Itc Clsa Oct2020

ITC
Rs169.50 - BUY
Chirag Shah A new narrative emerging

chirag.shah@clsa.com Long-term positives unfolding as revenue diversifies
+91 22 6650 5055 ITC’s FMCG segment is set to become a major value driver, with the company ’s
Nitin Gupta legacy cigarette business providing the cash to meet its ambitious goals. Now the
+91 22 6650 5046 second-largest FMCG player in India in terms of revenue, we expect this segment
to deliver an Ebitda Cagr of c.30% in FY20-23, driven by industry tailwinds,
multiple margin levers and falling capex. Value-accretive acquisitions and
improving capital allocation will provide support, against a backdrop of compelling
valuations. We upgrade from Outperform to BUY with a SOTP target of Rs220.
FMCG: The new value driver

9 October 2020
Contributing US$2bn to FY20 revenue (28% of the total) ITC’s FMCG business is
India set for accelerated growth, mainly in foods, which make up 81% of the segment.
Our analysis indicates a K-shaped acceleration with margins trending sharply
Consumer upwards and incremental capex falling. Investors have rightfully been concerned
Reuters ITC.BO about the lower margins in some categories, but we highlight that the company has
Bloomberg ITC IB incubated a larger category basket compared to peers, has an improving sales mix,
Priced on 7 October 2020
falling incubation costs, operating leverage benefits, and an ability to move into
CNX Nifty @ 11,738.9 new categories with limited incremental costs. The present value of capital
employed within FMCG since its inception (including losses) implies 1.6x FY20
12M hi/lo Rs265.90/147.20
sales, materially lower than M&A benchmarks.
12M price target Rs220.00
±% potential +30% Cigarettes: A cash cow for ambitious goals
Shares in issue 12,292.2m Despite multiple headwinds, the cigarette business has maintained strong free-
Free float (est.) 70.5% cashflow generation which should continue to help the FMCG business meet its
Market cap US$29.1bn goals. We are below consensus as our numbers build in further tax hikes even
3M ADV US$71.4m
though we believe there is a good chance they will not materialise. Cigarettes
account for 80% of tobacco industry tax and 9% of overall tobacco consumption.
Foreign s'holding 15.6%
Major shareholders Positive outlook, compelling valuations; upgrade to BUY

BAT 29.5% Falling capex for FMCG, a new asset-light model for the hotels business and a sharp
FPIs 15.6% increase in dividend payouts (80-85% of profit-after-tax) should address investor
concerns about capital allocation. Cross synergies and big ambitions for FMCG may
restrict any demerger but the scaling up of the segment could be an example of a
low-growth but large free cashflow generating business successfully seeding a high-
Blended ESG Score (%)*
growth, value-creating operation. We upgrade from Outperform to BUY with small
Overall 77.0
Country average 68.4
changes to FY20/21 EPS estimates. Valuations are compelling with about a 5% free-
GEM sector average 68.4 cashflow yield, 6% dividend yield and an implied 22CL PE multiple of 6.5x for the
*Click to visit company page on clsa.com for details cigarette business. The possible sale of the government’s stake in ITC and negative
Stock performance (%) regulatory newsflow could represent risks to our call.
1M 3M 12M
Absolute (10.5) (12.8) (32.6) Financials
Relative (13.4) (19.7) (36.2) Year to 31 March 19A 20A 21CL 22CL 23CL
Abs (US$) (10.3) (11.0) (34.8) Revenue (Rsm) 444,327 451,361 434,866 491,780 526,284
320 (Rs) (%) 120 Net profit (Rsm) 124,643 144,012 127,336 155,788 169,877
300
110 EPS (Rs) 10.2 11.7 10.3 12.6 13.7
280 CL/consensus (29) (EPS%) - - 93 96 94
100
260
EPS growth (% YoY) 13.3 15.2 (11.8) 22.0 8.8
240 90
PE (x) 16.7 14.5 16.4 13.4 12.4
220 80
Dividend yield (%) 3.4 6.0 5.3 6.3 6.9
200
70 FCF yield (%) 4.1 5.5 4.9 5.4 5.9
180 ITC (LHS)
Rel to Nifty 60 PB (x) 3.6 3.3 3.2 3.0 2.8
160
140 50
ROE (%) 22.8 23.6 19.7 23.1 23.5
Oct 18 Jun 19 Feb 20 Oct 20 Net cash per share (Rs) 20.9 27.3 28.3 31.9 35.2
Source: Bloomberg Note: What we refer to as FMCG in this report is referred to as ‘Other FMCG’ by ITC. Source: www.clsa.com
CLSA and CL Securities Taiwan Co., Ltd. (“CLST”) do and seek to do business with companies covered in its research reports. As such,
investors should be aware that there may be conflicts of interest which could affect the objectivity of the report. Investors should consider
this report as only a single factor in making their investment decisions. For important disclosures please refer to page 96.

ITC - BUY
We would like to thank Evalueserve for its help in preparing our research reports. Akshay Chandak (Strategy), Bhavik Mehta (IT), Mohit Gupta (Auto),
and Mononita Mitra and Zen Javeri (Power, Infra and Capital Goods) provide research support services to CLSA.
What’s the angle? ITC - Rs169.50 - BUY

Why write this now? We upgrade ITC to BUY as we believe the market is ignoring long-term positives.
We expect a K-shaped acceleration for the FMCG business with a profitability-
focused approach and benefits of scale driving a sharp acceleration in margins,
while incremental capital intensity falls. ITC’s derating in the past year was a factor
of ESG-related concerns, regulatory tightening, capital allocation and Covid-created
uncertainty. Most of these concerns are set to be addressed as the FMCG business
is at an inflection point and capital allocation issues are being addressed.
What is the ITC’s better score card on ESG metrics cigarette business notwithstanding; solid
market missing? margin drivers coupled with falling capex for FMCG business; the implied discount
of the cigarette business (which is now trading at a discount to global peers
compared to a healthy premium in the past); and management’s focused approach
to drive profitability and returns.
Devil’s advocate: Key risks: sharp rise in cigarette taxes; sustained economic slowdown; extended
Where could we be wrong? lockdowns; a technical stock overhang (from the government’s sale of its stake).
Valuation history
PE bands PB bands
430 log (Rs) 36.2x
430 log (Rs) 7.7x ITC derated in the past year due
30.8x 6.6x
to regulatory and macro
headwinds in the core cigarette
320 25.5x 300 5.5x business; lower-than-expected
revenue (ex-cigarettes); a sharp
4.2x rise in ESG-based investing; and
20.2x
230 210 capital allocation concerns. On a
reverse SOTP methodology,
3.0x
14.9x ITC’s cigarette business implies a
170 150
valuation of 6.5x FY22 PE, or an
unjustified 30% discount to
120 100
global peers.
Oct 15 Aug 16 Jun 17 Apr 18 Feb 19 Dec 19 Oct 20 Oct 15 Aug 16 Jun 17 Apr 18 Feb 19 Dec 19 Oct 20
Bands (from the top): max, +1sd, avg, -1sd, min
Target-price sensitivity
450 (Rs) Share price Targe price Blue-sky valuation: total shareholder
Blue sky Rainy day return of 56%, including 6%
dividend yield. Key assumptions:
gradual volume growth recovery
400 with no tax hikes for cigarettes in
the next two years; three-year
revenue Cagr of 15% for FMCG;
350 14x PE for cigarettes (45% discount
to 10-year historical average) and 6x
sales for FMCG (33% discount to
300 the sector average).
Base case target: total shareholder
return of 36%, including 6% dividend
255
250 yield. Key assumptions: longer time
for recovery in cigarettes, with
220 volumes in FY23 8% lower than
FY20; 11% FMCG sales Cagr. In our
200
SOTP, we ascribe 12x PE for
cigarettes and 5x sales for FMCG.
150 Rainy day valuation implies 12%

