7) 3.0 1.0
12 months 10.8 19.8 21.1
Abneesh Roy +91 22 6620 3141
Alok Shah +91 22 6620 3040
Rajiv Berlia +91 22 6623 3377
India Equity Research| Consumer Goods
October 27, 2017
Financials* (INR mn)
Year to March Q2FY18 Q2FY17 % change Q1FY18 % change FY17 FY18E FY19E
Total op inc. 103,141 96,607 6.8 99,547 3.5 428,036 443,542 492,386
EBITDA 37,615 36,300 3.6 37,464 0.4 154,359 160,659 182,583
Adj. profit 26,398 25,000 5.6 25,605 3.1 104,772 111,908 126,737
Adj Dil. EPS (INR) 2.2 2.1 5.2 2.1 3.1 8.6 9.2 10.4
Diluted P/E (x) 31.3 29.2 25.8
EV/EBITDA (x) 20.4 19.5 17.0
ROAE (%) 23.4 23.0 24.0
*Quarterly numbers are standalone; Annual numbers are consolidated
Consumer Goods
2 Edelweiss Securities Limited
Table 1: ITC segmental snapshot
Note: Q4FY17 nos. for Cigarette, FMCG-Others, are not strictly comparable owing to adoption of IND-AS from Q1FY17. Revenue growth and EBIT
margin for Cigarette is not comparable for Q1FY18 owing to GST based accounting
Source: Company, Edelweiss research
Cigarettes: Volumes decline as expected
Cigarette business saw volume decline of 6% YoY. Legal cigarette industry volumes continue
to remain under severe pressure due to the sharp increase in tax incidence under the GST
regime.
Pressure on legal cigarette industry escalated significantly on account of steep increase in
tax incidence and additional burden on business due to GST transition costs. While the
intention of the Government was to correct an apparent anomaly in cigarette taxation
under the new tax regime announced earlier on account of the removal of the cascading
effect of excise duty which existed in the pre GST regime, the upward revision resulted in
significantly higher tax incidence on cigarettes compared to the pre-GST scenario which is
not in keeping with the fundamental principle of revenue neutrality. In fact, the combined
impact of increase in excise duty announced by the Union Budget 2017 and the revision in
GST Compensation Cess resulted in an incremental tax burden of over 20% on ITC. It is
pertinent to note that the cumulative growth in tax incidence on cigarettes, after cognising
for the latest increase in Cess rates, stands at a staggering 202% since FY12.
Further, the cigarette business had to contend with additional costs associated with the
transition to GST due to non-availability of additional duty surcharge credit on transition
stocks and the unanticipated revision of GST Compensation Cess. It is apprehended that the
sharp increase in tax incidence on cigarettes will further increase the huge tax arbitrage.
This will severely undermine the legal cigarette industry and adversely impact tobacco
farmers and the revenue objective of the Government. According to an independent study
conducted by Euromonitor International, India is today the 4th largest market for illegal
cigarettes in the world. It isestimated that almost 68% of the tobacco consumed in the
country remains outside the tax net on account of evasion. Legal cigarettes account for
only about 11% of total tobacco consumption in the country, they contribute more than
87% of tax revenue from the tobacco sector. Despite the extremely challenging operating
(%) Q3FY15 Q4FY15 Q1FY16 Q2FY16 Q3FY16 Q4FY16 Q1FY17 Q2FY17 Q3FY17 Q4FY17 Q1FY18 Q2FY18
FMCG-Cigarettes 0.6 3.2 (1.2) 1.6 5.7 10.2 6.4 7.1 2.2 4.8 6.6 NA
FMCG-Others 11.4 10.9 12.2 7.1 7.1 5.4 9.5 13.3 3.4 6.5 9.0 5.0
Hotels 4.7 8.1 15.7 10.9 4.5 4.8 (0.2) 2.5 7.3 6.5 6.1 1.0
Agribusiness (10.6) (28.8) (29.4) (10.4) (7.3) 26.5 20.2 2.0 12.9 6.2 (1.2) 4.7
Paperboards, paper & packaging (4.7) (4.6) (1.8) (2.3) 5.1 3.0 (1.6) - (0.1) 4.4 2.8 (1.7)
