ITC LTD. Stock Coverage BUY CMP TARGET 362 LONG TERM INVESTMENT. Date 27 th July BSE Code

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1 Stock Coverage ITC LTD BUY CMP TARGET 362 LONG TERM INVESTMENT Date 27 th July 2018 BSE Code NSE Code ITC Market Cap (Rs Cr) week High/Low 307/ Industry Cigarettes/Tobacco Face Value Rs 1/Share Shares O/S (In No) Cr EPS * 9.40 Book Value* P/E P/B 7.05 *Note: On Standalone TTM basis Shareholding Pattern as on June 2018 ITC is one of India's foremost multi-business enterprise with a market capitalisation of US $ 50 billion and Gross Sales Value^ of US $ 10 billion. ITC is rated among the World's Best Big Companies, Asia's 'Fab 50' and the World's Most Reputable Companies by Forbes magazine and as 'India's Most Admired Company' in a survey conducted by Fortune India magazine and Hay Group. ITC is India's leading Fast Moving Consumer Goods company, the clear market leader in the Indian Paperboard and Packaging industry, a globally acknowledged pioneer in farmer empowerment through its wide-reaching Agri Business and a trailblazer in green hoteliering. ITC Infotech, a wholly-owned subsidiary, is one of India's fastgrowing IT companies in the mid-tier segment. Healthy Financial Performance : The Company delivered a healthy performance during the Q1FY19 amidst subdued demand conditions and continuing pressure on the legal cigarette industry. On a comparable basis, Gross Sales Value (net of rebates/discounts) for the quarter stood at Rs crores, representing a growth of 13.5% driven mainly by the Agribusiness. In FMCG-Others segment revenue was up by 14.3% on a relatively firm base Robust growth in Segment EBITDA (up 86% to 128 cr) was witnessed. Paperboards, Paper & Packaging segment profit was up 15% & trading opportunities in Oilseeds, Rice, Spices and Coffee drive Agribusiness revenue growth. Strong Expansion Plans: ITC is investing heavily in both agriculture and food segments as it sees huge potential in these two sectors. The company had announced investment of Rs 25,000 crore to enhance physical infrastructure and manufacturing capabilities. As a part of this plan, Compay is going to invest over Rs 10,000 crore in setting up food processing facilities on a pan India basis. This amount would be spent on more than 20 integrated manufacturing units for food processing. Asset right Model for Hotel business : In hotels business, company intends to follow the asset-right model by owning properties and managing for others. Presently, 60 percent of the hotels were owned and 40 percent managed for others. However, company is expected to increase this proportion to 50:50 in the next few years. This strategy will help company in growing faster going forward. Valuation Research Analyst : Astha Jain For Private Circulation Only The company is currently trading at of TTM eps of Rs 9.40 while it is trading at 30.43x of FY19E eps & 27.60x of FY20E eps. Co has shown decent financial performance in Q1FY19 & with co s focus on strengthening its FMCG business by achieving Rs 1 lakh Cr revenue in new FMCG business by coupled with strong expansion plans, we believe company is an attractive destination to deploy the funds at current levels. Hence, we recommend Buy on the stock with price target of Rs 362 for long term horizon.

