Margin PAT (Rs Margin

4 Recommendation BUY Best bet at current FMCG space, Attractive Valuations; BUY CMP Rs. 345 ITC posted a good quarter in terms of Net Sales/Gross Profit/EBITDA/PAT increased by 11.8%/13.9%/18.4%/18.2% YoY respectively. Further, Gross Target Price Rs. 429 margin improved by 110bps YoY to 57.7% and down by 240bps QoQ. Sector FMCG Improvement in Cigarette EBIT margin by 430bps YoY; however volume declined by 3% in Q4FY14 (the decline was 2% in Q3FY14). Stock Details In the last three months, ITC has underperformed Sensex by 11.7% since BSE Code 500875 its Q3FY14 result. This underperformance is driven by expensive valuation, slowdown in cigarette volume, shift towards high beta sectors. NSE Code ITC However, we believe valuations have corrected after this Bloomberg Code ITC IN underperformance and currently trade at attractive valuations. We feel Market Cap (Rs cr) 274305 the discount is not justified as ITC provides strong earnings visibility on Free Float (%) 100% account of pricing power in cigarette business, expected reversal in 52- wk HI/Lo (Rs) 387/285 decline in cigarette volume and break-even in foods/personal products. We have introduced FY16E numbers. We expect net sales to grow by Avg. volume BSE (Quarterly) 521867 19.5% in FY15E and by 16.6% in FY16E. At CMP, ITC is trading at a PE of Dividend (FY13) Rs. 5.25 per share 25.3x FY15E & 21.8x FY16E. The success of 64mm cigarette, turnaround in Face Value (Re) 1.00 Other FMCG business to improve overall RoE and strong pricing power, Shares o/s (Crs) 793.6 should be key decisive factor for the stock going forward. We have revised our TP of Rs 429 based on SOTP (FY16E) with a BUY rating. Relative Performance 1Mth 3Mth 1Yr The cigarette net revenue growth was up by 12.6% YoY to Rs. 4078.8cr. ITC -3.2% 7.0% 3.0% However, business grew its profitability by 20.8% YoY primarily led by Sensex 7.9% 18.7% 25.5% premiumization and better revenue mix which was off-set by 3% volume decline. Despite heavy taxation inflicted on cigarettes last year, ITC continue to maintain its average +18% EBIT growth mainly driven by the increased share of 64mm cigarettes and decline in RSFT (regular size filter tip) cigarettes during FY14. We feel that, with good growth in 64mm cigarettes which contributes 7%- 8% to the total cigarette revenue and Kings segment, the volume decline would be curtailed. More importantly, 64mm segment is not diluting the margins. We expect volume to recover in FY15E on the account of a) sustained growth in the 64mm cigarette segment while volume decline in other segment is slowing, b) the growth in 64mm segment is attributed to the shift from Shareholding Pattern 31 st Mar 14 bidis/illicit cigarette and less from cannibalization, c) effective ban on the Gutkha is likely to support volume growth. Thus benefitting ITC; in our view. Institutional (Incl. FII) 54.7% ITC's non-cigarette FMCG revenue grew by 13.7% YoY. However, to our Corporate Bodies (incl. 35.0% foreign) surprise, the business posted profit of Rs 43.1cr in Q4FY14 as against Rs 11.9cr Public & others 10.3% in Q4FY13, jump by 4x YoY. Despite quarterly fluctuation in the Other FMCG Ruchita Maheshwari business and broad-based slowdown in the staples category, ITC had achieved break-even in FY14. The segment had posted a profit of Rs 21.8cr in FY14 as Research Analyst compared to loss of Rs 81.3cr in FY13. Further, Agri business reported a revenue growth of 8.1% YoY to Rs 2004.2cr in Q4FY14 primarily due to +91 22 3926 8023 ruchita.maheshwari@nirmalbang.com improved realization and higher volumes. Paperboard reported a revenue increase by 19.3% YoY to Rs 1261.2cr in Q4FY14 aided by higher volumes and product mix enrichment. Year Net Sales Growth Margin PAT (Rs Margin EV/Sales EBIDTA EPS (Rs.) P/E (x) (cons) (Rs cr) (%) (%) cr) (%) (x) RoE FY13 31323.5 19.6% 10870.3 34.7% 7608.1 24.3% 9.6 35.8 6.0 35.7% FY14 34984.7 11.7% 12719.5 36.4% 8891.4 25.4% 11.2 30.9 5.4 35.3% FY15E 41802.2 19.5% 15602.2 37.3% 10861.0 26.0% 13.7 25.3 4.4 36.6% FY16E 48753.2 16.6% 18196.6 37.3% 12605.3 25.9% 15.8 21.8 3.7 36.1% 1 P a g e