FMCG-Cigarettes 8.8 6.0 2.2 3.0 3.4 11.5 8.0 8.4 1.7 8.0 9.0 2.3
FMCG-Others 10.7 12.6 48.9 (7.7) 63.6 46.0 (43.3) (70.6) (204.9) (29.3) (220.1) (728.5)
Hotels (53.8) (29.8) (40.0) (42.2) (10.0) 1.5 (116.8) NM 63.2 56.9 335.2 552.3
Agribusiness 16.3 13.0 15.5 (1.4) (3.1) 6.1 1.5 1.0 0.7 (20.8) (0.9) (13.7)
Paperboards, paper & packaging (7.7) 1.1 (7.4) (13.6) 12.7 6.5 (2.7) 10.8 2.1 18.3 3.9 18.2
FMCG-Cigarettes 69.7 64.3 67.0 37.3 68.1 65.1 36.5 37.7 36.6 36.4 37.3 NA
FMCG-Others 0.5 1.9 (0.4) (0.5) 0.8 2.6 (0.2) (0.1) (0.8) 1.9 0.2 0.7
Hotels 8.7 12.1 (2.5) (1.9) 7.5 11.8 0.4 0.2 11.4 17.3 1.7 1.4
Agribusiness 14.9 11.5 10.1 15.9 15.6 9.7 8.5 15.8 14.2 7.0 8.5 13.0
Paperboards, paper & packaging 17.8 15.8 20.1 15.7 19.1 16.4 18.7 17.4 18.4 17.5 18.9 20.9
Overall EBIT margins 38.4 34.3 38.3 27.6 38.5 34.9 26.5 27.7 26.3 25.2 27.5 39.8
EBIT margins
EBIT growth YoY
Revenues growth YoY
ITC
3 Edelweiss Securities Limited
environment, ITC has sustained its leadership position in the industry through relentless
focus on delivering world-class products, continuous innovation & value addition and best-
in-class execution.
Chart 1: Cigarette volumes
Source: Company, Edelweiss research
FMCG-others
ITC’s FMCG others segment revenue grew 10% YoY on a comparable basis despite muted
demand environment and disruption due to GST transition. This growth was driven by
strong performance of the Branded Packaged Foods and Personal Care businesses. However
ongoing restructuring of retail & trade footprint in the Lifestyle Retailing Business partially
offset strong performance of packaged foods and personal care segment.
The Branded Packaged Foods posted healthy growth in revenue led by atta, snacks and
noodles. In Staples, Snacks and Meals Business, ‘Aashirvaad’ atta continued to perform well
consolidating its leadership position across markets. The ‘Bingo!’ range of snack foods
recorded robust growth driven by ‘Yumitos’ potato chips and ‘Tedhe Medhe’. Several
innovative products such as Tedhe Medhe ‘Lime’ & ‘Tomato Masti’ and Mad Angles
‘Kasundi’, tailored to suit regional tastes and preferences were launched during Q2FY18.
In the Instant Noodles category, YiPPee! continued to perform well leveraging its superior
value proposition anchored on best-in-class product quality, safety and taste.
In the Confections Business, ‘Sunfeast’ biscuits performed well with ‘Dark Fantasy Choco
Fills’, ‘Sunfeast Marie’ and ‘Mom’s Magic’ continuing to enhance market standing. During
the quarter, company launched ‘Dark Fantasy Creations’ - a campaign themed around
‘making exquisite desserts with Dark Fantasy’ in collaboration with ITC Hotels. Product
portfolio was augmented with the introduction of innovative products anchored on the
health vector in select markets viz. ‘Farmlite Active Protein Power’, ‘Farmlite Digestive High
Fibre’ biscuits and ‘Sunfeast A2 Naat Maad Paal’ biscuits. Portfolio premiumisation
continued in the Confectionery category.
In the Dairy and Beverages business, B Natural juices continued to register strong growth.
The recently launched, first-to-market ‘100% Not from Concentrate Pomegranate juice’
(20.0)
(14.0)
(8.0)
(2.0)
4.0
10.0
Q2
FY1
3
Q3
FY1
3
Q4
FY1
3
Q1
FY1
4
Q2
FY1
4
Q3
FY1
4
Q4
FY1
4
Q1
FY1
5
Q2
FY1
4
Q3
FY1
5
Q4
FY1
5
Q1
FY1
6
Q2
FY1
6
Q3
FY1
6
Q4
FY1
6
Q1
FY1
7
Q2
FY1
7
Q3
FY1
7
Q4
FY1
7
Q1
FY1
8
Q2
FY1
8
(Cig
aret
te v
olu
me
gro
wth
%)
Consumer Goods
4 Edelweiss Securities Limited
continued to garner impressive consumer franchise in the health and wellness segment. In
Dairy, ‘Aashirvaad Svasti’ ghee was extended to the Delhi & NCR markets during the quarter.
