ITC Limited : Strong Growth Ahead

ITC Limited

Company Info

ITC Limited is one of India's most highly rated companies with interests spanning over diverse domains like Cigarettes, Hotels, Paperboards & Specialty Papers, Packaging, Agri-Business, Packaged Foods & Confectionery, Information Technology, Branded Apparel, Personal Care, Stationery, Safety Matches and other FMCG products.

The company is doing phenomenally well in its well established businesses like Cigarettes, Hotels, Agri-Exports etc, what makes it even special is the future growth potential in sectors like Packaged foods, Branded Apparel, Personal Care and similar segments. The company has been steadily building up brands and capturing market share from established players in the market.

The key differentiators are the companies superiors distribution reach, continued brand building, supply chain management and servicing capabilities. The company's CSR initiative 'e-Choupal' has been a significant game changer for rural India, where it has brought about great improvements by providing the power of internet to remotest villages and poor farmers across India.

Business Lines

Let us look at ITCs different business units and how they are doing. The company has a great many different businesses across widely varying domains and customer segments.

FMCG

The FMCG vertical consists of ventures in

· Cigarettes ( ITC is the clear market leader with brands like Insignia, India Kings, Classic, Gold Flake, Silk Cut, Navy Cut, Scissors, Capstan, Berkeley, Bristol and Flake) Holds 72% of Indian Cigarette market.

· Packaged Foods (Started with the ‘Kitchens of India’ in 2001, growing with brands like Sunfeast, Aashirvad, Bingo, Mint-o, Candyman

· Lifestyle Retailing ( major Indian brands Wills Lifestyle , John Players)

· Personal Care ( includes 'Essenza Di Wills', 'Fiama Di Wills', 'Vivel Di Wills' 'Vivel UltraPro', 'Vivel' and 'Superia' brands )

· Education & Stationary ( brands like Paperkraft and Classmate provides great quality with value for money products)

· Safety Matches & Agarbattis

Hotels

With over 100 hotels in more than 80 destinations, ITC (WelcomeGroup) has set new standards of excellence in the hotel industry in Accommodation, Cuisine, Environment and Guest Safety. Its restaurants like Bukhara, Dakshin and DumPukht are world famous for their delicious and authentic Indian cuisines.

The super deluxe premium Hotels are ITC Maurya( Delhi), ITC Maratha (Mumbai), ITC Sonar (Kolkata), ITC Grand Central (Mumbai,) ITC Windsor(Bengaluru), ITC Royal Gardenia (Bengaluru), ITC Kakatiya (Hyderabad) and ITC Mughal (Agra).

Paperboards and Specialty Papers

ITC's Paperboards and Specialty Papers business enjoys market leadership in the value-added paperboards segment, and also has a significant share of the Indian fine papers market. It is the largest exporter of coated boards from India.

Agri Commodities & Rural Services

With major thrust on exports the Agri Business Division has thrived well with current exports of over Rs. 1000 Crores (Rs. 10 billion). It currently focuses on exports and domestic trading of Soyameal, Basmati Rice, Wheat, Pulses, Marine products, processed fruits etc. The ITC initiative of E-Choupal has brought about farmer empowerments in remotest Indian villages with the use to technology to help day to day processes related to farming.

Stock Details

The following are the details related to ITC stock

NSE Code : ITC	52Week High: 184.70	Stock Price Performance:
Market Cap: 129,948 Cr	52Week Low: 126.92	1 Week : -1.61%	1 Month: 6.25%
Face Value: 1	Dividend Yield: 2.98%	3 Months : 0.18%	1 Year : 28.01%
EPS : 6.12	P/E : 27.42	Date of Listing : 3rd Nov, 1994

Budget Impact: The FY12 budget maintained a status quo on the excise duty levied on the Cigarette sector, the expectation was a 10% hike in duties. This is a big boost for ITC as this will lead to greater volume growth in the coming year. The stock price rose by 10% after the budget week.

Share Holding Pattern (Last 4 Quarters)

Date	31-Dec-10	30-Sep-10	30-Jun-10	31-Mar-10
Domestic Institutions	35.9	36.1	36.79	37.18
Foreign Institutions	14.1	14.15	13.48	13.4
Corporate Bodies	6.12	5.66	5.51	5.17
Individuals	11.41	11.59	0	0
Other Non-Institutions	32.14	32.14	43.85	43.86
Shares held by Custodians	0.35	0.36	0.37	0.39
Total Equity holding	100	100	100	100

Current Outlook

The company has been doing well in all verticals as is evident from the robust financial performance over the last 5 years. ITC maintained a positive growth momentum even under the recessionary pressures of 2008-2009 period.