140 downside, including dividend. Key
assumptions: double-digit tax hikes;
slower margin expansion in FMCG;
100 7x PE for cigarette and 2.5x
Oct 17 Mar 18 Aug 18 Jan 19 Jun 19 Nov 19 Apr 20 Oct 20 Mar 21 Aug 21 EV/sales for FMCG.
Source: CLSA
Find CLSA research on Bloomberg, Thomson Reuters, FactSet and CapitalIQ - and profit from our evalu@tor proprietary database at clsa.com
2 chirag.shah@clsa.com 9 October 2020

Investment thesis ITC - BUY
Why BUY ITC

Over the past two decades, ITC has used a small portion of its core business
ITC’s FMCG business is
now the second largest operating cashflow to incubate and scale-up its FMCG business, which in terms of
in India revenue is now the second largest in India. The FMCG business has built a strong
brand portfolio, largely organically, and is at an inflection point in terms of both
scale and margins (we expect a 30% Cagr in FMCG Ebitda for FY20-23). ITC’s
cigarettes business remains a cash cow and is providing capital to support FMCG’s
big ambitions. Value accretive acquisitions (ITC generates US$1.5bn free cashflow),
a clear path towards the profitable scaling-up of the FMCG business, and improving
capital allocation provide a much-needed supportive narrative for ITC against a
backdrop of subdued valuations including 5.4% free cashflow yield, 6.3% dividend
yield and an implied FY22CL PE multiple of 6.5x for the cigarettes business.
ITC’s cumulative operating cash generation and utilisation in the past couple of decades
Total investment in
FMCG of US$1.1bn (Rsbn)
1,200
(Rs78bn) since FY02 Rs1,122bn
1,000
800
600
Rs325bn
400 Rs677bn 29% of OCF
Rs120bn Rs338bn
60% of OCF
Rs78bn
7% of OCF Rs175bn
200
Rs1bn
0
FY02 Operating Dividend Capex - Capex - Investment Others FY20
Cash FMCG Others income
Source: ITC, CLSA
Revenue contribution trend by segments Ebit contribution trend by segments
Cigarette FMCG Agri business (%) Cigarette FMCG Agri business

(%) Paper Hotels Intersegment Paper Hotels Intersegment
120
120 5 3 4 3
4 1
100 12 7 8 8
14 13 12 5
100 17
8
7 3
5
7
21 23 22 23 80
80
60
60 20 25 28 31
86 89 90
86
40 40
51
20
47 46 43 20
0 0 (6)
(14) (12) (13) (13)
(5) (7) (5)
(4)
(20) (20)
FY10 FY15 FY20 23CL FY10 FY15 FY20 23CL
Source: ITC, CLSA Source: ITC, CLSA
9 October 2020 chirag.shah@clsa.com 3

Multiple tailwinds ahead for the FMCG business

We expect a K-shaped acceleration for ITC’s FMCG business with its focus on
A clear path to FMCG
profitability profitability, and economies of scale, driving a sharp acceleration in margins.
Meanwhile, capital intensity is on a downward trend as asset-utilisation improves.
We estimate the present value of capital employed in the FMCG business since
inception implies 1.6x on FY20 sales (including initial losses and upfront
investments) - significantly lower than recent M&A benchmarks.
While investors have rightfully been concerned about inherently lower margins in
some of ITC’s categories (such as Atta, or wheat flour) we would point out that the
benefits of ITC having incubated a much larger category basket compared to peers,
an improving sales mix, falling incubation costs, operating leverage benefits, and its
ability to move into new categories with limited incremental investment, offsets
some of these concerns. Acquisitions could also offer a significant additional growth
lever. Overall, we see a path towards the profitable scaling-up of ITC’s FMCG
business.
FMCG revenue growth trend

With multiple tailwinds,
FMCG revenue is likely 200 (Rsbn)
to accelerate 178
180
160
140 128
120
100 90
80
60
36
40
20 6
0
FY05 FY10 FY15 FY20 23CL
Source: ITC, CLSA
Potential value creation opportunities in the FMCG business . . . . . . with multiple margin levers
Increased adoption of
organsied food offerings Scale up of core businesses
Divestment of non-core Turnaround in the Home

Improving sales mix Shrinking incubation costs
lifestyle business and personal
Bolt on acquisition Addressing white spaces Ability to play adjacencies

with limited incremental Operating leverage benefits
investments
Source: CLSA Source: CLSA

FMCG business to have a K-shaped acceleration with rising Ebitda Sharp upside to margins in the FMCG business on the back of
margins and falling capital intensity improving scale, sales mix and shrinking category incubation costs
15 (%) Ebitda margin Capex as a % of sales 25 (Rsbn) Ebitda OPM (RHS) (%) 15
11.0
10 20
10
7.1
15
5
5
2.3
10
0
0
5
(5)
(5)
0
(10) (7.4)
(5) (10)
21CL
22CL
23CL
FY11
FY20
FY10
FY12
FY13
FY14
FY15
FY16
FY17
FY18
FY19
FY10 FY15 FY20 23CL
Cigarettes business remains a cash cow

Despite multiple headwinds, the cigarettes business has helped generate steady
Cigarette business
enabling FMCG growth free cashflow growth. We expect this to continue, which should help the FMCG
ambitions business reach its own ambitions for growth. The outlook for the cigarettes
business soured in February 2020 with the return of double-digit taxation, followed
by extended lockdowns that accelerated the slowdown in volumes. Our numbers
build in an 18% volume decline for FY21, a long time for volumes to recover (our
FY23 volume assumption is 8% lower than FY20), and further increases in cigarette
taxes (although we believe tax increases are unlikely as they would lead to a decline
in tax revenue for the government).
For the cigarette business we are building in a much slower recovery Amid volume pressure, we expect cigarette margins to settle at
in volumes, even in FY23CL, along with further tax hikes current levels
90 (bn sticks) 80 (% YoY)
85 75
70
80
65
75
60
70
55
65
50
60 45
55 40
21CL
22CL
23CL
21CL
22CL
23CL
FY05
FY18
FY17
FY18
FY19
FY02
FY03
FY04
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY19
FY20
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY20

Capital allocation issues slowly being addressed

Investor concerns about capital allocation are slowly being addressed as the hotels
Capex steadily
decreasing
business moves towards an asset light model, asset turnover for the FMCG business
improves and the dividend payout is increasing (80-85% of profit-after-tax). With a
large part of the capex being on hotels, ITC is looking to incrementally optimise
investment and drive revenue and profitability. Overall, we see average capex spend
decreasing from c.Rs26bn in the past five years to c.Rs20bn for the next three.
Last 5 years annual capex has averaged c.Rs26bn; capex requirement ITC has sustained and accelerated a healthy dividend pay out
is decreasing
Cigarettes FMCG Hotels Agri business Paperboards 120 (%) Special
dividends
23CL
22CL 100
21CL
FY20 80
FY19
FY18 60
FY17
FY16
40
FY15
FY14
20
FY13
FY12
FY11 (Rsm) 0
FY08
FY17
FY22
FY00
FY01
FY02
FY03
FY04
FY05
FY06
FY07
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY18
FY19
FY20
FY21
FY23
0 5,000 10,000 15,000 20,000 25,000 30,000
Long-term positives unfolding, valuations compelling