The Personal care business continues to focus on product mix enrichment. The ‘Engage On’
range of pocket perfumes recorded robust growth on the back of its unique value
proposition. The Fiama shower gel range and Vivel Lotus Oil soap continued to garner
impressive traction. During the quarter, company also launched moisturising skin cream
under the recently acquired ‘Charmis’ brand.
Company made steady progress during the quarter towards setting up state-of-the-art
owned integrated consumer goods manufacturing facilities at Panchla (West Bengal) and
Kapurthala (Punjab). These facilities are expected to commence operations in phases,
beginning Q3FY18.
Paper
Paperboards, Paper & Packaging segment registered a robust growth of 18% YoY driven by
richer product mix and structural cost saving initiatives. Improvement in profitability was
also aided by benign input costs. Growth in Segment Revenue, however, remained muted
on account of subdued demand environment prevailing in the FMCG and legal Cigarette
industry.
Capacity utilisation of India’s first Bleached Chemical Thermo Mechanical Pulp mill (BCTMP),
recently commissioned was ramped up progressively thereby reducing dependence on pulp
import. pulp. Capacity expansion projects in the value added Paperboard and Décor
segments are also making satisfactory progress.
Agri
The performance of Agri Business segment was impacted by shortage of leaf tobacco AP due
to lower crop output on account of drought in 2016 & adverse crop quality, relative strength
of INR vis-à-vis currencies of competing origins and limited trading opportunities in other
agri-commodities.
Hotel
During the quarter, room revenue grew at a healthy pace on account of increase in ARRs.
However, Food & Beverage revenue growth was impacted by highway liquor ban which
prevailed for a significant part of the quarter. While segment results improved sequentially,
it remained muted due to the challenging business context and gestation costs of the
recently commissioned ITC Grand Bharat, Gurgaon. Renovation work at ITC Maurya and ITC
Maratha also weighed on overall performance.
ITC
5 Edelweiss Securities Limited
Table 2: Segmental Performance
Source: Company, Edelweiss research
YoY and QoQ numbers not comparable owing to GST based accounting in Q2FY18 which was not
in the base quarter.
Outlook: Uncertainty looms; maintain ‘HOLD’
The government’s move to increase overall taxation under the new GST rate has come as a
surprise—against benefit envisaged under previous GST rates declared by the government.
This, along with the ~6% hike in budget, has resulted in overall tax burden of ~20% for the
company—ITC’s cigarette volumes had come under tremendous pressure during FY13-16
when the government had increased excise duty on cigarette by ~18% on an average
(volumes were down 20%). Government’s statement that it is not right that demerit goods
should benefit due to decrease in taxation indicates government’s tough stance on the sin
sector. Also, with cigarette under GST, it remains a key source for the government to
address any deficit it may have due to GST implementation and hence uncertainly looms in
terms of taxation.
However, ITC has recently increased prices across cigarette segments which are lower than
what we initially anticipated—price increase in 84mm cigarette is ~7.1%, in 69mm it is
~6.7%, while in 74mm it is 4.4%. Price increase in 64mm is varied—with ~20% hike in some
brands (example Bristol). This highlights that ITC has been cautious in hiking prices across
segments, keeping in mind the impact on volumes. We remain positive on ITC over the long
Year to March - Net Revenues (INR mn) Q2FY18 Q2FY17 % growth YoY Q1FY18 % growth QoQ
FMCG-Cigarettes 45,542 85,285 NA 87,742 NA
FMCG-Others 28,041 26,717 5.0 26,009 7.8
Hotels 3,002 2,973 1.0 3,049 (1.5)
Agribusiness 19,680 18,801 4.7 27,605 (28.7)
Paperboards, paper & packaging 13,094 13,314 (1.7) 13,598 (3.7)
Less: Inter-segment revenue 12,597 12,176 3.5 20,781 (39.4)
Net income (Excl other income) 96,762 134,914 (28.3) 137,222 (29.5)
FMCG-Cigarettes 32,917 32,169 2.3 32,741 0.5
FMCG-Others 205 (33) (728.5) 54 NM
Hotels 42 7 552.3 53 (20.2)
Agribusiness 2,562 2,970 (13.7) 2,351 9.0
Paperboards, paper & packaging 2,742 2,320 18.2 2,573 6.6
Profit before tax (Excl other income) 38,468 37,432 2.8 37,773 1.8
Year to March - Margin Q2FY18 Q2FY17 bps exp y-o-y Q1FY18 bps exp q-o-q
FMCG-Cigarettes 72.3 37.7 NA 37.3 NA
FMCG-Others 0.7 (0.1) 85 0.2 52
Hotels 1.4 0.2 119 1.7 (33)
Agribusiness 13.0 15.8 (278) 8.5 450
Paperboards, paper & packaging 20.9 17.4 352 18.9 202
Margin 39.8 27.7 1,201 27.5 1,223
EBIT (INR mn)
Consumer Goods
6 Edelweiss Securities Limited
term as per capita consumption of cigarettes in India is 1/18th of China, while the proportion
of legal cigarettes in overall tobacco consumption remains low at 11%.