Segment Highlights: The Cigarette segment reported an EBIT growth of 20.8% YoY to Rs. 2551.9cr in Q4FY14. EBIT margins for the cigarette increased by 430bps YoY to 62.6%, driven largely by price increase taken during the quarter and product mix improvement. However, company reported 3% decline in cigarette volume as against 3% volume growth during the same quarter last year. A pick-up in 64mm cigarette consumption helped ITC to boost margins even when overall sales volumes declined. A nearly 40% duty hike on normal-sized cigarettes in the past two years along with a sharp drop in discretionary spending is gradually pushing up sales of the 64 mm cigarettes. Other FMCG revenues grew by 13.7% YoY to Rs. 2314.5cr. Revenue growth was aided by product mix/realization improvement, new product launches across most categories, enhanced scale, operating leverage, supply chain efiiciencies and strategic cost management initiatives. The segment reported a profit of Rs. 43.1cr in Q4FY14 as against Rs 11.9cr in Q4FY13, jump by 4x YoY. The segment has broken even operationally in FY14 amidst a general slowdown in the segment. Paperboard reported a decline in EBIT margin by 290bps YoY to 14.9% due to steep rise in input price particularly wood, coal and chemical costs. The company has taken a price and cost control actions to mitigate the impact of steep hike in input prices. The new paperboard machine, commissioned in March 2013 at the Bhadrachalam plant, has been fully ramped up. The revenue growth of 19.3% YoY was attributed to recent capacity additions. Agri business reported a sales growth of 8.1% YoY to Rs. 2004.2cr in Q4FY14 aided by improved realization and higher volumes. The segment reported an increased in EBIT margin by 40bps YoY to 7.3%. Hotel segment reported improvement in the EBIT margin by 580bps YoY to 18.7% in Q4FY14 and down by 100bps QoQ aided by sueprior perfromance by ITC Grand Chola. The segment reported a sales growth of 1.6% YoY to Rs. 320.5cr in Q4FY14relatively weak pricing scenario. Annexure: Source: Company & Nirmal Bang Research 2 P a g e

Source: Company & Nirmal Bang Research SOTP Valuation: FY16E EV/EBIDTA (x) Rs. / share Cigarettes 18 309 FMCG Others (EV/Sales) 4 62 Hotels 13 14 Agri Business 7 8 Paper 8 19 Net (debt)/cash per share 17 Target Price 429 Source: Nirmal Bang Research 3 P a g e

Q4FY14 Standalone Result Analysis Rs. in crore Particulars Q4FY14 Q4FY13 YoY% Q3FY14 QoQ% Net Sales 9145.1 8180.3 11.8% 8623.1 6.1% Other Operating Income 93.4 77.1 21.1% 103.7-10.0% Total Income 9238.5 8257.4 11.9% 8726.9 5.9% Increase / Decrease in Stock 150.4 265.3 39.5 Consumption of raw material 2707.9 2414.1 12.2% 2796.7-3.2% Purchase of traded goods 1011.4 868.5 16.5% 603.2 67.7% Employees Cost 410.8 343.4 19.6% 400.8 2.5% Other Expenditure 1754.7 1659.9 5.7% 1602.4 9.5% Total Expenditure 6035.1 5551.1 8.7% 5442.6 10.9% EBITDA 3203.4 2706.3 18.4% 3284.3-2.5% Interest 9.5 24.3-60.7% 9.1 4.3% Other Income 266.7 254.0 5.0% 391.1-31.8% PBDT 3460.6 2936.0 17.9% 3666.2-5.6% Depreciation 237.8 206.7 15.1% 225.9 5.3% Tax 944.7 801.4 17.9% 1055.0-10.4% Reported Profit After Tax (PAT) 2278.0 1928.0 18.2% 2385.3-4.5% EPS (Unit Curr.) 2.9 2.4 3.0 Equity 795.3 790.2 793.6 Face Value 1 1 1 BPS BPS EBITDA(%) 35.0% 33.1% 190 38.1% -310 PBDT(%) 37.8% 35.9% 190 42.5% -470 PAT(%) 24.9% 23.6% 130 27.7% -280 Source: Company and Nirmal Bang Research 4 P a g e