At current valuations, we think regulatory concerns for ITC are priced-in and the
The market is ignoring
significant tailwinds
long-term positives are being ignored by the market. Our SOTP-based target price
of Rs220 values the cigarettes business at 12x earnings (-2sd below its five-year
average multiples). We value the FMCG business at US$11bn (30% of the overall
value) implying a c.45% discount to the FMCG industry average on an EV/Sales
basis, and c.20% to Britannia Industries, a pure-play domestic food company.
Valuations at 6.5x 22CL imply PE ratios for ITC’s cigarettes business are now one
of the lowest globally, with about a 30% discount to the global peer average. Cross
synergies and ITC’s big ambitions for FMCG may restrict any demergers but the
scaling up of the FMCG business could provide another example of a low growth
but large FCF-generating business successfully seeding a high-growth value
creating business (similar to Reliance Industries, who used core business cashflow
to diversify into telecoms and retail).
Our SOTP target price of Rs220 offers 36% upside, including Cigarettes continue to be a big part of the target price, but FMCG
dividend yield of 6.3% is emerging as a large value creator for the stock
Segment Valuation Multiple Rs/sh Segment value
methodology (x) (US$bn) Net cash
Cigarette PE 12 102 17.0 13%
FMCG others EV/Sales 5 65 10.9 Hotels
1%
Agri business EV/Ebitda 6 5 0.8
Paperboards & EV/Ebitda 11 15 2.5 Paperboards
packaging & packaging
7%
Hotels EV/Ebitda 10 2 0.4
Cigarette
Net cash 1 29 4.8 Agri business 47%
Fair value 2%
218 36.3
Target price 220
Current price 170 28.5
FMCG others
Upside 30 30%
Upside with dividend yield 36
Note: Current price considered as of close of business on 7 Oct 2020. Source: CLSA Source: CLSA

FY22 EV/sales valuation for FMCG stocks under coverage FY22 PE for global tobacco companies
11 (x) 16 (x)
10.2 14 13.6
10.0
10
12 11.0 11.3
9.0 9.0
9 10 8.5 9.1 9.4
7.9 8.2
8
8 6.5
7.7
6 5.3
7 6.8 4
6.3
2
6 5.7
5.3 0
5.0
BAT Malaysia
Imperial Tobacco
ITC
Japan Tobacco Inc

Gudang Garam
Altria Group
Average
Kt&G Corp
BAT Plc
Phillip Morris
5
4
Dabur
ITC
Emami
GCPL
Britannia
Colgate
Nestle
Marico
HUL
Sector
Note: EV/Sales for peer based on consensus. Source: Bloomberg, CLSA Note: ITC’s 6.5x PE is on an implied basis for cigarettes. Source: Bloomberg, CLSA
India Consumer - Coverage valuations

Mkt cap TP Rec EPS growth (%) PE (x) EV/Ebitda (x) RoAE (%)
(US$bn) (Rs)
21CL 22CL 21CL 22CL 21CL 22CL 21CL 22CL
Consumer staples
HUL 66.0 2,525 BUY 17.2 20.4 58.3 48.4 43.3 36.1 35.7 25.2
ITC 29.0 220 BUY (11.8) 22.0 16.5 13.5 11.7 9.4 19.7 23.1
Nestle 20.6 16,100 SELL 19.0 17.1 60.0 51.3 40.2 34.5 106.0 105.5
Britannia 12.2 4,200 O-PF 37.9 3.2 46.5 45.0 36.9 35.8 40.2 35.9
Dabur 12.1 590 BUY 9.7 19.4 55.4 46.4 44.7 37.1 23.4 24.2
GCPL 9.9 715 O-PF 14.1 13.0 46.0 40.7 33.6 30.4 19.6 20.7
Marico 6.3 350 U-PF 16.2 6.6 39.2 36.7 27.1 25.0 37.9 36.1
Colgate 5.3 1,420 U-PF 13.0 5.6 44.9 42.5 29.5 27.9 53.7 55.0
Emami 2.1 325 BUY 11.0 3.9 28.2 27.1 21.4 20.6 29.0 26.6
Discretionary
Asian Paints 25.5 2,200 O-PF (1.8) 31.5 75.7 57.5 47.0 37.9 25.2 29.7
Titan 13.8 931 SELL (49.7) 116.8 145.9 67.3 74.9 40.8 10.4 20.8
Pidilite 9.9 1,490 O-PF (16.7) 51.6 81.3 53.6 58.5 38.7 18.8 25.7
Kansai Nerolac 3.5 430 SELL (21.2) 55.8 61.4 39.4 37.7 25.9 10.8 15.5
Jubilant Food 4.4 2,245 U-PF (43.9) 150.9 172.4 68.7 43.5 27.7 15.7 33.3
Varun Bev. 2.8 870 BUY 247.6 29.1 24.6 19.1 11.1 9.4 21.3 22.8
Westlife 0.8 426 BUY nm nm (59.9) 143.7 103.4 26.0 (19.2) 8.5
Durables
Havells 5.8 530 SELL (32.7) 66.8 86.0 51.5 55.8 30.7 11.1 17.0
Voltas 3.1 670 O-PF (23.0) 75.6 56.3 32.0 44.3 23.4 9.0 14.8
Crompton 2.2 295 O-PF (23.5) 40.6 45.4 32.3 33.9 24.2 23.4 28.4
TTK prestige 1.2 5,700 BUY (11.1) 23.4 44.9 36.4 30.9 25.9 14.1 16.1
Note: Based on closing price on 7 Oct 2020. Source: Companies, Bloomberg, CLSA

Key risks to our view

A higher-than-expected rise in cigarette taxes, entry into low margin/long gestation
Extended lockdowns
and increased taxes categories in the FMCG business, a sustained economic slowdown or extended
pose a risk lockdowns permanently damaging cigarette business volumes are key risks to our
call. The technical stock overhang from the possible sale of the government’s 7.9%
stake in ITC (that it owns through the Specified Undertaking of Unit Trust of India -
SUUTI) could also represent a risk. The increasing focus on ESG remains an issue
for tobacco stocks though we highlight that notwithstanding the core cigarette
business, ITC has set solid standards for ESG.
ITC: business snapshot

ITC business overview
ITC Limited
Net revenue (FY20): Rs451bn
10Y Revenue Cagr: 10%
Adj. PAT (FY20): Rs144bn
10Y earnings Cagr: 13%
Sales mix: 46% Ebit mix: 85% Sales mix: 10% Ebit mix: 7% Sales mix: 13% Ebit mix: 5%
Cigarettes Paper, paperboard and packaging Agri business

Net revenue (FY20): Rs200bn Net revenue (FY20): Rs61bn Net revenue (FY20): Rs102bn
5Y/10Y Sales Cagr: 5%/9% 5Y/10Y Sales Cagr: 4%/7% 5Y/10Y Sales Cagr: 4%/10%
Ebit (FY20): Rs148bn Ebit (FY20): Rs13bn Ebit (FY20): Rs8bn
Other info: Other info:
Inter-segment sales mix: 25% Inter-segment sales mix: 42%
Leaf tobacco sales: 14%
Sales mix: 28% Ebit mix: 2%
Other FMCG
Paper boards Packaging
Net revenue (FY20): Rs128bn Others
and paper material
5Y/10Y Sales Cagr: 7%/13% (25%)
(66%) (9%)
Ebit (FY20): Rs4bn
Sales mix: 4% Ebit mix: 1%

Foods (81%) Incense stick and
Personal care Educational Hotels
Key categories: (10%) stationary (5%) matches (2%)
Atta, Biscuits, Snacks, Net revenue (FY20): Rs18bn
Key categories: Key brands: Key brands:
Noodles, Juices, 5Y/10Y Revenue Cagr: 9%/8%
Soap, Body wash, Classmate, Mangaldeep, Aim,
Confectionaries, Ebit (FY20): Rs1.6bn
Floor cleaner, Paperkraft Homelites, Ship
Dairy, Chocolate,
Wipes, Disinfectant Hotel properties:
Spices, Coffee
spray, Perfume, ITC Hotels (14 hotels, 4,200 rooms)
Deodorants, Welcomhotel (16 hotels, 2,000 rooms)
Skin care The Fortune brand (43 hotels, 3,200 rooms)
Lifestyle retailing (2%) The WelcomeHeritage (36 hotels, 900 rooms)
Key brands: WLS
Note: Sales and Ebit mix for FY20. Source: ITC, CLSA

