ITC Limited SELL. PhillipCapital (India) Pvt. Ltd. FMCG: Quarterly Update 20 May 2013

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1 ITC Limited PhillipCapital (India) Pvt. Ltd. FMCG: Quarterly Update 20 May 2013 ITC reported Q4FY13 numbers were largely in line with our estimates with a marginal beat in cigarette volume growth and a strong growth in Agri business segment. We maintain our negative stance on ITC because of regulatory and volume pressures on the cigarettes business, high consensus expectations and steep valuations. The key takeaways of the results are as follows: Cigarettes business volume growth at ~2.5% YoY; EBIT margins expand 320bps: ITC reported a gross revenue growth of 17.8% YoY primarily driven by pricing growth. Net sales growth in the segment was 11.5% while the volume growth in the segment at ~2.5% YoY was marginally better than our estimates. The segment EBIT growth was 20% YoY and the margins expanded by 320bps to 58.3%. We note that costs in the cigarette segment were largely flat (up just 1% YoY) which helped the company to report sharp EBIT growth. The government had hiked excise duty by 18% during the union budget for FY14. We believe the trade channel in anticipation of price hikes would have accumulated inventory in the quarter translating to the higher volume growth. In Q4FY12, we believe inventory accumulation was lower on account on account of deferred price hikes. FMCG others segment reports robust growth; EBIT breakeven in line with expectations: The FMCG others segment reported a revenue growth of 26% which was largely in line with our expectations. The segment reported an EBIT of Rs 110mn. The segment has breakeven after a significant period of gestation marked by entries into new categories and sustained brand investments. Hotels and paper board segment report tepid growth; Agri business surprises positively: Sluggishness in the hotels segment continued and the segment reported a revenue growth of 12% YoY notwithstanding the opening of ITC Grand Chola in Chennai. Segment EBIT declined by 51% YoY on account of challenging operating environment and increased operational expenses of Grand Chola in Chennai. Paper boards business reported revenue growth of 12.5% YoY but operating profits declined by 4% YoY. Agri business reported a sharp revenue and EBIT growth of 19% YoY and 20% YoY respectively. EBIDTA and PAT growth in line with our expectations: Consolidated EBITDA grew by 21% with a margin expansion of 50bps YoY. The strong EBIDTA growth was helped by sluggish employee expenses and other operating expenses as gross profit growth was much lower at 14.2% YoY. The earnings growth of 19% YoY was helped by the strong EBIDTA growth driven by cost control and robust revenue growth in the cigarettes business. Maintain Estimates; Maintain recommendations: We have largely maintained our estimates unchanged as the revenues and earnings were largely in line with our estimates. We maintain our recommendation on the stock on account of steep valuations, rising down trading risks and regulatory concerns. SELL ITC IN CMP RS 335 TARGET RS 290 ( 14%) Company Data O/S SHARES (MN) : 7902 MARKET CAP (RSBN) : 2645 MARKET CAP (USDBN) : WK HI/LO (RS) : 355 / 225 LIQUIDITY 3M (USDMN) : 41.9 FACE VALUE (RS) : 1 Share Holding Pattern, % FII / NRI : 51.1 FI / MF : 33.4 NON PROMOTER CORP. HOLDINGS : 4.9 PUBLIC & OTHERS : 10.6 Price Performance, % 1mth 3mth 1yr ABS REL TO BSE Price Vs. Sensex (Rebased values) Apr 10 Feb 11 Dec 11 Oct 12 ITC Rel. to BSE Source: Bloomberg, Phillip Capital Research Other Key Ratios Rs mn FY13 FY14E FY15E Net Sales 295, , ,599 Ebidta 105, , ,223 Net Profit 73,793 84, ,057 EPS, Rs PER, X EV/EBIDTA, x EV/Net Sales, x ROE, % Source: PhillipCapital India Research Naveen Kulkarni ( ) nkulkarni@phillipcapital.in Ennette Fernandes ( ) efernandes@phillipcapital.in 1 of 7

