EBITDA 34.2% 26.6% 28.9% NPM 23.8% 18.7% 19.2%

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1 RESULTS REVIEW Share Data Market Cap Rs bn Price Rs BSE Sensex 14, Reuters Bloomberg Avg. Volume (52 Week) ITC.BO ITC IN 1.2 mn 52-Week High/Low Rs / Shares Outstanding Valuation Ratios (Consolidated) 3,768.6 mn Year to 31 March 2009E 2010E EPS (Rs.) /- (%) 15.4% 9.2% PER (x) 18.9x 17.3x EV/ Sales (x) 4.2x 3.7x EV/ EBITDA (x) 13.6x 12.2x Shareholding Pattern (%) Promoters 0 FIIs 14 Institutions 38 Public & Others 48 Relative Performance Aug-07 Sep-07 Oct-07 ITC Nov-07 Dec-07 Jan-08 Feb-08 Mar-08 Apr-08 May-08 Jun-08 Jul-08 Rebased BSE Index ITC Limited Non-Cigarette FMCG business to maintain margin pressure ITC Limited reported a fall of 4.4% in net profits in Q1 09. The key highlights of the quarter were: Cigarette business failed to capture any growth during the quarter and reported a flat revenue of Rs bn qoq as the Company discontinued its non-filter cigarette business due to heavy duties. This has dented the volume growth and thus, we have revised our revenue estimates down for the segment and expect it to grow at a CAGR of 6% over FY08-10E. Non-cigarette FMCG and other business kept the momentum as the revenue from these segments together grew by 25% qoq to Rs bn, increasing their contribution to around 65% in the total revenue. Looking at accelerating pace, we expect the non-cigarette business to grow at a CAGR of 26.3% for FY08-10E. Margins crunched under cost pressure from higher raw material costs and purchases coupled with rising employee costs. EBITDA margin fell by 533 bps yoy to 28.9%. However, judicious spending in general expenditures brought the margins up by 235 bps from 26.6% in the last quarter. With the Company s focus on non-cigarette FMCG segment which is already highly cluttered, we believe the ad spends and promotional expenses to be heavy and thus expect EBITDA margins to drop to around 30% for FY10E. Hold Valuation: We have valued the stock using DCF model and arrived at a target price of Rs Although, ITC has proved its expertise in the cigarettes, hotels, paper and agri-businesses, it is yet to convert the noncigarette FMCG business into profits. Hence, we reiterate our Hold rating on the stock. Key Figures (Standalone) Quarterly Data Q1'08 Q4'08 Q1'09 YoY% QoQ% (Figures in Rs. mn, except per share data) Net Sales 32,938 39,344 38, % (0.9)% EBITDA 11,276 10,447 11, % 7.9% Net Profit 7,829 7,356 7,487 (4.4)% 1.8% Margins(%) EBITDA 34.2% 26.6% 28.9% NPM 23.8% 18.7% 19.2% Per Share Data (Rs.) Normalised EPS (5.3)% 2.1% Please see the end of the report for disclaimer and disclosures. -1-

2 Result Highlights Net sales for Q1 09 improved 18.4% yoy on the back of fair contribution from the cigarette business and remarkable agri business performance (up 32.3% yoy). The cigarette business grew by mere 6.2% yoy, mainly attributable to price hike as volumes got a hit due to discontinuation of nonfilter cigarette business. Hotel business remained flat with revenue of Rs. 2.4 bn. Besides, agri and paperboard & packaging businesses witnessed a strong growth of 32.3% and 26.6% yoy, respectively. EBITDA for the quarter failed to attract any improvements and remained flat at Rs bn due to higher raw material costs, purchases of traded goods, and employee costs which grew by 211 bps, 275 bps and 23 bps, respectively, on a yoy basis. Net profit fell by 4.4% yoy to Rs. 7.5 bn owing to higher tax burden. Segmental Highlights Fair performance by the non-cigarette FMCG business; losses grow due to the increasing promotional expenses The cigarette business grew marginally by 6.2% yoy and remained flat sequentially at Rs bn because of the sharp hike in excise duties and a consequent fall in volumes. The rates of excise duties on non-filter cigarettes increased to the tune of % in the Union Budget 2008, which made business non-profitable for legitimate manufacturers. As a result, ITC decided to discontinue the manufacturing of non-filter cigarettes. Considering the decline in volumes, we have downgraded our segment revenue estimates and now expect it to grow at a CAGR of 6% for FY08-10E. However, profits from the segment continued to grow after a sequential fall last quarter at a fair 10.5% qoq to Rs. 9.6 bn, contributing 85.5% to the pool. operating margin too improved sequentially but fell by 208 bps yoy to 55.3%. The FMCG & others business reported a fair growth of over 27.5% yoy to Rs. 6.9 bn with a partial increase in revenue contribution of 73 bps to 15.6%. The branded packaged foods revenue expanded by 23%; Bingo! range of potato chips and finger snack foods by 72%; Sunfeast range by Please see the end of the report for disclaimer and disclosures. -2-