We maintain ‘HOLD/ Sector Performer’ and value ITC on SOTP basis on FY19E to arrive at a
target price of INR307.
Table 3: SOTP valuation
Source: Edelweiss research
Chart 2: 1 year forward price to earning
Source: Bloomberg, Edelweiss research
FY19E Methodology
Target
multiple
Per share
contribution
Cigs EPS 8.6 P/E 27x 232
FMCG Sales/Share 9.6 P/S 4x 39
Hotels EBITDA/Share 0.3 EV/EBITDA 15x 5
Agri EBITDA/Share 1.0 EV/EBITDA 10x 10
Paper EBITDA/Share 1.1 EV/EBITDA 10x 11
Net cash 11
307Value of share
0
100
200
300
400
500
Oct
-12
Ap
r-1
3
Oct
-13
Ap
r-1
4
Oct
-14
Ap
r-1
5
Oct
-15
Ap
r-1
6
Oct
-16
Ap
r-1
7
Oct
-17
(IN
R)
20x
35x
25x
15x
30x
ITC
7 Edelweiss Securities Limited
Financial snapshot (INR mn) Year to March Q2FY18 Q2FY17 % change Q1FY18 % change YTD18 FY18E FY19E
Net revenues 102,264 95,355 7.2 98,765 3.5 201,029 439,943 488,648 Other operating income 877 1,252 (30.0) 782 12.2 1,659 3,599 3,738
Total operating Income 103,141 96,607 6.8 99,547 3.6 202,688 443,542 492,386
Raw material costs 43,564 36,714 18.7 38,360 13.6 81,924 172,458 186,663
Staff costs 6,065 6,003 1.0 6,746 (10.1) 12,812 35,635 40,069
Other expenses 15,897 17,590 (9.6) 16,976 (6.4) 32,873 74,790 83,070
Total expenditure 21,963 23,593 (6.9) 23,723 (7.4) 45,685 110,426 123,139
EBITDA 37,615 36,300 3.6 37,464 0.4 75,079 160,659 182,583
Depreciation 2,824 2,684 5.2 2,682 5.3 5,506 11,079 11,538
EBIT 34,791 33,616 3.5 34,782 0.0 69,573 149,579 171,046
Other income 4,942 4,754 4.0 4,768 3.7 9,710 20,394 21,182
Interest 290 107 170.6 104 179.5 394 509 307
Add: Prior period items
Add: Exceptional items
Profit before tax 39,443 38,262 3.1 39,446 0.0 78,889 169,464 191,921
Provision for taxes 13,045 13,262 (1.6) 13,841 (5.8) 26,885 57,618 65,253
Minority interest (62) (69)
Associate profit share
Reported net profit 26,398 25,000 5.6 25,605 3.1 52,003 111,908 126,737
Adjusted Profit 26,398 25,000 5.6 25,605 3.1 52,003 111,908 126,737
Diluted shares (mn) 12,152 12,112 12,152 12,152 12,147 12,147
Adjusted Diluted EPS 2.2 2.1 5.2 2.1 3.1 4.3 9.2 10.4
As % of net revenues
COGS 42.2 38.0 38.5 40.4 38.9 37.9
Employee cost 5.9 6.2 6.8 6.3 8.0 8.1
Other expenditure 15.4 18.2 17.1 16.2 16.9 16.9
EBITDA 36.5 37.6 37.6 37.0 36.2 37.1
EBIT 33.7 34.8 34.9 34.3 33.7 34.7
PBT 38.2 39.6 39.6 38.9 38.2 39.0
Adjusted net profit 25.6 25.9 25.7 25.7 25.2 25.7
Tax rate 33.1 34.7 35.1 34.1 34.0 34.0
Consumer Goods
8 Edelweiss Securities Limited
Company Description
ITC is one of the largest consumer companies in India with businesses spanning cigarettes,
hotels, paper and agri-commodities. Its branded foods division with products such as
staples, confectionery, noodle, snacks and biscuits is doing well and gaining strong market
share across many categories. ITC has been successful in foods and constantly expanding its
personal product portfolio (soaps, shampoos, deo, talc). Though the cigarettes division is
still the major source of revenue, other businesses (agri, paper, hotel) have grown over the
years. Recently ITC has entered the nicotine gum space with the launch of Kwiknic.