2 Q4FY13 results (Rs mn) Q4FY13 Q3FY13 QoQ, % Q4FY12 YoY, % Net sales 81,803 76, , Growth, % Total income 81,803 76, , Operating expenses 55,511 48, , EBITDA 26,292 27, , Growth, % Margin, % Depreciation EBIT 24,225 25, , Margin, % Interest paid Other Income 3,311 4,148 2,841 Pre tax profit 27,293 29, , Tax provided 8,014 9, , PC Net Profit 19,280 20, , Reported PAT 19,280 20, , Growth, % Margin, % Adj Fully Dilluted EPS, Rs Source: Company, PhillipCapital India Research 2 of 7

3 Segment wise financial details Q4FY10 Q1FY11 Q2FY11 Q3FY11 Q4FY11 Q1FY12 Q2FY12 Q3FY12 Q4FY12 Q1FY13 Q2FY13 Q3FY13 Segment Net Sales (Rs. Mn) Cigarettes 24,530 24,836 25,501 27,726 27,673 28,736 29,681 32,328 32,496 33,042 33,852 36,574 Other FMCG 11,227 10,014 10,556 11,021 13,125 11,978 13,407 13,707 16,165 14,731 16,908 17,827 Hotels 2,562 2,099 2,089 2,816 3,003 2,305 2,111 2,787 2,858 2,324 2,170 3,095 Agri Business 9,881 13,568 12,496 10,376 10,818 17,071 14,345 11,394 14,142 16,914 20,239 16,310 Paperboards 8,030 7,937 9,192 8,773 9,170 9,596 10,054 9,784 9,799 10,361 10,590 10,616 Growth YoY % Cigarettes Other FMCG Hotels Agri Business Paperboards Segment EBIT (Rs. Mn) Cigarettes 12,512 13,050 14,582 15,330 14,706 15,767 17,289 18,442 17,579 18,998 20,802 22,335 Other FMCG Hotels , Agri Business 697 1,231 2,024 1, ,571 2,388 1,419 1,056 1,714 2,597 1,726 Paperboards 1,688 1,885 2,456 1,914 1,937 2,270 2,897 2,243 1,958 2,647 2,825 2,286 Segment EBIT Margin % Cigarettes Other FMCG Hotels Agri Business Paperboards Segment EBIT Growth YoY % Cigarettes Hotels Agri Business Paperboards EBIT Contribution % Cigarettes Other FMCG Hotels Agri Business Paperboards Source: Company, Phillip Capital India Research 3 of 7

4 Financials Income Statement Y/E Mar, Rs mn FY12 FY13E FY14E FY15E Net sales 247, , , ,599 Growth, % Other income 3,754 3,041 3,497 3,934 Total income 251, , , ,533 Raw material expenses 96, , , ,548 Employee expenses 12,654 13,922 16,287 18,674 Other Operating expenses 54,273 58,319 70,143 81,088 EBITDA (Core) 88, , , ,223 Growth, % Margin, % Depreciation 6,988 7,921 9,216 10,046 EBIT 81,499 97, , ,177 Growth, % Margin, % Interest paid ,028 Other Non Operating Income 8,253 9,450 10,800 12,463 Pre tax profit 88, , , ,613 Tax provided 27,352 32,614 41,489 47,556 Profit after tax 61,621 73,793 84, ,057 Net Profit 61,621 73,793 84, ,057 Growth, % Net Profit (adjusted) 61,621 73,793 84, ,057 Unadj. shares (m) 7,738 7,818 7,902 7,902 Wtd avg shares (m) 7,541 7,818 7,902 7,902 Balance Sheet Y/E Mar, Rs mn FY12 FY13E FY14E FY15E Cash & bank 28,189 36,150 45,324 84,415 Debtors 9,860 11,661 12,912 14,193 Inventory 56,378 66,007 70,965 76,016 Loans & advances 18,311 28,819 32,751 36,935 Total current assets 112, , , ,559 Investments 63,166 70,603 70,603 70,603 Gross fixed assets 141, , , ,019 Less: Depreciation 50,452 60,880 70,096 80,142 Add: Capital WIP 22,763 22,855 19,952 21,527 Net fixed assets 113, , , ,405 Non current assets 0 1,487 1,487 2,260 Total assets 293, , , ,319 Current liabilities 48,087 51,893 56,924 62,985 Provisions 44,111 52,589 55,333 57,866 Total current liabilities 92, , , ,851 Non current liabilities 13,861 17,294 17,294 17,294 Total liabilities 106, , , ,145 Paid up capital 7,818 7,902 7,902 7,902 Reserves & surplus 180, , , ,777 Shareholders equity 187, , , ,679 Total equity & liabilities 293, , , ,319 Source: Company, PhillipCapital India Research Estimates Cash Flow Y/E Mar, Rs mn FY12 