ITC - BUY
Financials at a glance
Year to 31 March 2019A 2020A 2021CL (% YoY) 2022CL 2023CL
Profit & Loss (Rsm)

Revenue 444,327 451,361 434,866 (3.7) 491,780 526,284
Cogs (ex-D&A) (173,052) (172,351) (178,673) (195,205) (209,949)
Gross Profit (ex-D&A) 271,275 279,010 256,194 (8.2) 296,576 316,334
SG&A and other expenses (103,850) (104,803) (106,789) (114,920) (123,469)
Op Ebitda 167,425 174,206 149,405 (14.2) 181,655 192,866
Depreciation/amortisation (13,117) (15,633) (16,633) (18,133) (19,133)
Op Ebit 154,308 158,574 132,772 (16.3) 163,523 173,733
Net interest inc/(exp) 24,504 29,579 32,550 10 39,130 47,036
Other non-Op items 5,630 4,836 5,320 10 6,118 6,883
Profit before tax 184,442 192,989 170,642 (11.6) 208,771 227,652
Taxation (59,798) (48,978) (43,306) (52,983) (57,774)
Profit after tax 124,643 144,012 127,336 (11.6) 155,788 169,877
Minority interest 0 0 0 0 0
Net profit 124,643 144,012 127,336 (11.6) 155,788 169,877
Adjusted profit 124,643 144,012 127,336 (11.6) 155,788 169,877
Cashflow (Rsm) 2019A 2020A 2021CL (% YoY) 2022CL 2023CL
Operating profit 154,308 158,574 132,772 (16.3) 163,523 173,733
Depreciation/amortisation 13,117 15,633 16,633 6.4 18,133 19,133
Working capital changes (16,533) 4,180 4,880 16.7 (8,108) (4,916)
Other items (33,402) (40,325) (30,843) (40,420) (44,558)
Net operating cashflow 117,491 138,062 123,442 (10.6) 133,127 143,392
Capital expenditure (31,682) (23,160) (21,540) (20,080) (18,663)
Free cashflow 85,808 114,902 101,902 (11.3) 113,047 124,729
M&A/Others 15,591 45,728 31,655 (30.8) 37,767 44,943
Net investing cashflow (16,092) 22,568 10,115 (55.2) 17,687 26,280
Increase in loans (69) 3,186 - - -
Dividends (74,869) (84,222) (125,078) (109,948) (133,135)
Net equity raised/other 8,932 2,127 5,116 140.5 5,080 5,044
Net financing cashflow (66,006) (78,909) (119,962) (104,868) (128,090)
Incr/(decr) in net cash 35,393 81,722 13,595 (83.4) 45,946 41,581
Exch rate movements 0 0 0 0 0
Balance sheet (Rsm) 2019A 2020A 2021CL (% YoY) 2022CL 2023CL
Cash & equivalents 256,557 338,279 351,873 4 397,819 439,400
Accounts receivable 36,462 20,920 23,828 13.9 26,947 28,837
Other current assets 75,872 80,381 73,868 (8.1) 83,535 89,396
Fixed assets 218,878 232,978 237,885 2.1 239,832 239,362
Investments 46,910 36,460 36,460 0 36,460 36,460
Intangible assets 0 0 0 0 0
Other non-current assets 63,300 43,337 41,795 (3.6) 47,264 50,581
Total assets 697,979 752,354 765,709 1.8 831,858 884,037
Short-term debt - - - - -
Accounts payable 33,683 34,467 35,742 3.7 40,420 43,256
Other current liabs 64,246 58,121 60,271 3.7 68,159 72,941
Long-term debt/CBs 111 3,298 3,298 0 3,298 3,298
Provisions/other LT liabs 20,441 16,177 17,176 6.2 18,177 19,177
Shareholder funds 579,498 640,292 649,222 1.4 701,805 745,366
Minorities/other equity 0 0 0 0 0
Total liabs & equity 697,979 752,354 765,709 1.8 831,858 884,037
Ratio analysis 2019A 2020A 2021CL (% YoY) 2022CL 2023CL
Revenue growth (% YoY) 11.9 1.6 (3.7) 13.1 7.0
Ebitda margin (%) 37.7 38.6 34.4 36.9 36.6
Ebit margin (%) 34.7 35.1 30.5 33.3 33.0
Net profit growth (%) 13.8 15.5 (11.6) 22.3 9.0
Op cashflow growth (% YoY) (7.1) 17.5 (10.6) 7.8 7.7
Capex/sales (%) 7.1 5.1 5.0 4.1 3.5
Net debt/equity (%) (44.3) (52.3) (53.7) (56.2) (58.5)
Net debt/Ebitda (x) - - - - -
ROE (%) 22.8 23.6 19.7 23.1 23.5
ROIC (%) 36.6 40.7 35.0 42.8 44.6
Source: www.clsa.com

Section 1: FMCG: The new value driver ITC - BUY
FMCG: The new value driver

We expect a K-shaped ITC is looking to quickly grow its FMCG business, which currently makes US$2bn
acceleration for the of revenue (or about 28% of total ITC revenue), making it the second-largest FMCG
FMCG business firm in India. It is mainly focussed on foods, which made up 81% of its business in
FY20. We expect it to see a K-shaped acceleration, with its focus on profitability
and economies of scale driving a sharp acceleration in margins while incremental
capex is on a downward trend as asset-utilisation improves. While investors have
rightfully been concerned about inherently lower margins in some of ITC’s
categories, we would point out that the benefits of ITC having incubated a much
larger category basket compared to peers, an improving sales mix, falling incubation
costs, operating leverage benefits, and its ability to move into new categories with
limited incremental investments, offsets some of these concerns.
ITC’s FMCG business: an overview

Two decades of solid In a bid to reduce its dependence on tobacco, in 2000 ITC started its FMCG
growth business, riding on the strengths of its strong distribution, branding and sourcing
capabilities. In less than two decades, ITC has become the second-largest FMCG
firm in India in terms of revenue, with most of its portfolio built organically (barring
a few small-ticket brand acquisitions). In the last decade, revenue contribution from
FMCG expanded from 20% in FY10 to 28% in FY20. Similarly, its Ebitda
contribution expanded from -6% in FY10 to +7% in FY20.
Figure 1
ITC - FMCG segment performance; over the last ten years margins have seen a steady improvement
(Rsbn) FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20 21CL 22CL 23CL
Net sales 45 55 70 81 90 97 105 113 125 128 144 160 178
% growth 23.1 23.6 26.4 16.0 11.3 7.7 8.0 8.0 10.5 2.7 12.2 11.0 11.0
Ebitda (2.0) (0.9) 0.4 1.6 2.1 3.1 2.6 4.6 7.6 9.1 12.4 15.2 19.4
% growth nm nm nm 273.3 28.3 44.6 (13.6) 72.1 66.5 20.5 35.7 22.3 28.2
Ebitda margin (%) (4.6) (1.7) 0.6 2.0 2.3 3.2 2.5 4.0 6.1 7.1 8.6 9.5 11.0
Depreciation (0.9) (1.0) (1.3) (1.4) (1.8) (2.0) (2.4) (2.9) (3.7) (4.9) (5.6) (5.7) (5.9)
as a % of net block 8.0 7.2 6.9 6.3 6.0 5.6 4.9 5.1 5.3 6.3 6.4 6.2 6.1
Ebit (3.0) (2.0) (0.8) 0.2 0.3 1.0 0.3 1.6 3.9 4.2 7.0 9.5 13.5
% growth nm nm nm nm 56.2 198.6 (72.4) 483.6 135.3 9.5 65.5 35.7 42.1
Ebit margin (%) (6.7) (3.5) (1.2) 0.3 0.4 1.0 0.3 1.4 3.1 3.3 4.9 5.9 7.6
Capital Employed 19 20 25 34 40 49 57 57 61 66 72 79 85
RoCE (%) (16.5) (10.1) (3.6) 0.7 0.9 2.3 0.5 2.9 6.5 6.7 10.2 12.6 16.4
Note: Data in this table is before considering unallocated items. Source: ITC, CLSA
Figure 2 Figure 3
FMCG revenue trend FMCG Ebitda trend

