ITC LTD BSE NSE

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1 ITC LTD BSE Code: NSE Code: ITC CMP (22/03/11): ` Eq. Cap (FV `1): ` Crs Market Cap: `1313 Bn Reco: BUY Target Price: `237 Upside: 40%

2 Business Portfolio Cigarettes Foods Personal Care Lifestyle Retailing Education & Stationery Matches Incense Sticks Hotels Paper & Packaging Agri Business Information Tech.

3 SWOT Analysis

4 Outstanding Market Leader: Cigarettes, Hotels, Paperboards, Packaging and Agri-Exports Gaining Market Share: Nascent businesses of Packaged Foods &Confectionery, Branded Apparel and Greeting Cards. Least sensitive to raw-material and food inflation, given its strong presence in the back-end agri raw-material sourcing and smooth tobacco price environment

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6 Cigarettes: Macro picture.. Tobacco Per Capita consumption in India (468 grams/year) is ~ 60% of World Average (743 grams/year) Cigarettes account for less than 15% of tobacco consumed in India unlike world pattern of 85% Cigarettes contribute nearly 85% of Revenue to the Exchequer from tobacco sector Annual per capita adult cigarette consumption in India (85) is ~10% of world average (844); even lower than Pakistan (618), Sri Lanka (303), Nepal (488), Bangladesh (243) and China (1771) Biri : Cigarettes ratio = 10 : 1 is at very low; Hence, immense room for future growth Affordability to improve going forward: Of the 58% of adult Indian males who consume tobacco, barely 15% can afford cigarettes The best thing about Cigarettes is Demand is relatively inelastic relative to Prices

7 The Budget Proposal: Cigarette/Tobacco The FY12 Budget has not proposed a change in excise duty on cigarettes against an expectation of up to 10% increase. This is the 2 nd time, in the past 5 years, when excise duty on cigarettes has not been increased. The reason we believe was to protect earnings of the cigarette leaf tobacco farmers who have been going through extremely trying times on account of low production and depressed international prices The Other reason could have been the high taxes on cigarettes had also led to a growing market for contraband/black-market. Smuggled part of illegal/blackmarket segment is threatening the livelihood of ~5 mn tobacco farmers The proposal is likely improve volumes in the organised industry ITC with a market share of ~72%, is in an advantageous position as it took a pre-emptive price increase of 4% in January 2011

8 Cigarette Division: remains a Cashcow Powerful brands - Insignia, India Kings, Classic, Gold Flake, Silk Cut, Navy Cut, Scissors, Capstan, Berkeley, Bristol and Flake Market leader with a ~72% share, while Godfrey Phillips has ~12%. VST Industries and Golden Tobacco Co each has an ~8% share Its seen that, smokers are reluctant to change their brand to one delivering a lower nicotine yield and, of those who do, many do not persist with the change. Seeing stability in its cigarette sales volumes and expects the volume growth on the back of constant migration from other forms like bidis and chewing tobacco Strengthened its brand portfolio significantly by launching brands such as Flake Excel and Duke Filter; and Lucky Strike and Armenteros cigars (launched in select metros) at premium-end The extension of new pictorial warnings by a year and ban by the Supreme Court on sale of chewing tobacco products in plastic sachets could have a positive impact on cigarette sales. Factors such as taste and draw characteristics tend to favour ITC and also it enjoys enormous pricing power.

9 Cigarette Division: Key Risk An increase in taxation and the Govt intention to curb the consumption of tobacco products remain the key risks to ITC s cigarette business over the longer term. Rise in VAT announced in several states

10 Non-Cigarette FMCG Business Best brand creators in FMCG space The Foods Division represented in 4 categories in the market: Confectionaries (Candyman and Minto are market leaders) launched in 2002 This success was possible through the right product mix, aggressive Advertisement budgets, and innovative distribution strategy.

11 Non-Cigarette FMCG Business Lifestyle Retailing & Personal Care Caters to lifestyle segment under 2 Brands: Wills Lifestyle & John Players. Plans to increase its exclusive outlets count to 400 by FY11E. Personal Care Portfolio includes: Essenza Di Wills, Fiama Di Wills, Vivel Di Wills, Vivel UltraPro, Vivel & Superia There is a reasonable amount of loyalty among consumers for personal care products, especially in skincare, which can pose a challenge for any new entrants. Gained ~6% market share in soaps (Vivel brand) launched in 2008 Launched Deos John Players - (Market Size `200 Crs) & Talcs (Market Size `1000 Crs) under Vivel Brand ITC enjoys a strong brand recall and its strongest qualifier is its distribution muscle, which should help the company establish itself in newer categories as well and would result in higher market penetration.