FY13E FY14E FY15E Pre tax profit 88, , , ,613 Depreciation 6,988 7,921 9,216 10,046 Chg in working capital 1,324 11,268 2,365 2,696 Total tax paid 26,643 29,304 41,489 47,556 Cash flow from operating activities 70,642 73,756 91, ,406 Capital expenditure 24,029 21,085 22,097 16,575 Chg in investments 7,621 7, Cash flow from investing activities 31,650 28,522 22,097 16,575 Free cash flow 38,991 45, Equity raised/(repaid) Dividend (incl. tax) 40,890 47,717 50,861 52,819 Cash flow from financing activities 40,810 47,633 50,861 52,819 Net chg in cash 1,819 2,400 18,128 39,013 Valuation Ratios & Per Share Data FY12 FY13E FY14E FY15E Per Share data EPS (INR) Growth, % Book NAV/share (INR) FDEPS (INR) CEPS (INR) CFPS (INR) DPS (INR) Return ratios Return on assets (%) Return on equity (%) Return on capital employed (%) Turnover ratios Asset turnover (x) Sales/Total assets (x) Sales/Net FA (x) Working capital/sales (x) Working capital days Liquidity ratios Current ratio (x) Quick ratio (x) Interest cover (x) Dividend cover (x) Net debt/equity (%) (15.0) (16.2) (18.3) (28.5) Valuation PER (x) Price/Book (x) Yield (%) EV/Net sales (x) EV/EBITDA (x) EV/EBIT (x) of 7

5 Recommendation Chart Buy (TP 225) Buy (TP 245) Neutral (TP 230) Neutral (TP 250) Neutral (TP 250) (TP 260) (TP 245) (TP 290) (TP 260) Jan 11 Apr 11 Jul 11 Oct 11 Jan 12 Apr 12 Jul 12 Oct 12 Jan 13 Apr 13 Source: PhillipCapital India Research 5 of 7

6 Management Vineet Bhatnagar (Managing Director) (91 22) Sajid Khalid (Head Institutional Equities) (91 22) Jignesh Shah (Head Equity Derivatives) (91 22) Research Automobiles, IT Services Deepak Jain (9122) Neha Garg (9122) Varun Vijayan (9122) Banking, NBFCs Manish Agarwalla (9122) Sachit Motwani, FRM (9122) Consumer, Media, Telecom Naveen Kulkarni, CFA, FRM (9122) Ennette Fernandes (9122) Vivekanand Subbaraman (9122) Cement Vaibhav Agarwal (9122) Sales & Distribution Kinshuk Tiwari (9122) Pawan Kakumanu (9122) Shubhangi Agrawal (9122) Dipesh Sohani (9122) Economist Anjali Verma (9122) Engineering, Capital Goods Ankur Sharma (9122) Jishar Thoombath (9122) Metals Dhawal Doshi (9122) Dharmesh Shah (9122) Infrastructure Vibhor Singhal (9122) Raheel Arathodi (9122) Oil&Gas, Fertiliser Gauri Anand (9122) Saurabh Rathi (9122) Sunil Kamath (Sales Trader) (9122) Rajesh Ashar (Sales Trader) (9122) Retail, Real Estate Abhishek Ranganathan, CFA (9122) Neha Garg (9122) Mid caps Kapil Bagaria (9122) Raheel Arathodi (9122) Technicals & Quant Analyst Neppolian Pillai (9122) Shikha Khurana (9122) Sr. Manager Equities Support Rosie Ferns (9122) Mayur Shah (Execution) (9122) Gurudatt Uchil (Execution) (9122) Contact Information (Regional Member Companies) SINGAPORE Phillip Securities Pte Ltd 250 North Bridge Road, #06 00 Raffles City Tower, Singapore Tel : (65) Fax: (65) JAPAN Phillip Securities Japan, Ltd 4 2 Nihonbashi Kabutocho, Chuo ku Tokyo Tel: (81) Fax: (81) THAILAND Phillip Securities (Thailand) Public Co. Ltd. 15th Floor, Vorawat Building, 849 Silom Road, Silom, Bangrak, Bangkok Thailand Tel (66) Fax: (66) UNITED STATES Phillip Futures Inc. 141 W Jackson Blvd Ste 3050 The Chicago Board of Trade Building Chicago, IL USA Tel (1) Fax: (1) MALAYSIA Phillip Capital Management Sdn Bhd B 3 6 Block B Level 3, Megan Avenue II, No. 12, Jalan Yap Kwan Seng, Kuala Lumpur Tel (60) Fax (60) INDONESIA PT Phillip Securities Indonesia ANZ Tower Level 23B, Jl Jend Sudirman Kav 33A, Jakarta 10220, Indonesia Tel (62) Fax: (62) FRANCE King & Shaxson Capital Ltd. 3rd Floor, 35 Rue de la Bienfaisance Paris France Tel (33) Fax : (33) AUSTRALIA PhillipCapital Australia Level 37, 530 Collins Street Melbourne, Victoria 3000, Australia Tel: (61) Fax: (61) INDIA PhillipCapital (India) Private Limited No. 1, C Block, 2 nd Floor, Modern Center, Jacob Circle, K. K. Marg, Mahalaxmi Mumbai Tel: (9122) Fax: (9122) HONG KONG Phillip Securities (HK) Ltd 11/F United Centre 95 Queensway Hong Kong Tel (852) Fax: (852) CHINA Phillip Financial Advisory (Shanghai) Co. Ltd. No 550 Yan An East Road, Ocean Tower Unit 2318 Shanghai Tel (86) Fax: (86) UNITED KINGDOM King & Shaxson Ltd. 6th Floor, Candlewick House, 120 Cannon Street London, EC4N 6AS Tel (44) Fax: (44) SRI LANKA Asha Phillip Securities Limited Level 4, Millennium House, 46/58 Navam Mawatha, Colombo 2, Sri Lanka Tel: (94) Fax: (94) of 7

7 Disclosures and Disclaimers PhillipCapital (India) Pvt. Ltd. has three independent equity research groups: Institutional Equities, Institutional Equity Derivatives and Private Client Group. This report has been prepared by Institutional Equities Group. The views and opinions expressed in this document may or may not match or may be contrary at times with the views, estimates, rating, target price of the other equity research groups of PhillipCapital (India) Pvt. Ltd. This report is issued by PhillipCapital (India) Pvt. Ltd. which is regulated by SEBI. PhillipCapital (India) Pvt. Ltd. is a subsidiary of Phillip (Mauritius) Pvt. Ltd. References to "PCIPL" in this report shall mean PhillipCapital (India) Pvt. Ltd unless otherwise stated. This report is prepared and distributed by PCIPL for information purposes only and neither the information contained herein nor any opinion expressed should be construed or deemed to be construed as solicitation or as offering advice for the purposes of the purchase or sale of any security, investment or derivatives. The information and opinions contained in the Report were considered by PCIPL to be valid when published. The report also contains information provided to PCIPL by third parties. The source of such information will usually be disclosed in the report. Whilst PCIPL has taken all reasonable steps to ensure that this information is correct, PCIPL does not offer any warranty as to the accuracy or completeness of such information. Any person placing reliance on the report to undertake trading does so entirely at his or her own risk and PCIPL does not accept any liability as a result. Securities and Derivatives markets may be subject to rapid and unexpected price movements and past performance is not necessarily an indication to future performance. This report does not have regard to the specific investment objectives, financial situation and the particular needs of any specific person who may receive this report. Investors must undertake independent analysis with their own legal, tax and financial advisors and reach their own regarding the appropriateness of investing in any securities or investment strategies discussed or recommended in this report and should understand that statements regarding future prospects may not be realized. In no circumstances it be used or considered as an offer to sell or a solicitation of any offer to buy or sell the Securities mentioned in it. The information contained in the research reports may have been taken from trade and statistical services and other sources, which we believe are reliable. PhillipCapital (India) Pvt. Ltd. or any of its group/associate/affiliate companies do not guarantee that such information is accurate or complete and it should not be relied upon as such. Any opinions expressed reflect judgments at this date and are subject to change without notice Important: These disclosures and disclaimers must be read in conjunction with the research report of which it forms part. Receipt