200 (Rsbn) 20 (Rsbn)
180
160 15
140
120 10
100
80 5
60
40 0
20
0 (5)
21CL
22CL
23CL
21CL
22CL
23CL
FY03
FY06
FY02
FY04
FY05
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18
FY19
FY20
FY06
FY02
FY03
FY04
FY05
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18
FY19
FY20

ITC’s FMCG business has evolved

ITC’s category presence has continued to evolve over the years. It has seen double-
digit long-term growth momentum across categories including staples, biscuits,
educational stationary and snacks. It has only seen a decline in the lifestyle
business, which has not been a key focus.
Figure 4
FMCG top line evolution

Particulars FY08 FY13 Cagr (%) FY20 Cagr (%)
(%) (Rsbn) (%) (Rsbn) (FY08-FY13) (%) (Rsbn) (FY08-FY20)
Staples (Wheat flour, Species, Salt) 29 7.3 20 14.0 14 32 41.6 16
Biscuits 24 6.0 26 18.2 25 20 26.0 13
Lifestyle 27 6.8 6 4.2 (9) 2 2.6 (8)
Educational stationary 4 1.0 10 7.0 48 5 6.4 17
Salty snacks 4 1.0 7 4.9 37 8 10.4 22
Confectionary 8 2.0 7 4.9 20 2 3.1 4
Noodles 4 2.8 8 10.4
Personal care 12 8.4 10 12.8
Juices 3 4.2
Others 4 1.1 8 5.6 39 8 10.9
Total 100 25.1 100 69.8 23 100 128.4 15
Source: ITC, CLSA
Figure 5 Figure 6
Estimated FMCG revenue break down for FY08 Estimated FMCG revenue break down for FY20
Others Others
Chips 4% Lifestyle 10%
4% 2%
Educational Confectionary
stationary Staples (Wheat Staples (Wheat flour,
3%
4% flour, Species, Salt) Species, Salt)
29% 38%
Educational
Confectionary
stationary
8%
6%
Noodles
Biscuits
9%
24%
Lifestyle Biscuits
27% Chips 23%
9%
Figure 7
FMCG segment revenue FMCG sub-segment Cagr FY08-FY20

saw a Cagr of 15% over (%)
25
FY08-FY20
20
15
10
(5)
(10)
Biscuits
Lifestyle
Chips
Educational
Overall
Confectionary
Staples
stationary
Source: CLSA

Between FY08 and FY20, revenue from the FMCG segment saw a Cagr of 15%.
New categories developed included noodles, juices and personal care.
Figure 8
ITC is India’s second-largest ITC is second largest listed FMCG Company in India (based on FY20 revenue)
listed FMCG company (Rsbn)
391
140
120
100
80
128
60 123
114
98 96
40 87
73
20 45
26
0 Nestle
Emami
HUL
Britannia
Consumer
Marico
Colgate
ITC
GCPL
Dabur
Tata
Note: For ITC considered FMCG revenue. Source: Companies, CLSA
Figure 9
Based on FY20 revenue, ITC ITC is third-largest listed Foods & Beverages player (based on FY20 revenue)
was India’s third-largest (Rsbn) Nestle² Britannia ITC¹ HUL Tata consumer³
listed F&B player FY20 123 114 104 75 96
FY21CL 134 130 117 128 108
FY22CL 153 144 128 146 117
FY23CL 173 159 142 161 126
¹ Foods and beverages business for ITC, ² Nestle follows CY for reporting, as such FY20 data is for CY19, ³ Tata consumer
numbers are based on Bloomberg consensus. Source: Companies, Bloomberg, CLSA
Figure 10
Peer comparison with other Food & Beverage focused FMCG companies
(%) ITC Nestle Britannia
Sales mix Salt Chocolate Others Health Food Drinks Soup Milkmaid Others
Pasta 1% 1% 5% 1% 1% 1% 4%
Ketchup Cake
-1% Others
1% 6%
Ghee 1%
1% Breakfast cereals Bread
Spices 1% 10%
2% Baby
Instant Pasta
Confectioaries Atta foods
2%
3% 38% Curd 29%
6%
Juices
4% Tetra pack milk Noodle Biscuits
Biscuits 10% 23% 80%
Salty 25% Coffee
Snacks Noodles 12% Chocolate
10% 10% 12%
Contribution of F&B 81 100 100

Contribution of personal care 10
Historical growth Cagr
Sales Cagr FY15-FY20 7 5 8
Ebitda Cagr FY15-FY20 34 7 17
Expected growth Cagr
Sales Cagr FY20-FY23 11 12 12
Ebitda Cagr FY20-FY23 29 16 18
Margin profile
Ebitda margin - FY20 7 23 15
Ebitda margin - FY23 11 25 18
Key Balance sheet metrics
RoCE - FY22 12 110 39
Source: Companies, CLSA

Figure 11
ITC has the third-widest General trade outlet reach
general trade outlet reach
9.0 (m)
8.5
8.0
7.5
7.0
6.5 6.2
6.0
5.5
5.0
4.5
4.0
HUL Dabur ITC CLGT GCPL BRIT MRCO NEST HMN
Figure 12
Significant scale for its ITC - Key consumer brand size (on consumer spending)
major brands
~Rs60bn
~Rs40bn
~Rs27bn
~Rs14bn
~Rs13bn
~Rs8bn
~Rs5bn
Source: ITC, CLSA

Figure 13
ITC brands have been Brand ranking

gaining market share
Sunfeast Bingo
Aashirvaad No.1 in Bridges Yippee!
No.1 in
No.1 in Branded segment No.2 in
Cream Biscuts
Atta No.1 in Potato Noodless
No.3 Overall
chips (South)
Classmate Engage Fiama Mangaldeep

No.1 in No.2 in No.2 in No.1 in Dhoop
Notebooks Deodrants Bodywash No.2 in Agarbatti
Source: ITC, CLSA
Figure 14
The company has FMCG brand portfolio

24 mature brands
Source: ITC, CLSA

Figure 15
Timeline of the FMCG business
Launched Wills Lifestyle high-end

FY01
Launched Expression greeting cards Launched Kitchens of India ready to-eat meals
Launched Mangaldeep incense sticks
FY02 Launched John Players
Entry into wheat flour under Aashirvaad
Entry into biscuits under Sunfeast Acquired Aim and Houselite
FY03
Launched Mint-O and Candyman
Launched Aashirvaad ready-to-eat meals
FY04
Launched Kitchens of India desserts Launched Aashirvaad spices
Entry into personal care segments Launched Sunfeast pasta
FY05
Launched Sunfeast-Golden Bakes cookies
Launched Aashirvaad instant mixes
FY06
Launched Superia soaps and shampoos Entry into salty snacks under Bingo
Launched Vivel soaps and shampoos Launched Paperkraft stationery
FY07
Launched Miss Players apparel
Launched Fiama shampoos and shower gels
FY08
Launched Fiama Gel bathing bars
Launched Classmate ball pen
FY09
Launched Aashirvaad 'multi grain' atta
Launched Vivel Active Fair cream
FY10
Entry into instant noodles under Sunfeast Yippee!
Launched Fiama men's face wash
FY11
Launched Dark Fantasy Choco-fills premium
biscuits under Launched Vivel Face wash
FY12
Launched Vivel body lotion