3 16%; Aashirvaad by 31%;and Lactos by 10%. New launches in personal care too have shown a good customer response. The stationery business recorded a healthy sales growth of 25% over the previous year, positioning the Company as the largest marketer of notebooks in India. Within no time, the two flagship brands, Classmate for the student community and Paperkraft for the working executives, have established a strong presence in the Indian stationery market. Lifestyle retailing business stood further enhanced with sales growing by 15% during the quarter. However, rental costs are expected to keep on adding pressure on the fixed costs. Commercial production commenced at the new Ozone bleached pulp mill with a capacity of 122,000 tonnes Luxury hotel projects at Bengaluru and Chennai are on schedule Andhra witnessed an unprecedented spurt in agriprices with rates increasing by more than 70% because of a demand-supply mismatch The paperboard, speciality paper & packaging business posted a robust growth of 26.6% yoy to Rs. 6.1 bn driven by the 30% growth of the premium value-added paperboard segment and the robust performance of the packaging business. EBIT spurted 42.6% yoy to Rs. 1.2 bn with margin moving up by 229 bps yoy to 20.4%. Notwithstanding this high cost scenario, the business succeeded in partially neutralising the cost pressures by optimising opportunity buying and increasing sales realisations. During the quarter, the hotels business posted flat revenues of Rs. 2,390 mn, yoy, with the contribution to total sales falling to 5.4% despite better occupancies & room rates and higher food & beverage sales. However, operating profit improved by 32.7% yoy to Rs. 853 mn, and margin rose by 8.8% yoy to 35.7%. With massive expansion plans, we believe that the hotels business would witness a robust growth from FY10E onwards, with the Commonwealth Games coming up and the tourism and overseas businesses growing steadily year over year. After a strong comeback last quarter, the agri business witnessed a robust growth of 32.3% yoy to Rs bn supported by a continuing strong soyabean trading and record leaf tobacco exports, which registered a top-line increase of 49%. Its contribution to total sales grew to over 40%. EBIT for the agri business grew smartly by 40.5% yoy to Rs. 765 mn, and the margin improved by 24 bps yoy to 4.2%. Despite a sharp appreciation in the rupee, cigarette leaf tobacco exports soared by 21% yoy, driven by a 27% volume growth. Please see the end of the report for disclaimer and disclosures. -3-

4 Key Events ITC s information technology arm has acquired the US-based technology firm Pyxis Solutions for around USD 25 mn to boost its activities in the US market. The Company launched the following products during the quarter: o Classmate Invento Mathematical instrument box o Vivel shampoo o Pickle-mirch variant under the Aashirvaad brand Key Risks The following factors may pose a threat to our rating: The requirement of pictorial health warnings on tobacco products Any further imposition or relaxation of taxes on cigarettes An unexpected hike in the prices of raw commodities Outlook Hotel, paper and packaging, and agri businesses continue to perform well and thus, ITC s diversified business mix cushions fairly for the individual business risks. The positive impact of the developmental activities is evident from the sequential improvement in the segment results of non- FMCG businesses. However, non-cigarette FMCG segment is still in its gestation period. Though ITC leverages well over its brand equity and cigarette distribution network for the penetration into the new categories, higher ad spends and promotional expenses are inevitable. Therefore, under current inflationary scenario we do not expect the Company to break even in this segment by 2010 and thus, implying an extended pressure on the operating margins. The ban on exports and rising crop prices pose a threat for its agri-business, taxing its margins. All said, we have downgraded our revenue estimates and expect ITC s net sales to grow at a CAGR of 12.9% for FY08-10E. However, we remain Please see the end of the report for disclaimer and disclosures. -4-

5 unchanged on our conservative EBITDA margin estimates and expect it to drop to around 30% for FY09E-10E. At the current price of Rs , the stock is trading at a forward P/E of 18.9x and 17.3x for FY09E and FY10E, respectively. We have valued the stock using DCF model and arrived at a target price of Rs. 182 (assuming Rf 9.0%, WACC 14.3%, terminal growth rate 5%). Although, ITC has proved its expertise in the cigarettes, hotels, paper and agri-businesses, it is yet to convert the non-cigarette FMCG business into profits. Hence, we reiterate our Hold rating on the stock. Key Figures (Consolidated) Year to March FY06 FY07 FY08 FY09E FY10E CAGR (%) (Figures in Rs mn, except per share data) (FY08-10E) Net Sales 103, , , , , % EBITDA 34,522 40,862 45,681 50,595 56, % Net Profit 23,691 27,743 31,782 36,686 40, % Margins(%) EBITDA 33.5% 32.3% 31.2% 30.9% 30.1% NPM 23.0% 21.9% 21.7% 22.4% 21.4% Per Share Data (Rs.) Adj EPS % PER (x) 31.3x 20.6x 21.8x 18.9x 17.3x Please see the end of the report for disclaimer and disclosures. -5-

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