and use of the research report is subject to all aspects of these disclosures and disclaimers. Additional information about the issuers and securities discussed in this research report is available on request. Certifications: The research analyst(s) who prepared this research report hereby certifies that the views expressed in this research report accurately reflect the research analyst s personal views about all of the subject issuers and/or securities, that the analyst have no known conflict of interest and no part of the research analyst s compensation was, is or will be, directly or indirectly, related to the specific views or recommendations contained in this research report. The Research Analyst certifies that he /she or his / her family members does not own the stock(s) covered in this research report. Independence: PhillipCapital (India) Pvt. Ltd. has not had an investment banking relationship with, and has not received any compensation for investment banking services from, the subject issuers in the past twelve (12) months, and PhillipCapital (India) Pvt. Ltd does not anticipate receiving or intend to seek compensation for investment banking services from the subject issuers in the next three (3) months. PhillipCapital (India) Pvt. Ltd is not a market maker in the securities mentioned in this research report, although it or its affiliates may hold either long or short positions in such securities. PhillipCapital (India) Pvt. Ltd does not hold more than 1% of the shares of the company(ies) covered in this report. Suitability and Risks: This research report is for informational purposes only and is not tailored to the specific investment objectives, financial situation or particular requirements of any individual recipient hereof. Certain securities may give rise to substantial risks and may not be suitable for certain investors. Each investor must make its own determination as to the appropriateness of any securities referred to in this research report based upon the legal, tax and accounting considerations applicable to such investor and its own investment objectives or strategy, its financial situation and its investing experience. The value of any security may be positively or adversely affected by changes in foreign exchange or interest rates, as well as by other financial, economic or political factors. Past performance is not necessarily indicative of future performance or results. Sources, Completeness and Accuracy: The material herein is based upon information obtained from sources that PCIPL and the research analyst believe to be reliable, but neither PCIPL nor the research analyst represents or guarantees that the information contained herein is accurate or complete and it should not be relied upon as such. Opinions expressed herein are current opinions as of the date appearing on this material and are subject to change without notice.furthermore, PCIPL is under no obligation to update or keep the information current. Copyright: The copyright in this research report belongs exclusively to PCIPL. All rights are reserved. Any unauthorized use or disclosure is prohibited. No reprinting or reproduction, in whole or in part, is permitted without the PCIPL s prior consent, except that a recipient may reprint it for internal circulation only and only if it is reprinted in its entirety. Caution: Risk of loss in trading in can be substantial. You should carefully consider whether trading is appropriate for you in light of your experience, objectives, financial resources and other relevant circumstances. PhillipCapital (India) Pvt. Ltd. 2nd Floor, C Block, Modern Centre, Mahalaxmi, Mumbai of 7