FY13
Entry into deodorants under Engage
Acquisition of Shower to Shower and Savlon
FY14
Entry into Gum category under Gum-on Launched Mom's magic Yumfills Whopie
Entry into dairy under Aashirvaad Svasti -
Pure Ghee
FY15
Acquired B Naturals from Balan group
Entry into juices under B Natural
Innovation in deos: Engage On Pocket perfume
FY16
Launched Power Up Atta Noodles Entry into chocolate under Fabelle
Launched Aashirvaad Svasti Pouch Milk Entry into coffee under Sunbean
Launched ITC MasterChef super safe spices and
FY17
ITC MasterChef Prawns
Launched Yippee! Mood Masala
Acquisition of Charmis brand
FY18
Launched Aashirvaad Svasti Dahi, Paneer, Rice Forayed into vegetable segment under Farmland
Launched Sunfeast Snacky, Bounce
Launched Yippee! New range with non-veg options
Acquired Nimyle, floor cleaner brand FY19
Launched Dermafique skin care range
Launched Sunfeast Wonderz Milk Launched Fiama Hand wash
Launched Fiama Bath Accessories Launched Sunfeast Vega wellness Biscuits
FY20 Launched Bingo Starters made of pulses
Extended Savlon hygiene solutions Launched Aashirvaad Nature's superfood
Launched ITC MasterChef Snacks Unique range
of frozen snacks
FY21
Launched Nimwash 100% natural action
Vegetable & Fruit wash
Source: ITC, CLSA

One of the most diversified FMCG companies in India

Management can now focus ITC is one of the most diversified FMCG businesses in India. Its push to diversify
on profitability and returns has led to around 28% of overall revenue coming from FMCG in FY20. With 11
integrated consumer goods manufacturing and logistics facilities (nine
commissioned and two in progress) and most categories in production, we expect
management to now focus on improving profitability metrics.
No need for any We think ITC’s market share of non-dairy categories (sized at Rs2.1trillion) is about
expansionary capex for the 5%. This, along with a high unorganised share of about 44% (players with
organic business unbranded/non-compliant products), provides a good opportunity for ITC to benefit
from consumers trading up. With strategic capex now in place, we do not see the
need for any expansionary capex for the organic business over the next five years.
Figure 16
ITC’s FMCG business overview - a diversified FMCG company

Key category Category Penetration Unorganised Category Value add FY20 revenue ITC value ITC brands
presence size² (%) (%) OPM opportunity¹ contribution market
(Rsbn) (%) (%) share (%)
HPC 545 58 30 21 10.0
Soap 230 99 15 20 ** 40.0 4 Superia, Vivel,
Fiama Di Wells, Savlon
Deodorant 40 10 25 15 *** 20.0 11 Engage
Body Wash 13 5 5 25 **** 11.0 15 Fiama Di Wills, Vivel
Sanitiser 20 30 30 20 ** 10.0 na Savlon
Hand wash 30 20 80 20 *** 10.0 na Savlon, Fiama Di Wills
Perfume 40 10 25 25 **** 2.0 na Essenza Di Wills
Floor cleaner 22 70 60 20 *** 2.0 na Nimyle
Skin care 100 35 50 25 **** 2.0 na Charmis. Dermafique
Talc 20 50 25 20 ** 1.6 na Shower & Shower
Others 1.4
F&B 10,845 90 73 16 81.0
Atta 170 99 90 8 ** 38.0 35 Aashirvaad
Biscuits 350 92 35 15 **** 25.0 15 Sunfeast
Noodles 60 75 20 20 *** 10.0 22 Yippee
Salty Snacks 320 95 50 15 *** 10.0 na Bingo
Spices 150 99 70 15 *** 4.0 na Aashirvaad, Sunrise
Juices 60 40 10 15 *** 3.0 na B Naturals
Confectionaries 150 40 60 15 ** 2.0 na Candyman, Mint-O, Gumon
Ghee 2,250 75 85 10 ** 1.0 na Aashirvaad
Pasta 25 5 30 20 ** 0.5 na Yippee
Salt 80 99 70 10 * 0.5 na Aashirvaad
Chocolate 150 40 40 20 **** 0.5 na Fabelle
Pouch milk 7,000 99 75 8 * 0.3 na Aashirvaad
Milk shakes 100 10 25 18 *** 0.3 na Sunfeast Wonderz
Coffee 50 70 10 15 *** 0.1 na Sunbean
Others 4.9 na
Educational stationary 22 **** 5.0 Paperkraft, Classmate
Retail 12 2.0 WLS
Incense Stick 10 1.0 Mangaldeep
Safety Match Stick 8 1.0 Aim, Homelite, Ship
¹ Value add opportunity represent opportunity in the category to premiumise (no of * denoted opportunity), ² Organised category size. Source: CLSA

Figure 17
ITC’s presence in the F&B category - no major competitors except for biscuits and noodles
Size¹ Penetration Unorganised Revenue contribution (%)
(Rsbn) (%) share (%) ITC 6
Britannia Nestle Dabur Emami HUL Marico
Foods and beverages as a % of overall FMCG revenue 81 100 100 47 8 28 21
Tea 400 99 50 32
Biscuits 350 92 35 25 80 0
Salty Snacks 320 95 50 10
Atta 170 99 90 38
Confectionaries 150 40 40 3
Chocolate 150 40 40 1 12
Ice Cream 140 70 30 11
Bread 120 40 50 10
Honey 35 40 70 17
Chyawanprash 10 30 60 15 13
Health Food Drinks 75 10 10 1 39
Juice 60 40 10 4 32
Instant Noodle 60 75 75 10 23 0
Coffee 50 70 20 0 12 11
Cake 42 30 30 0 6
Baby foods - formula milk 30 40 0 15
Baby foods - infant cereal 25 20 5 14
Breakfast cereals 25 5 5 1 0
Instant Pasta 25 5 30 1 2 0
Ketchup 25 20 40 1 4
Super Premium Edible Oil 20 20 10 18
Tetra pack milk 15 10 0 10
Pouch milk 7,000 99 75 0
Soup 10 5 50 1 4
Spices 150 99 70 2
Salt 80 99 70 1
Milk shake 100 10 25 0
Ghee 2,250 75 50 1
Other 5 4 9² 36³ 884 0 35
Foods and Beverages 11,902 74 54 100 100 92 100 100 100 18
¹ Organised category size; ² For Nestle Others comprises of curd and Milkmaid; ³ For Dabur others comprises of healthcare, dige stive and glucose;
4
For Emami others is healthcare; 5 For Marico others is oats; 6 For ITC other FMCG revenue. Source: CLSA

Figure 18
ITC’s aim has been to create ITC category presence and entry time-line
brands organically Category Entry Type of foray Brand
Incense sticks FY02 In-organic Mangaldeep
Wheat flour FY02 Organic Aashirvaad
Biscuits FY03 Organic Sunfeast
Salt FY04 Organic Aashirvaad
Pasta FY04 Organic Sunfeast
Spices FY04 Organic Sunfeast
Ready to eat meals FY04 Organic Aashirvaad
Salty snacks FY06 Organic Bingo
Soaps FY07 Organic Vivel, Superia
Personal care FY08 Organic Fiama
Noodles FY10 Organic Sunfeast
Premium biscuits FY11 Organic Dark Fantasy
Face wash FY12 Organic Vivel, Superia
Body Lotion FY13 Organic Vivel, Superia
Deodorant FY13 Organic Engage
Talc FY14 In-organic Shower & Shower
The Savlon brand, which Antiseptic liquid FY14 In-organic Savlon

was acquired in FY15, Hand wash FY14 In-organic Savlon
has seen a Cagr of 50% Sanitiser FY14 In-organic Savlon
Juices FY15 In-organic B Naturals
Ghee FY15 Organic Aashirvaad
Chocolate FY16 Organic Fabelle
Coffee FY16 Organic Sunbean
Pouch milk FY17 Organic Aashirvaad
Skin care FY18 In-organic Charmis
Vegetable FY18 Organic Farmland
Other Dairy FY19 Organic Aashirvaad
Premium skin care FY19 Organic Dermafique
Nimyle, acquired a couple Floor cleaner FY19 Organic Nimyle

of years ago, has seen a Milk shakes FY19 Organic Sunfeast
100% Cagr Bath accessories FY19 Organic Fiama
Value added foods FY20 Organic Aashirvaad
Vegetable and fruit wash FY21 Organic Nim Wash
Wipes FY21 Organic Savlon
Disinfectant spray FY21 Organic Savlon
Source: ITC, CLSA
Agri-business: a strategic fit and competitive advantage