Year Ended	Mar-10	Mar-09	Mar-08	Mar-07	Mar-06
Net Sales	19135.87	16332.33	14659.1	12668.72	10317.56
% Growth	17.17%	11.41%	15.71%	22.79%
Operating Income	254.9	217.75	248.01	--	--
Other Income	370.23	300.41	346.04	367.39	326.03
Total Expenditure	12811.77	11260.04	10090.96	8582.54	6932.42
Gross Profit	6895.85	5571.76	5155.91	4449.47	3697.25
Net Profit	4168.18	3324.59	3157.76	2755.26	2295.38
% Growth	25.37%	5.28%	14.61%	20.04%

The Cigarette business is a great cash generator with steady volume growth for the company and is supplementing the other business in the FMCG gamut, the new FMCG businesses are on course to attain breakeven soon, with the Processed Foods attaining profitability in FY11. Moreover the increased capacity in the Paperboard and increased demand in the Agri business will boost revenues.

With the current Cricket world cup, the tourist revenues are expected to gear up from the Hotel business, which augurs well for ITC. The average room rates and occupancy levels are showing steady increase over the past few quarters.

Rs in Crores	Dec-10	Sep-10	Jun-10	Mar-10
Net Sales Turnover	5,513.74	5,147.18	4,847.34	5,131.61
Other Income	193.04	124.49	98.48	59.20
Total Income	5,706.78	5,271.67	4,945.82	5,190.81
Growth %	8.25%	6.59%	-4.72%
Total Expenses	3,484.45	3,272.29	3,210.25	3,513.65
EBITDA	2,222.33	1,999.38	1,735.57	1,677.16
Depreciation	168.10	163.99	159.68	153.86
EBIT	2,054.23	1,835.39	1,575.89	1,523.30
Interest	22.96	5.36	5.80	18.51
PBT	2,031.27	1,830.03	1,570.09	1,504.79
Tax	642.19	583.29	499.78	476.57
Net Profit	1,389.08	1,246.74	1,070.31	1,028.22
Growth %	11.42%	16.48%	4.09%

Recent Events

Perhaps the one reason for leaving excise duty on cigarettes unchanged in the budget is the growing menace of illicit cigarette market, which has grown 50% over the past few years. This poses a threat in terms of revenue losses to ITC where it is the dominant player.

Five states including Rajasthan, Gujarat, J &K, Bihar has increased state VATs on cigarette considerably. But major volume contributors like Andhra Pradesh, Tamil Nadu, Delhi, West Bengal has left VAT at earlier levels. With rise in per capita income more people ( of the smoking population) would shift to branded cigarettes.

In the FMCG business the company has been successful in creating brands and capturing market share. Bingo has a 13% market share of snacks market, Sunfeast is now the No.3 player in biscuits, while Candyman and Mint-o are market leaders. In the personal care segment ITC now has almost 6% market share in the soaps category. With a judicious mix of Ad spends coupled with right product mix and leveraging on its distribution network has worked well for ITC.

With improved growth outlook for India overall, the hospitality sector will see a steady rise in demand with higher occupancy rates over the next few years. ITC has the fastest growing Hotel business with highest operating efficiency over peers, marks great future revenue potential.

Peer Review

Since ITC do not have a strict peer in terms of its diversified business in India, we review the closely listed peers from the Cigarette, Processed Foods and Personal care space.

	Diversified	Processed Foods	Cigarette	Personal Care
	ITC Limited	Nestle India Limited	Godfrey Phillips India Ltd.	Hindustan Unilever Ltd.
Year	201003	200912	201003	201003
Current Ratio	0.92	0.6	1.91	0.84
Debt Equity Ratio	0	0	0.15	0
Interest Cover Ratio	54.88	519.79	20.42	332.13
Operating Margin	33.62	20.32	11.06	13.26
Gross Profit Margin	35.26	19.89	13.89	16.49
Net Profit Margin	21.61	12.67	8.17	12.09
Return On Equity	28.93	113.06	15.33	81.48
Return On Capital Employed	28.28	112.89	12.44	81.27
Payout Ratio	94.02	71.39	21.96	64.39

As is evident, ITC performs well on all key financial parameters in terms of its peers in Cigarette ( Godfrey Phillips India) as well as the high operational margins of Nestle (Processed Foods) and HUL ( Personal Care). Going forward ITC will generate a lot of free cash flow, which will significantly increase the dividend payout for the company.

Recommendation: BUY

With a diversified business model fuelled by robust operational efficiency, strong market share ( Cigarettes) and growing brands ( FMCG ) ITC is bound to do well in the coming future. Although the company faces some uncertainties in terms of taxation and imposition of further duties under the new GST regime, but the company is on a strong footing to face the challenge.

With strong cash flows coming from the Cigarette business, where company has superior pricing power in an inelastic market, funding won’t be a problem. With Processed foods attaining breakeven and improved margins and market share , superior growth is evident in the revenues and profits.

Compared to players like HUL, P&G who are facing margin pressures ITC can leverage its Cigarette advantage to strengthen its market share and brand portfolio. Overall looks to be a strong long term growth story.

With a high pay-out ratio and superior dividend yield, the stock would provide a strong downside support as well to any portfolio. Buy in staggered manner with targets of Rs 200 and beyond.