2 Company Overview- FMCG: Cigarettes: ITC's cigarettes are manufactured in state-of-the-art factories at Bengaluru, Munger, Saharanpur, Kolkata and Pune. ITC's wide range of brands, includes Insignia, India Kings, Classic, Gold Flake, American Club, Navy Cut, Players, Scissors, Capstan, Berkeley, Bristol, Flake, Silk Cut, Duke & Royal. In overseas markets, West Asia is a key export region for ITC.With a Portfolio of brands under the Classic, Wills and Scissors Umbrella, ITC has cemented its international standing being the 3rd largest player in the countries of Bahrain & Qatar. ITC was also the first company to introduce a flavor on demand (capsule) product in the economy industry segment in West Asia region. FMCG : Others: Company s vibrant portfolio of brands represents an annual consumer spend of nearly Rs crores in aggregate. Company s FMCG brands have achieved impressive market standing in a relatively short span of time. Today, many of ITC s products have assumed market leadership Aashirvaad is No. 1 in Branded Atta, Sunfeast is No. 1 in Premium Cream Biscuits, Bingo! is No. 1 in the Bridges segment of Snack Foods, Classmate is No. 1 in Notebooks. Other ITC brands are also gaining significant consumer franchise YiPPee! is No. 2 in Noodles, Engage is No. 2 in Deodorants and Mangaldeep is No. 2 in Agarbattis and No. 1 in the Dhoop segment Hotels :. Company s Hotels business remains amongst the fastest growing hospitality chains in the country with over 104 properties under four distinct brands ITC Hotel in the Luxury segment, WelcomHotel in the Upper-Upscale segment, Fortune in the Mid-market to Upscale segment and WelcomHeritage in the Leisure & Heritage segment During the year, the Business commissioned the 103-room WelcomHotel Coimbatore and expanded presence in business and leisure destinations adding managed properties in Chennai, Bengaluru, Pahalgam and Mussoorie Paperboards & Speciality Paper : The 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. ITC s units have capacity close to 7,00,000 TPA of paper and paperboards. ITC offer the greenest paper and paperboards products manifest in stationery brands such as Classmate and Paperkraft, whilst creating largescale livelihoods. Agri Business : Co s Agri Business is the country's second largest exporter of agri-products. It currently focuses on exports and domestic trading of Soyameal, Wheat & Wheat Flour, Rice, Pulses, Barley & Maize, Fruit Purees/Concentrates, IQF/Frozen Fruits, Organic Fruit Products etc. Consumer Spend For Private Circulation Only \

3 Strong Expansion Plans ITC is investing heavily in both agriculture and food segments as it sees huge potential in these two sectors.the company had announced investment of Rs 25,000 crore to enhance physical infrastructure and manufacturing capabilities. As a part of this plan, Compay is going to invest over Rs 10,000 crore in setting up food processing facilities on a pan India basis. This amount would be spent on more than 20 integrated manufacturing units for food processing. Company would invest in agriculture sector to empower around 10 million farmers by During FY18, company commissioned two world-class Integrated Consumer Goods Manufacturing and Logistics Units (ICMLs) at Panchla, West Bengal and Kapurthala, Punjab. Significant progress was also made in constructing several other state-of-the-art owned ICMLs across regions to secure capacity and enable the FMCG Businesses to rapidly scale up in line with long-term demand forecast. Currently, over 15 projects are underway and in various stages of development from land acquisition/site development to construction of buildings and other infrastructure. The Businesses are focussing on deploying Industry 4.0 technologies including advanced analytics, big data and industrial Internet of Things (IoT) in areas such as overall equipment efficiency, energy management, maintenance, downtime analysis, quality and traceability. In hotels business, company intends to follow the asset-right model by owning properties and managing for others. Presently, 60 percent of the hotels were owned and 40 percent managed. Company is expected to increase this proportion to 50:50 in the next few years. ITC has a pipeline of six new properties including the only overseas one at Colombo. During the year FY 18, in Hotels business, growth is better driven by increase in ARR and robust growth in Food & Beverage revenue. Improvement in room rates and operating leverage aided faster growth of 26% in Segment Results, notwithstanding the gestation costs of ITC Grand Bharat and the WelcomHotel Coimbatore. The Business seeks to scale up the brand going forward with the addition of new hotels under construction at Amritsar, Guntur and Bhubaneswar along with a robust pipeline of managed properties. In addition to grant of several patents in previous years, company was granted three more patents during the year two international and one national in respect of cigarettes. In Paperbords & Speciality Segment, company remains the clear leader in the Value Added Paper segment and continues to consolidate its preferred supplier status amongst leading end-use customers and brands. Further, company s expansion project in the Value Added Paper segment at Bhadrachalam unit is nearing completion.