Segment Analysis Rs. in crore Particulars Q4FY14 Q4FY13 YoY% Q3FY14 QoQ% FMCG - Cigarettes 4078.8 3623.2 12.6% 4116.1-0.9% FMCG - Others 2314.5 2036.2 13.7% 2077.8 11.4% Hotels 320.5 315.5 1.6% 315.4 1.6% Agri Business 2004.2 1854.5 8.1% 1786.4 12.2% Paperboards, Paper & Packaging 1261.2 1057.5 19.3% 1257.4 0.3% Total 9979.2 8886.8 12.3% 9553.1 4.5% Profit / Loss before Interest & Tax FMCG - Cigarettes 2551.9 2112.4 20.8% 2652.6-3.8% - Liability no longer written back 0.0 0.0 0.0 FMCG - Cigarettes (Total) 2551.9 2112.4 20.8% 2652.6-3.8% FMCG - Others 43.1 11.9 263.0% 10.4 316.3% Hotels 59.9 40.6 47.3% 62.2-3.8% Agri Business 145.5 127.5 14.1% 205.4-29.2% Paperboards, Paper & Packaging 188.4 188.1 0.1% 231.7-18.7% Total 2988.8 2480.6 20.5% 3162.3-5.5% Less: Interest (Net) 9.5 24.3 9.1 - Liability no longer written back 0.0 0.0 0.0 Interest Cost (Total) 9.5 24.3 9.1 Other un-allocable income net of unallocable exp. -243.5-273.0-287.2 Profit before Tax 3222.7 2729.3 3440.3 Less: Tax Expense 944.7 801.4 1055.0 Profit After Tax 2278.0 1928.0 18.2% 2385.3-4.5% EBIT Margin BPS BPS FMCG - Cigarettes 62.6% 58.3% 430 64.4% -180 FMCG - Cigarettes (Excluding liability) 62.6% 58.3% 430 64.4% -180 FMCG - Others 1.9% 0.6% 130 0.5% 140 Hotels 18.7% 12.9% 580 19.7% -100 Agri Business 7.3% 6.9% 40 11.5% -420 Paperboards, Paper & Packaging 14.9% 17.8% -290 18.4% -350 Source: Company and Nirmal Bang Research 5 P a g e

