ITC

March19,2012

Introduction of advalorem component; effective excise increase of 15%:

Government has introduced an ad-valorem component in Cig (length >65mm) in
addition to the existing specific duty. 10 % ad-valorem excise duty will be levied on
50% of MRP i.e. 5% of MRP, resulting into effective ~15% excise increase, in line
with our expectations. It has also created a new slab of sub-65mm length Cig
which will attract only specific excise duty. ITC can take advantage of this new slab
to boost volumes at entry level. However, we believe it will take time as current
portfolio is entirely 65mm plus and ITC will prefer up-trading consumers to
premium brands. As per our workings (shown in details on next page under
various scenarios), ITC will need to take ~7% price hike to neutralize the excise
hike, assuming VAT stays at 18%. Price hike required will be 8% and 9% for VAT
rates of 19% and 20%, respectively. However, in order to grow Cig EBIT by 15%,
we estimate a price hike of 13-15% under different VAT scenarios (showndifferent
scenarioworkingsonnextpages).

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.

Estimatesunchanged,maintainBUYwithSOTPTPofRs240: While we maintain

our earnings estimates, we tweak the composition of Cig revenue growth. We
now model for 1% volume decline (earlier assumption of 2% volume growth) and
13% price increase for FY13. With the key uncertainty pertaining to Budget
behind, we now await remaining state budgets and changes in VAT.

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

<65 (newly introduced)

NonFilter

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

EBIT per stick

0.806

EBIT margins (Gross basis)

31.0%

EBIT margins (Net basis)

55.4%

Excise as % of gross ASP

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

EBIT per stick

7%

12%pricehike

2.91

0.93

12%

12%

15%

3.82

2.94

0.95

EBIT margins (Gross basis)

29.0%

30.8%

31.9%

32.4%

EBIT margins (Net basis)

55.4%

57.5%

58.8%

59.5%

Excise as % of gross ASP

47.6%

46.5%

45.8%

45.4%

13%

13%

18%

Source:CompanyData,PLResearch

March 19, 2012

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

EBIT per stick

0.8058

EBIT margins (Gross basis)

29.0%

30.7%

31.8%

32.4%

EBIT margins (Net basis)

55.4%

57.5%

58.8%

59.4%

Excise as % of gross ASP

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

EBIT per stick

0.8044

0%

0.8772

9%

0.9258

15%

0.9501

EBIT margins (Gross basis)

28.9%

30.7%

31.8%

32.3%

EBIT margins (Net basis)

55.3%

57.4%

58.8%

59.4%

Excise as % of gross ASP

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

Net (debt)/ cash

Totalvaluepershare

Source:PLResearch

March 19, 2012

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

Eff. Tax Rate

31.8
Other Inc / PBT
10.4
Eff. Depr. Rate (%)
5.0
FCFE / PAT
86.5
Source:CompanyData,PLResearch.

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

Cig Vol. Gr.

(2.8)
Cig Pricing Gr.
18.0
Cig EBIT Gr.
17.5
Other FMCG Rev. Gr.
23.0
Other FMCG Losses
(3,315)
Source:CompanyData,PLResearch.

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

March 19, 2012

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

Prabhudas Lilladher Pvt. Ltd.

3rd Floor, Sadhana House, 570, P. B. Marg, Worli, Mumbai-400 018, India
Tel: (91 22) 6632 2222 Fax: (91 22) 6632 2209
RatingDistributionofResearchCoverage

55.7%

60%

%ofTotalCoverage

50%
40%
30%
20%

25.0%
17.1%

10%

2.1%

0%
Buy

Accumulate

Reduce

PLsRecommendationNomenclature

Sell

BUY

Over 15% Outperformance to Sensex over 12-months

Accumulate

Outperformance to Sensex over 12-months

Reduce

Underperformance to Sensex over 12-months

Sell

Over 15% underperformance to Sensex over 12-months

TradingBuy

Over 10% absolute upside in 1-month

TradingSell

Over 10% absolute decline in 1-month

NotRated(NR)

No specific call on the stock

UnderReview(UR)

Rating likely to change shortly

This document has been prepared by the Research Division of Prabhudas Lilladher Pvt. Ltd. Mumbai, India (PL) and is meant for use by the recipient only as
information and is not for circulation. This document is not to be reported or copied or made available to others without prior permission of PL. It should not be
considered or taken as an offer to sell or a solicitation to buy or sell any security.
The information contained in this report has been obtained from sources that are considered to be reliable. However, PL has not independently verified the accuracy
or completeness of the same. Neither PL nor any of its affiliates, its directors or its employees accept any responsibility of whatsoever nature for the information,
statements and opinion given, made available or expressed herein or for any omission therein.
Recipients of this report should be aware that past performance is not necessarily a guide to future performance and value of investments can go down as well. The
suitability or otherwise of any investments will depend upon the recipient's particular circumstances and, in case of doubt, advice should be sought from an
independent expert/advisor.
Either PL or its affiliates or its directors or its employees or its representatives or its clients or their relatives may have position(s), make market, act as principal or
engage in transactions of securities of companies referred to in this report and they may have used the research material prior to publication.
We may from time to time solicit or perform investment banking or other services for any company mentioned in this document.

March 19, 2012