12 Non-Cigarette FMCG Business Education, Stationery & Others Manufacturer of India's first Ozone treated environment friendly Elemental Chlorine Free (ECF) pulp, paper and paperboard. Brands include: Paperkraft & Classmate Market size of Indian Stationery Business: `10,000 Crs, Only 25% covered by branded players Targets 4-fold increase in Stationery Business revenue in next 4-5 years Also manufactures Safety Matches (brand - AIM) and Agarbattis (Mangaldeep)

13 Non-Cigarette FMCG Business Likely to break-even by FY13E Foods division (ex-bingo) achieved break-even early FY11. Foods division expected to grow at 20% CAGR over next 3 years. Other Non-Cigarette FMCG business likely to break-even by FY13E. Losses expected to reduce by 20% each year to FY13E Further penetration likely by way of new product launches and aggressive ad spends.

14 Paperboards & Packaging Business: Industry Scenario Annual Demand for Paperboard: ~1.8-2 million TPA Low per capita usage in India at around 7 kg per annum (World Average over 55 kg) Indian paperboard market growing at 7% pa Indian paperboard Market Size: `5,000 Crs Value Added Coated board - the fastest growing segment (15% p.a.) in India driven by the growing sophistication of the consumer Budget Proposal.. Excise Duty on paper and paper articles increased to 5% (4%). Customs duty on raw material (wood pulp/ waste paper) has been halved from 5 to 2.5%.

15 ITC Ltd - Paperboards & Packaging Business Caters to a wide spectrum of packaging, graphic, communication, writing, printing and specialty paper requirements Sales Network: 6 sales offices and a network of more than 50 dealers in India, along with an international trade network of 15 distributors / agents. Has 4 manufacturing units with a total production capacity of 5.5 lakh tonnes per annum (TPA) `1,100 Crs expansion to increase Bhadrachalam Paper Unit capacity to 6 lakh TPA (current capacity 4.5 lakh TPA) underway Plans to invest `3,000 Crs from internal accruals to build a capacity of 3 lakh TPA in Andhra Pradesh. Domestic market share 22%

16 PaperBoards & Packaging Business: Initiatives Backward integration in form of captive plantations in Andhra Pradesh & Chattisgarh Aims to increase the area covered under its social forestry programme by 30% in the next 5 years to a total of 1.50 lakh ha. Presently have around 115,000ha under pulpwood plantation, and expanding it by at least 10,000ha a year. Developed clones of Eucalyptus Tress which would take only 4 years to grow to the right size for felling in contrast to earlier 7 years. WOW (Wealth Out of Waste) program, a step towards waste paper collection business to improve raw material supplies.

17 PaperBoards & Packaging Business: Impact of Japan Earthquake.somehow holds positive Japan, largest paper consumer globally was recently hit by Earthquake and Tsunami which affected paper production units in Japan. Domestic paper manufacturers are reporting a hike in global pulp prices on anticipation of huge demand from Japan, where production has been hit by the tsunami Brazilian hardwood pulp prices quoting ~US$50 a tonne higher at about US$750 a tonne. ITC having captive plantations in place, would be insulated from rising global pulp prices and thereby benefit from improved margins (paper prices also likely to go up)

18 e-choupal initiative Network of 6,500 centres spread across 40,000 villages An Initiative that leverages IT to improve living conditions and promote economic growth Designed to tackle the challenges posed by the Indian agriculture, characterised by fragmented farms, weak infrastructure and the involvement of numerous intermediaries Will help in enhancing the competitiveness of Indian agriculture and trigger a good cycle of higher productivity, higher incomes, and increased capacity for farmer risk management, larger investments and higher quality and productivity. Growth in rural incomes will also unleash the potential demand for industrial goods necessary for the continued growth of the Indian economy Strategy is likely to create huge rural distribution infrastructure and significantly enhance ITC s marketing reach.

19 Hotels: ITC-Welcomgroup, 2 nd largest hotel chain in India Current Strength: ~100 hotels in 80+ locations with ~8000 rooms in total across 4 brands. Projects in Pipeline: ~40 hotels in various stages of development. Target for the next 3 years: ~150 hotels with over rooms with focus on large super-luxury hotels In the near term, two ITC Luxury Collection hotels are planned a 600-room hotel in Chennai and a 400-room hotel adjacent to ITC Sonar in Kolkata. Next 2 years auger well for the hospitality industry in India in terms of demand and the regular injection of new rooms will ensure that the consumer will always find value for the money he spends.

20 Outlook Potential recovery in hotels, strong growth in agri-business and diminishing losses in non-cigarette FMCG businesses will help ITC sustain strong earnings growth going forward. ITC remains our top pick in the FMCG space for its diversified business model & presence in categories with lower competitive intensity.

21 FINANCIALS

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23 Thank You Research Analyst: Jyotiranjan Das Bharti Gupta Head of Research: Nirav Asher

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