Consolidated Financials Profitability (Rs. In Cr) FY13 FY14 FY15E FY16E Balance Sheet (Rs. In Cr) FY13 FY14 FY15E FY16E Y/E - March Share Capital 790.2 795.3 795.3 795.3 Revenues - Net 31323.5 34984.7 41802.2 48753.2 Reserves & Surplus 22367.7 26441.6 31329.1 37001.5 % change 19.6% 11.7% 19.5% 16.6% Net Worth 23157.9 27237.0 32124.4 37796.8 EBITDA 10870.3 12719.5 15602.2 18196.6 Minority Interest 179.9 203.0 317.8 437.7 Interest 87.2 6.4 38.3 26.6 Total Loans 90.8 226.6 166.6 106.6 Other Income 1181.69 1303.33 1353.33 1403.33 Net Deferred Tax Assets 1189.5 1271.5 1271.5 1271.5 EBDT 11964.8 14016.5 16917.2 19573.3 Total Liabilities 24618.1 28938.1 33880.3 39612.5 Depreciation 859.1 964.9 1028.5 1152.3 Net Fixed Assets 13885.4 15741.5 18046.9 19482.5 Extraordinary/Exceptional 0.0 0.0 0.0 0.0 Investments 5981.3 7284.0 7284.0 7284.0 PBT 11105.7 13051.6 15888.7 18421.1 Goodwill in Consolidation 316.5 297.1 297.1 297.1 Tax 3412.1 4060.9 4925.5 5710.5 Other Assets 622.8 1096.0 1290.4 1505.0 PAT 7693.6 8990.6 10963.2 12710.5 Inventories 7522.1 8255.2 10484.8 12228.3 Share of Profit & loss 10.9 10.6 12.6 14.6 Sundry Debtors 1395.8 2439.2 2903.5 3386.3 Minority Interest in Income 96.4 109.8 114.8 119.8 Cash & Bank 3828.3 3490.2 3602.7 5605.1 Adj PAT 7608.1 8891.4 10861.0 12605.3 Loans & Advances 1777.1 2245.1 2419.6 2821.9 Shares o/s ( No. in Cr.)* 790.2 795.3 795.3 795.3 C A L&A 14523.3 16429.8 19410.6 24041.6 EPS 9.6 11.2 13.7 15.8 CL & P 10711.2 11910.3 12448.7 12997.7 Adj EPS* 9.6 11.2 13.7 15.8 Working Capital 3812.1 4519.5 6961.9 11043.9 Cash EPS 10.8 12.5 15.1 17.4 Total Assets 24618.1 28938.1 33880.3 39612.5 DPS (Rs.) 5.2 6.1 7.5 8.7 Cash Flow (Rs. In Cr) FY13 FY14E FY15E FY16E Quarterly (Rs. In Cr) June.13 Sept.13 Dec.13 Mar.14 Operating Net Revenue including OI 7410.7 7852.5 8726.9 9238.5 Profit Before Tax 11105.7 13051.6 15888.7 18421.1 EBITDA 2791.3 3175.8 3284.3 3203.4 Direct Taxes paid -3412.1-4060.9-5246.8-5783.8 Interest 17.0-32.7 9.1 9.5 Depreciation 859.1 964.9 1028.5 1152.3 EBDT 2774.4 3208.5 3275.2 3193.9 Change in WC -758.7-1518.6-2524.4-2294.2 Dep 215.3 220.9 225.9 237.8 Interest Expenses 87.2 6.4 38.3 26.6 Other Income 203.2 246.2 391.1 266.7 Other Income -858.0-1221.3-1353.3-1403.3 PBT 2762.2 3233.8 3440.3 3222.7 CF from Operation 7023.1 7222.0 7831.0 10118.7 Tax 870.9 1003.3 1055.0 944.7 Investment PAT from ordinary activities 1891.3 2230.5 2385.3 2278.0 Capex -2479.8-2824.4-3000.0-2500.0 Minority Interest 0.0 0.0 0.0 0.0 Other Investment -774.5-1302.7 0.0 0.0 PAT 1891.3 2230.5 2385.3 2278.0 Goodwill on consolidation -2.4 19.4 0.0 0.0 EPS (Rs.) 2.4 2.8 3.0 2.9 Interest Received 1181.7 1303.3 1353.3 1403.3 Operational Ratio FY13 FY14 FY15E FY16E Total Investment -2074.9-2804.4-1646.7-1096.7 EBITDA margin (%) 34.7% 36.4% 37.3% 37.3% Free Cash Flow 4948.2 4417.5 6184.4 9022.0 Adj.PAT margin (%) 24.3% 25.4% 26.0% 25.9% Financing Adj.PAT Growth (%) 21.6% 16.9% 22.2% 16.1% Equity raised/(repaid) 0.0 5.1 0.0 0.0 Price Earnings (x) 35.8 30.9 25.3 21.8 Inc/Dec in Reserves 0.0 0.0 0.0 0.0 Book Value (Rs.) 29.3 34.2 40.4 47.5 Debt raised/(repaid) -16.5 135.8-60.0-60.0 ROCE (%) 52.3% 51.5% 53.3% 52.6% Dividend (incl. tax) paid -4146.4-4890.3-5973.5-6932.9 RONW (%) 35.7% 35.3% 36.6% 36.1% Deferred Revenue Exp. 0.0 0.0 0.0 0.0 Debt Equity Ratio 0.0 0.0 0.0 0.0 Interest Expenses -87.2-6.4-38.3-26.6 Price / Book Value (x) 11.8 10.1 8.5 7.3 Cash Flow from Financing Activities -4250.0-4755.6-6071.9-7019.6 EV / Sales 6.0 5.4 4.4 3.7 Net Cash Flow 698.2-338.1 112.5 2002.4 EV / EBIDTA 21.8 18.8 15.4 13.1 Beginning Cash Flow 3130.1 3828.3 3490.2 3602.7 Cash as reported in Balance Sheet 3828.3 3490.2 3602.7 5605.1 Source: Company and Nirmal Bang Research 6 P a g e

Disclaimer: This Document has been prepared by Nirmal Bang Research (A Division of Nirmal Bang Securities PVT LTD). The information, analysis and estimates contained herein are based on Nirmal Bang Research assessment and have been obtained from sources believed to be reliable. This document is meant for the use of the intended recipient only. This document, at best, represents Nirmal Bang Research opinion and is meant for general information only. Nirmal Bang Research, its directors, officers or employees shall not in anyway be responsible for the contents stated herein. Nirmal Bang Research expressly disclaims any and all liabilities that may arise from information, errors or omissions in this connection. This document is not to be considered as an offer to sell or a solicitation to buy any securities. Nirmal Bang Research, its affiliates and their employees may from time to time hold positions in securities referred to herein. Nirmal Bang Research or its affiliates may from time to time solicit from or perform investment banking or other services for any company mentioned in this document. Nirmal Bang Research (Division of Nirmal Bang Securities PVT LTD) B-2, 301/302, Marathon Innova, Nr. Peninsula Corporate Park Lower Parel(W), Mumbai-400013 Board No. : 91 22 3926 8000/8001 Fax. : 022 3926 8010 7 P a g e