Investment Theme
ITC has sustained its market leadership in the cigarettes space and delivered robust
performance (both topline and profitability) amidst heavy taxation burden (three
consecutive years of steep excise hike on cigarettes in Union Budget) and regulations with
constant focus on innovation and distribution. The e-Choupal network established by ITC
gives it a phenomenal sourcing edge, which has helped it transform into a consumer giant.
ITC’s FMCG business is likely to remain profitable in FY15 (turned profitable in FY14 with
overall profit of INR220mn). Paper business helps address packaging needs of FMCG
business with consistent quality and comparatively lower costs. Agri business has seen
robust performance aided by tobacco leaf and traded commodities exports; provides
strategic sourcing support to the company’s cigarette and branded packaged foods
businesses by ensuring high quality supplies. We expect ITC’s cigarette EBIT growth to
remain resilient and FMCG’s profitability surge to sustain. With a new business-friendly
government at the Centre, we expect hotel, paper and FMCG growth rates to improve over
ensuing years.
Key Risks
High incidence of taxation and strict regulatory norms on cigarette usage in public and
packaging poses threat to cigarette volume growth.
Growing contraband market of cigarettes also poses significant threat for the cigarettes
business.
Slowdown in macro-economic environment is a major threat to hotels business.
SUUTI stake sale is a likely overhang on the stock.
9 Edelweiss Securities Limited
ITC
Financial Statements
Income statement (INR mn)
Year to March FY16 FY17 FY18E FY19E
Gross revenues 546,732 582,880 622,872 679,719
Excise duties 158,690 159,279 182,929 191,072
Net revenue 388,042 423,600 439,943 488,648
Other Operating Income 3,879 4,436 3,599 3,738
Total operating income 391,921 428,036 443,542 492,386
Materials costs 135,685 160,492 172,458 186,663
Gross profit 256,236 267,545 271,084 305,722
Manufacturing expenses 68,369 68,761 65,991 72,320
Employee costs 34,410 36,317 35,635 40,069
Ad. & sales costs 8,949 8,107 8,799 10,750
EBITDA 144,509 154,359 160,659 182,583
Depreciation 10,774 11,528 11,079 11,538
EBIT 133,735 142,831 149,579 171,046
Add: Other income 15,307.99 17,615.3 20,393.66 21,182.42
Less: Interest Expense 536 243 509 307
Profit Before Tax 148,506 160,204 169,464 191,921
Less: Provision for Tax 53,582 55,491 57,618 65,253
Less: Minority Interest (84) (60) (62) (69)
Reported Profit 95,009 104,772 111,908 126,737
Adjusted Profit 95,009 104,772 111,908 126,737
Shares o /s (mn) 12,040 12,147 12,147 12,147
Adjusted Basic EPS 7.9 8.6 9.2 10.4
Diluted shares o/s (mn) 12,108 12,179 12,147 12,147
Adjusted Diluted EPS 7.8 8.6 9.2 10.4
Adjusted Cash EPS 8.8 9.6 10.1 11.4
Dividend per share (DPS) 5.7 5.6 5.0 5.7
Dividend Payout Ratio(%) 86.1 78.1 65.0 65.0
Common size metrics
Year to March FY16 FY17 FY18E FY19E
Materials costs 34.6 37.5 38.9 37.9
Staff costs 8.8 8.5 8.0 8.1
Ad. & sales costs 2.3 1.9 2.0 2.2
Other expenses 17.4 16.1 14.9 14.7
EBITDA margins 36.9 36.1 36.2 37.1
EBIT margins 34.1 33.4 33.7 34.7
Net Profit margins 24.2 24.5 25.2 25.8
Growth ratios (%)
Year to March FY16 FY17 FY18E FY19E
Revenues 1.0 9.2 3.9 11.1