4 Healthy Financial Performance in Q1 FY19 During Q1 FY19, FMCG-Others Segment Revenue grew by 14.3% on a relatively firm base (based on Gross Sales Value which includes adjustments only for taxes that are excluded from reported Gross Revenue). This was led by Staples, Snacks and Meals Business in the Branded Packaged Foods Business, Deodorants and Liquids (handwash & bodywash) in the Personal Care Products Business, Classmate Notebooks and Agarbattis offset by the ongoing restructuring of retail footprint and trade presence in the Lifestyle Retailing Business. Segment EBITDA at Rs cr. registered robust growth of 86% on the back of enhanced scale, product mix enrichment and cost management initiatives, despite sustained investment in brand building and gestation costs of new categories viz. Juices, Dairy, Chocolates, and Health & Hygiene segment in the Personal Care Products Business.The Branded Packaged Foods Businesses posted robust growth in revenue with most major categories recording improvement in market standing.in FMCG -Cigarette Segment, some of the key interventions during the quarter include the launch of innovative variants viz., Hollywood (triple segment filter) and Flake Taste Pro (dual segment filter). Additionally, two brands, American Club and Players, which were launched towards the end of continue to be scaled up. Hotels Segment recorded healthy growth in revenue and profit driven by higher room rates, strong Food & Beverage sales and high operating leverage. The Business commissioned ITC Kohenur, a 271 room luxury property at Hyderabad, on 1st June The Business made steady progress during the quarter in the construction of ITC Hotels at Kolkata & Ahmedabad and WelcomHotels in Guntur & Bhubaneswar.During Q1 FY19, Paperboards, Paper & Packaging segment profit was up by 15%.Segment Results registered robust growth driven by strategic investments in imported pulp substitution, process innovation leading to improved pulp yield, benefits of a cost-competitive fibre chain, product mix enrichment and higher realisation. While there was some improvement in the order book position during the quarter, Segment Revenue remained muted due to slow pick-up in demand in end user industries and unabsorbed capacity in the domestic industry. Shutdown of a paperboard machine for a part of the quarter for rebuild also weighed on Segment Revenue. Operations of the Bleached Chemical Thermo Mechanical Pulp mill was scaled up during the quarter thereby reducing import dependency and delivering substantial savings to the Business, especially in view of the sharp increase in imported pulp prices in recent months.capacity utilisation was also scaled up at the recently commissioned Décor machine at the Tribeni unit. Rebuild of a paperboard machine at the Bhadrachalam unit is nearing completion and is likely to be commissioned in the ensuing quarter. Agri Business leveraged market opportunities in Oilseeds, Rice, Spices and Coffee resulting in robust growth in revenue during the quarter. However, pressure on legal cigarette industry volumes, adverse quality and leaf cost escalation pertaining to Andhra 2017 crop, and lower export incentives weighed on Segment Results.

5 Consolidated P&L A/c Rs Cr Particulars FY16 FY17 FY18 FY19E FY20E Net Sales Growth ( %) Expenditure EBIDTA Growth (%) EBIDTA Margin (%) Other Income Depreciation EBIT EBIT Margin (%) Interest Exceptional Item PBT Tax PAT Min Int & Ass Sh Consolidated PAT Growth (%) NPM (%) Ratios Particulars FY16 FY17 FY18 FY19E FY20E EPS ROCE(%) ROE(%) Book Value Debt/Equity

6 Consolidated Balance Sheet Rs Cr Particulars FY16 FY17 FY18 FY19E FY20E Sh Capital Res & Surplus Sh App/Warrants Minority Interest Total Debt(Long Term+Short Term Borrowings) Other Long Term Liab & Provison Net Deferred Tax Liability Sources Of Fund Net Fixed Assets Non Current Investments Intangible Assets Other Non Current Assets Total Current Assets Current Liabilities & Provisions Net Current Assets Uses Of Funds

7 Standalone Quarterly Financial Highlights Rs Cr Particulars Q1FY19 Q1FY18 Q4FY18 YoY% QoQ% Total Income (21.20) 0.57 Total Expenses (33.63) 0.05 Operating Profit Net Profit (3.89) PBIDTM % NPM % (4.42) EPS (3.75) Past Price Movement

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