ITC::Takeaways Motilal Oswal Annual Global Investor Conferences

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Key Takeaways
Cigarettes: Volume growth strong; margin expansion to be gradual
 Cigarette volume growth remains strong, although the low base effect will not be a
big factor in the coming quarters as it was in 1QFY12.
 Post the recent increase in VAT in Tamil Nadu (from 12.5% to 20%), ITC's average
VAT rate is ~16.5%. Recent price increases will enable the company to absorb the
impact of the excise hike.
 ITC operates at 55%+ EBIT margin in cigarettes, the highest in the industry.
Incremental margin expansion over the next 2-3 years will be a function of improved
product mix and will be moderate.
FMCG: Improving profitability in biscuits; new launches driving growth
 FMCG losses declined 15% in 1QFY12 and continue to trend lower; the key driver
for this decline has been the foods division, which has now broken even for the last
six quarters.
 The two major new launches of FY11, Sunfeast Yippee noodles and Vivel Activ Fair
skin cream, have performed well. Yippee in particular has performed well above
expectations, with demand outstripping current capacity.
 In personal care, the volume share of soaps has exceeded 6%; ITC is targeting
double-digit market share in soaps in 2-3 years. In shampoos, Fiama Di Wills Anti
Hair Fall has been well accepted.
Hotels: Gradual recovery; to invest INR15b over three years
 In hotels, the company expects low to mid single-digit occupancy growth; ARR
growth will play out after the next few quarters, as room additions in the industry
are likely to slow down. Over the next three years, ITC plans to invest INR15b in the
hotels business. It will commission its 600-room Chennai property by 4QFY12.
Agri and Paper
 Agri division sales are likely to grow in high single digits, as leaf tobacco prices are
stable. Demand for Indian leaf tobacco is unlikely to increase due to higher production
in Brazil and Africa.
 ITC's new 0.1m ton paperboard unit will aid growth in FY13; FY12 growth will be
driven by mix improvement and higher realizations.
Valuation and view
 The company plans to invest INR15b across businesses in FY12.
 ITC continues to be our top pick in our FMCG coverage universe due to strong
pricing power and higher growth potential in the cigarettes business, declining losses
in FMCG, and likely uptick in the hotels business.
 The stock trades at 25.9x FY12E EPS of INR7.8 and 22x FY13E EPS of INR9.2. Buy.