EBITDA 1.8 6.8 4.1 13.6
PBT 3.4 7.9 5.8 13.3
Adjusted Profit (1.7) 10.3 6.8 13.3
EPS (1.9) 9.6 7.1 13.3
Key Assumptions
Year to March FY16 FY17 FY18E FY19E
Macro
GDP(Y-o-Y %) 7.9 6.6 7.1 7.7
Inflation (Avg) 4.9 4.5 4.0 4.5
Repo rate (exit rate) 6.8 6.3 5.8 5.8
USD/INR (Avg) 65.5 67.1 66.0 66.0
Company
Revenue growth (Y-o-Y %)
Cigs-Volume growth (dom) (8.5) 1.5 (4.0) (2.0)
Cigs-Price change (dom) 15.9 9.3 10.0 9.0
FMCG sales growth (dom) 7.7 8.1 11.2 14.9
Hotel sales growth (dom) 8.5 4.2 8.0 10.0
Agri sales growth (dom) (22.6) 21.8 5.0 10.0
Paper sales growth (dom) 5.9 (0.7) 6.0 10.0
Overall growth (%) 1.0 9.2 3.9 11.1
Cig margin (dom) 38.2 39.0 39.0 39.0
FMCG margin (dom) 0.6 0.4 1.0 2.0
Hotel margin (dom) 4.8 9.0 10.0 10.0
Agri margin (dom) 21.3 18.5 18.5 18.5
Paper margin (dom) 23.6 25.0 24.0 24.0
EBITDA margin assumpn
COGS as % of sales 34.6 37.5 38.9 37.9
A&P as % of sales 2.3 1.9 2.0 2.2
Employee cost (% of rev) 8.8 8.5 8.0 8.1
Financial assumptions
Tax rate (%) 36.1 34.6 34.0 34.0
Capex (INR mn) 10,529 19,337 16,701 25,000
Debtor days 18 19 18 18
Inventory days 239 203 230 230
Payable days 60 57 60 60
Cash conversion cycle 197 165 188 188
Dep. (% gross block) 4.6 6.8 5.7 5.2
Dividend payout 86.1 78.1 65.0 65.0
Yield on cash 10.6 11.0 12.0 11.5
10 Edelweiss Securities Limited
Consumer Goods
Peer comparison valuation
Market cap Diluted P/E (X) EV / EBITDA (X) ROAE (%)
Name (USD mn) FY18E FY19E FY18E FY19E FY18E FY19E
ITC 50,429 29.2 25.8 19.5 17.0 23.0 24.0
Colgate 4,421 44.9 37.4 27.4 23.2 46.7 48.6
Dabur 8,744 41.2 34.4 35.5 29.3 26.3 27.2
Emami 4,340 72.9 49.2 35.3 27.7 20.9 27.2
Hindustan Unilever 41,926 51.2 43.9 35.1 30.0 75.7 81.1
Nestle Ltd 10,627 57.3 45.8 32.2 26.3 38.4 44.1
Source: Edelweiss research
Cash flow metrics
Year to March FY16 FY17 FY18E FY19E
Operating cash flow 97,990 106,273 106,977 129,494
Investing cash flow (39,208) (32,509) (16,866) (25,000)
Financing cash flow (56,125) (73,010) (73,349) (82,786)
Net cash Flow 2,657 754 16,762 21,708
Capex (11,813) (19,337) (16,701) (25,000)
Dividend paid (51,327) (69,941) (72,740) (82,379)
Profitability and efficiency ratios
Year to March FY16 FY17 FY18E FY19E
ROAE (%) 25.3 23.4 23.0 24.0
ROACE (%) 39.6 35.7 34.9 36.4
Inventory Days 246 203 230 230
Debtors Days 18 19 18 18
Payable Days 64 57 60 60
Cash Conversion Cycle 200 165 188 188
Current Ratio 4.4 4.2 4.6 4.8
Adjusted Debt/Equity - - - -
Interest Coverage Ratio 249.5 587.8 293.9 556.8
Operating ratios
Year to March FY16 FY17 FY18E FY19E
Total Asset Turnover 1.0 0.9 0.9 0.9
Fixed Asset Turnover 2.6 2.8 2.6 2.7
Equity Turnover 1.0 1.0 0.9 0.9
Valuation parameters
Year to March FY16 FY17 FY18E FY19E
Adj. Diluted EPS (INR) 7.8 8.6 9.2 10.4
Y-o-Y growth (%) (1.9) 9.6 7.1 13.3
Adjusted Cash EPS (INR) 8.8 9.6 10.1 11.4
Diluted P/E (x) 34.3 31.3 29.2 25.8
P/B (x) 7.6 7.1 6.5 6.0
EV / Sales (x) 8.0 7.3 7.0 6.3
EV / EBITDA (x) 21.6 20.4 19.5 17.0
Dividend Yield (%) 2.1 2.1 1.9 2.1
Balance sheet (INR mn)
As on 31st March FY16 FY17 FY18E FY19E
Share capital 8,047 12,147 12,147 12,147
Reserves & Surplus 418,748 451,982 491,150 535,508
Shareholders' funds 426,795 464,129 503,297 547,655
Minority Interest 2,609 2,947 2,885 2,817
Short term borrowings 571 273 213 154
Long term borrowings 267 184 144 104