Agri-business brings with it ITC has a broad agri-business with a non-leaf tobacco share of 86% compared to
strong back-end support for 62% a decade ago. The company has strong links with farms in 17 states covering
the FMCG business wheat, oilseeds, coffee, spices and milk. Given that 81% of its FMCG business is
from foods (for FY20), the agri-business provides strong back-end support (42% of
internal sales for FY20) and offers strong competitive advantages. Its “e-choupal”
initiative (a digital endeavour for direct procurement from farmers) has widened its
coverage, linking 35,000 villages through about 6,100 e-Choupal, servicing about
4million farmers. ITC sources about two-thirds of its procurement through e-
Choupal. Apart from FMCG businesses, the agri-business segment has brought with
it a value-added vertical.

Figure 19 Figure 20
Agri-business revenue trend Agri-business Ebitda trend

140 (Rsbn) 12 (Rsbn)
120 10
100
8
80
6
60
4
40
20 2
0 0
21CL
22CL
23CL
FY16
21CL
22CL
23CL
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY17
FY18
FY19
FY20
FY12
FY07
FY08
FY09
FY10
FY11
FY13
FY14
FY15
FY16
FY17
FY18
FY19
FY20
Figure 21
ITC’s agri-business provides Agri-business: strategic sourcing support to foods businesses

support for its foods
categories
Source: ITC, CLSA
Figure 22
Agri-business sales to inter- Agri-business: strategic direction

segment stands at c.42%
Source: ITC, CLSA

Figure 23
Inter-segment synergies A simplified representation of material flow within ITC’s businesses
Source: ITC, CLSA
Agri-business playing an ITC’s agri-business capabilities play an important role in securing supplies for its
important role packaged food business. Similarly, the paperboard and packaging business plays a
vital role in packaging for other FMCG products.
The scale versus margins conundrum

FMCG now perfectly From a business perspective, aggressive top-line expansion with no focus on
positioned to drive profitability seems to be a flawed strategy. However, from the perspective of ITC,
profitability where management identified emerging headwinds for the core business, we
believe diversifying revenue streams was the right strategy. ITC has leveraged cash
from its core business to fund capacity in the FMCG business. With capacity,
distribution infrastructure, brand strength and scalability in place, we think the
FMCG business is perfectly positioned to drive profitability.
The focus on profitability has been rewarding and we expect profitability to

accelerate. ITC attributes its margin expansion in the past decade to enhanced
scale, a better product mix, reduced distance-to-market, and other strategic cost
management initiatives after absorbing the impact of a sustained investment in
brand building and gestation costs for new categories. However, meaningful
profitability margins have remained elusive.

Figure 24
We expect margin Profitability of FMCG businesses vs. other listed Food peers
expansion to accelerate (Rsm) ITC¹ Britannia Nestle² Tata consumer³
Ebitda
FY20 9,140 16,876 28,156 12,922
FY21CL 12,401 24,081 32,294 15,911
FY22CL 15,171 24,722 37,625 17,659
FY23CL 19,454 27,912 43,543 19,260
Ebitda margins (%)
FY20 7.1 14.7 22.9 13.4
FY21CL 8.6 18.5 24.0 14.7
FY22CL 9.5 17.2 24.5 15.1
FY23CL 11.0 17.6 25.2 15.3
Ebit
FY20 4,231 15,028 24,992 10,204
FY21CL 7,000 22,081 28,581 13,645
FY22CL 9,500 22,372 33,511 15,400
FY23CL 13,500 25,312 38,930 16,857
Ebit margins (%)
FY20 3.3 13.1 20.3 10.9
FY21CL 4.9 17.0 21.3 12.6
FY22CL 5.9 15.6 21.9 13.2
FY23CL 7.6 16.0 22.6 13.4
Depreciation as a % of gross block
FY20 6 8 9 9
FY21CL 6 7 10 na
FY22CL 6 7 9 na
FY23CL 6 7 9 na
Gross block
FY20 78,268 24,546 36,092 26,088
FY21CL 84,768 27,546 38,092 na
FY22CL 91,768 31,546 46,092 na
FY23CL 97,768 35,546 50,092 na
¹ Overall FMCG business for ITC, ² Nestle follows CY for reporting, as such FY20 data is for CY19, ³ Tata consumer
numbers are based on Bloomberg consensus. Source: Companies, Bloomberg, CLSA
Figure 25
Ebitda margin profile for FMCG companies under coverage

(%) FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20
ITC - FMCG business (7) (5) (2) 1 2 2 3 3 4 6 7
HUL 13 15 12 13 13 14 15 17 17 19 21
Nestle 20 20 20 21 22 22 21 20 22 22 24
Dabur 17 18 18 16 16 16 17 19 20 21 20
GCPL 12 17 18 18 15 15 17 19 20 20 20
Marico 13 14 14 12 13 16 15 17 20 18 18
Colgate 16 22 20 19 19 18 20 24 23 26 27
Emami 24 24 20 20 20 24 24 29 30 27 26
F&B providing Its strong agri-business has helped ITC create scale in its Foods & Beverages
opportunities to create portfolio. However, margins in this category are relatively weak compared to the
scale home and personal care categories. Foods & Beverages categories offer an
opportunity to create scale but have relatively low margin profiles (10-20%, versus
around 25-30% for home and personal care). However this has also helped limit
competition in the organised space.

Figure 26 Figure 27
FMCG is primarily a food & beverage play for ITC - FY20 ITC’s foods & beverages portfolio split
Retail Match stick Incense stick Salt Chocolate Others

2% 1% 1% Pasta 1% 1% 5%
Educational -1%
stationary
5% Ghee
1%
HPC
10% Spices
2%
Atta
Confectioaries 38%
3%
Juices
4%
Foods
81% Biscuits
Salty Snacks 25%
10%
Noodles
10%
ITC has made significant front-end investments in capacity

Significant Capex since Seeing the potential opportunity from organised foods and beverages, ITC has been
FY02 aggressive over the last couple of decades in setting up capacity across this vertical.
Since FY02, ITC’s FMCG business has invested Rs78bn in capex with cumulative
Ebitda losses of Rs10bn. The business turned profit positive from FY13.
ITC has added nine integrated consumer goods manufacturing and logistics (ICML)
facilities and is in process of setting up two more. These large facilities were built
to augment ITC’s manufacturing and sourcing footprint across categories with a
view to provide structural advantages including ensuring product freshness,
improving market responsiveness, reducing the cost of servicing proximal markets
and providing a heightened focus on product hygiene, safety and quality.
Figure 28
Asset turnover likely to see Sustained capacity expansion with a slowdown in top line continues to depress asset turnover -
a gradual recovery we expect slow but steady improvement
7 (x)
6 5.7
5.4
5.3
5 4.7
4.5 4.3
4.2
4.0 4.0
4 3.7 3.7
3.5
2.9
3 2.6
2.5
2.2 2.0
1.8 1.8 1.9
2 1.7
1 0.7
0
FY08
FY20
FY02
FY03
FY04
FY05
FY06
FY07
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18
FY19
21CL
22CL
23CL
Note: Asset turnover = Turnover/gross block; Gross Block = Cumulative capex in the ‘FMCG’ business.
Source: ITC, CLSA