Total Borrowings 838 457 357 257
Long Term Liabilities 1,863 2,174 2,174 2,174
Def. Tax Liability (net) 18,395 18,338 18,338 18,338
Sources of funds 450,500 488,046 527,052 571,241
Gross Block 160,039 179,376 209,376 234,376
Net Block 144,594 152,623 171,708 185,170
Capital work in progress 25,597 37,299 24,000 24,000
Intangible Assets 6,473 6,312 6,312 6,312
Total Fixed Assets 176,664 196,234 202,020 215,482
Non current investments 51,258 66,940 66,940 66,940
Cash and Equivalents 126,851 132,998 149,760 171,468
Inventories 91,294 87,412 108,672 117,624
Sundry Debtors 19,172 24,743 21,696 24,098
Loans & Advances 210 153 153 153
Other Current Assets 51,065 50,504 50,504 50,504
Current Assets (ex cash) 161,741 162,812 181,025 192,379
Trade payable 23,393 26,593 28,349 30,684
Other Current Liab 42,621 44,344 44,344 44,344
Total Current Liab 66,013 70,937 72,693 75,028
Net Curr Assets-ex cash 95,728 91,875 108,332 117,351
Uses of funds 450,500 488,046 527,052 571,241
BVPS (INR) 35.2 38.1 41.4 45.1
Free cash flow (INR mn)
Year to March FY16 FY17 FY18E FY19E
Reported Profit 95,009 104,772 111,908 126,737
Add: Depreciation 10,774 11,528 11,079 11,538
Interest (Net of Tax) 343 159 336 203
Others (5,365) (10,630) 112 38
Less: Changes in WC 2,770 (444) 16,458 9,018
Operating cash flow 97,990 106,273 106,978 129,496
Less: Capex 11,813 19,337 16,701 25,000
Free Cash Flow 86,178 86,937 90,277 104,496
11 Edelweiss Securities Limited
ITC
Insider Trades
Reporting Data Acquired / Seller B/S Qty Traded
19 May 2017 Rajeev Pathak Sell 25000.00
19 May 2017 D. M. Hazarika Sell 15000.00
04 May 2017 G. Vijaya Kumar Sell 30000.00
03 May 2017 Barun Kar Sell 17000.00
03 May 2017 A. Madhusudhana Rao Sell 32345.00
*in last one year
Bulk Deals Data Acquired / Seller B/S Qty Traded Price
07 Feb 2017 Lic A/C Lic Allocation Contra Fund Buy 80840763 275.85
07 Feb 2017 Administrator Of The Specified Undertaking Of The Uti-1964 Sell 80840763 275.85
07 Feb 2017 Administrator Of The Specified Undertaking Of The Unit Trus Sell 80840763 275.85
07 Feb 2017 Uti Admnstr Of The Specified Undertaking Of Uti-Unit Schm 64 Sell 80840763 275.85
07 Feb 2017 Life Insurance Corporation (Scheme 5) Buy 80840763 275.85
07 Feb 2017 Life Insurance Corporation Of India Ltd Buy 80840763 275.85
*in last one year
Holding – Top10 Perc. Holding Perc. Holding
Tobacco manufacturer 24.45 Life insurance corp 16.22
Unit trust of india 9.05 Myddleton invest coy 3.99
General insurance co 1.75 New india assurance 1.66
Standard life aberde 1.51 Oriental insurance c 1.33
Gic private limited 1.31 Rothmans intl enterp 1.27
*in last one year
Additional Data
Directors Data Yogesh Chander Deveshwar Chairman Nakul Anand Executive Director
Sanjiv Puri CEO and Executive Director R Tandon Executive Director
Zafir Alam Non-Executive Director Sunil Behari Mathur Non-Executive Director
Pillappakkam Bahukutumbi Ramanujam Non-Executive Director Sahibzada Syed Habib-ur-Rehman Non-Executive Director
Meera Shankar Non-Executive Director Suryakant Balkrishna Mainak Non-Executive Director
S Banerjee Non-Executive Director Nirupama Rao Non-Executive Director
A Duggal Non-Executive Director
Auditors - Deloitte Haskins & Sells, Kolkata
*as per last annual report
12 Edelweiss Securities Limited
Company Absolute
reco
Relative
reco
Relative
risk
Company Absolute
reco
Relative
reco
Relative
Risk
Asian Paints BUY SO M Bajaj Corp HOLD SU H
Berger Paints BUY SO L Britannia Industries BUY SO L
Colgate HOLD SP M Dabur BUY SO M
Emami BUY SO H GlaxoSmithKline Consumer
Healthcare
HOLD SU M
Godrej Consumer BUY SO H Hindustan Unilever HOLD SP L
ITC HOLD SP M Marico BUY SO M
Nestle Ltd HOLD SP L Pidilite Industries BUY SO M
United Spirits HOLD SP H
RATING & INTERPRETATION
ABSOLUTE RATING
Ratings Expected absolute returns over 12 months
Buy More than 15%
Hold Between 15% and - 5%
Reduce Less than -5%
RELATIVE RETURNS RATING
Ratings Criteria
Sector Outperformer (SO) Stock return > 1.25 x Sector return
Sector Performer (SP) Stock return > 0.75 x Sector return
Stock return < 1.25 x Sector return
Sector Underperformer (SU) Stock return < 0.75 x Sector return
Sector return is market cap weighted average return for the coverage universe
within the sector
RELATIVE RISK RATING
Ratings Criteria
Low (L) Bottom 1/3rd percentile in the sector
Medium (M) Middle 1/3rd percentile in the sector
High (H) Top 1/3rd percentile in the sector
Risk ratings are based on Edelweiss risk model
SECTOR RATING
Ratings Criteria
Overweight (OW) Sector return > 1.25 x Nifty return
Equalweight (EW) Sector return > 0.75 x Nifty return
Sector return < 1.25 x Nifty return
Underweight (UW) Sector return < 0.75 x Nifty return
13 Edelweiss Securities Limited
ITC
Edelweiss Securities Limited, Edelweiss House, off C.S.T. Road, Kalina, Mumbai – 400 098.
Board: (91-22) 4009 4400, Email: [email protected]
Aditya Narain
Head of Research
Coverage group(s) of stocks by primary analyst(s): Consumer Goods
Asian Paints, Bajaj Corp, Berger Paints, Britannia Industries, Colgate, Dabur, Godrej Consumer, Emami, Hindustan Unilever, ITC, Marico, Nestle Ltd, Pidilite Industries, GlaxoSmithKline Consumer Healthcare, United Spirits
Distribution of Ratings / Market Cap
Edelweiss Research Coverage Universe
Rating Distribution* 161 67 11 240 * 1stocks under review
Market Cap (INR) 156 62 11
Date Company Title Price (INR) Recos
Recent Research
27-Oct-17 United Spirits Uncertainties behind; brighter prospects ahead; Result Update
3,026 Buy
26-Oct-17 Emami Volumes recover; outlook promising; Result Update
1,171 Buy
25-Oct-17 Hindustan Unilever
Volumes recover; sustained cost cuts boost margins; Result Update
1,272 Hold
> 50bn Between 10bn and 50 bn < 10bn
Buy Hold Reduce Total
Rating Interpretation
Buy appreciate more than 15% over a 12-month period
Hold appreciate up to 15% over a 12-month period
Reduce depreciate more than 5% over a 12-month period
Rating Expected to
-
149
297
446
594
743
Jan
-14
Feb
-14
Mar
-14
Ap
r-1
4
May
-14
Jun
-14
Jul-
14
Au
g-1
4
Sep
-14
Oct
-14
No
v-1
4
De
c-1
4
(IN
R)
One year price chart
200
230
260
290
320
350
Oct
-16
No
v-1
6
De
c-1
6
Jan
-17
Feb
-17
Mar
-17
Ap
r-1
7
May
-17
Jun
-17
Jul-
17
Au
g-1
7
Sep
-17
Oct
-17
(IN
R)
ITC
14 Edelweiss Securities Limited
Consumer Goods
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15 Edelweiss Securities Limited
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16 Edelweiss Securities Limited
Consumer Goods
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