Figure 29
FMCG business assets turnover trend (based on segment data available)

(Rsm) FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20
Revenue 36,339 44,716 55,256 69,828 80,992 90,113 97,044 104,829 113,210 125,053 128,442
Gross block¹ 10,563 11,684 14,411 18,058 22,669 29,384 36,726 48,260 56,597 69,808 78,194
Assets turnover (x) 3.7 4.0 4.2 4.3 4.0 3.5 2.9 2.5 2.2 2.0 1.7
Capex 1,664 1,121 2,728 3,646 4,611 6,715 7,342 11,534 8,336 13,211 8,386
as a % of revenue 4.6 2.5 4.9 5.2 5.7 7.5 7.6 11.0 7.4 10.6 6.5
Depreciation (2,403) (3,336) (4,369) (5,624) (7,055) (8,831) (10,875) (13,241) (16,155) (19,881) (24,790)
Net block 8,160 8,348 10,042 12,434 15,614 20,553 25,851 35,020 40,441 49,927 53,404
¹ includes Rs4.2bn worth of trademarks that have considered of having indefinite useful life. Source: ITC, CLSA
Figure 30
ITC’s asset turnover Assets turnover for FMCG businesses

continues to decrease
ITC HUL Nestle Dabur
(x)
12 GCPL Britannia Marico
10
0
FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20
Note 1: Assets turn = Turnover/Gross block; Note 2: Ratio from FY17 is based on Ind AS, prior period reported
numbers are on IGAAP. It has top line related impact, where under Ind AS companies are required to adjust trade
promotion with top line. Incidentally companies have increased trade promotion in the last three years; Note 3: FY17
also has an influence of higher capex spends to avail tax benefit in north-east. Source: Companies, CLSA
Significant investments into ICMLs

ICML investment at Rs40bn We think the total investment into ICML’s commissioned since 2017 is Rs40bn,
indicating that a large part of the capex in the FMCG business has gone into front -
ended investments in ICMLs. For example, in 2018 ITC commissioned its largest
integrated food manufacturing and logistics facility with ‘Wheat mandi’, with an
investment of Rs15bn in Kapurthala, Punjab. This ICML is still in the ramp-up phase,
with direct buying from farmers reducing transaction, handling and transportation
costs. ITC also plans to scale up this ICML with crop development initiatives.
Another large ICML was commissioned in 2019 in Tamil Nadu with an investment
of Rs10bn. There are two other ICMLs under construction in Telangana and Odisha
with a total investment of Rs15bn.
ICML’s are strategic assets, providing cost advantages, agility and scalability to the
business. The two new facilities are expected to be ready in FY21 and FY22.

Figure 31
ITC has created enough ITC - key capacity commissioning in last six years
capacity for categories in Year Plant/Name of property Location
nine ICML
FY15 Integrated Consumer Goods Manufacturing and Malur (Karnataka)
Logistics facility (ICML)
FY16 Manufacturing facilities - Finger Snacks, Dhulagarh (West Bengal),

Dairy & Biscuits Munger (Bihar), Mangaldoi
(Assam)
FY17 Manufacturing facilities Uluberia (West Bengal), Mysore

(Karnataka), Guwahati (Assam)
FY18 Integrated Consumer Goods Manufacturing and Panchla (West Bengal) and
Logistics facility (ICML) Kapurthala (Punjab)
FY19 Integrated Consumer Goods Manufacturing and Pudukkottai (Tamil Nadu)

FY19 New manufacturing lines across categories such as Kapurthala (Punjab), Trichy
Biscuits, Beverages, Noodles, Potato Chips, Finger (Tamil Nadu), Panchla (West
Snacks Bengal) and Guwahati (Assam)
FY20 The manufacturing capability of ICML Trichy was Trichy, Tamil Nadu
augmented during the year with the commissioning of
state-of-the-art lines for Finger Snacks, Atta and
Biscuits
Source: Company, Media, CLSA
Figure 32
ICML’s are strategic for the ITC - ICML network

foods business
Kapurthala
Haridwar
Guwahati
Uluberia
Panchla
Ranjangaon
Khurda
Medak
Malur
Commercialised (9 nos)
Mysore
Under construction/
Trichy commissioninged (2 nos)
Source: ITC, CLSA

What is changing?
FMCG to deliver solid ITC’s FMCG business has grown to become the second-largest FMCG business in
growth and profitability India, in terms of revenue. We expect it to deliver about 30% Ebitda growth over
FY20-23CL on the back of industry tailwinds, multiple margin levers and improving
asset utilisation. We also believe that unlike in the past, inorganic growth should
offer an additional growth lever. We see a path towards the profitable scaling up of
the FMCG business.
K-shaped acceleration: We expect a K-shaped acceleration for the business with

its focus on profitability and economies of scale driving a sharp acceleration in
margins, and incremental capex on a downward trend as asset-utilisation improves.
Figure 33
With nine ICML in place and FMCG expected to see a K-shaped acceleration
two in the pipeline, capex
should decrease (%) Ebitda margin Capex as a % of sales
15
10
(5)
(10)
FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20 21CL 22CL 23CL
Source: ITC, CLSA
Figure 34 Figure 35
Key levers of growth/turnaround for “other” FMCG business Key levers for the “other” FMCG business
Increased adoption of
organsied food offerings Scale up of core businesses
Divestment of non-core Turnaround in the Home

Improving sales mix Shrinking incubation costs
lifestyle business and personal
Bolt on acquisition Addressing white spaces Ability to play adjacencies

with limited incremental Operating leverage benefits
investments

Potential value creation in the FMCG business

 Brand extension into adjacencies: We see ITC’s FMCG several regional businesses relatively stressed in the current
business as one of the most diversified in India in terms of environment, we see a better backdrop where ITC can now
category presence, with the company having incubated a look to acquire regional businesses and then use its distribution
much larger category basket than peers, particularly within network to scale up (as in the case of its recent acquisition of
packaged foods, and with significant investments made in the Sunrise brand). Key reasons for ITC pursuing acquisitions
brand building over the past two decades. Four brands - could be to address gaps in its portfolio and distribution. ITC
Aashirvaad, Sunfeast, Yippee and Bingo in the foods category can always leverage its manufacturing, sourcing and brand
and Classmate in educational stationary have achieved architecture to create value from these acquisitions.
significant scale with strong brand recall. These mature
brands offer significant opportunities to enter into  Turnaround in home & personal care: In the past, ITC’s efforts
adjacencies (see Figures 48 and 49) which would mean at incubating brands in the personal care category have not
significantly lower incubation costs for new categories and yielded great results. However, Covid-19 presents a setting to
faster break-evens. Of the non-dairy categories sized at drive the penetration of its acquired Savlon brand and scale
US$28bn (Rs2.1trillion, excluding the US$120bn/Rs9trillion up premium offerings under the Fiama brand. We expect the
dairy segment), we see ITC’s market share at about 5%. This, personal care business to get a near-term boost from current
with high unorganised share (c.44% overall), provides a good health and hygiene trends.
opportunity to benefit from consumers trading up.
 Multiple margin levers, including Atta (flour): We see
 Further leveraging back-end sourcing capabilities: ITC is one of significant margin levers for the FMCG business. An improving
the few FMCG companies with the ability to manage complex sales mix towards the value added segment, shrinking
agri-sourcing. It now has strong farm links in 17 states covering incubation costs, operating leverage benefits and its ability to
wheat, oilseeds, coffee, spices, and milk. This gives the play adjacencies with limited incremental investments, all offer
company a unique advantage in entering large categories which margin upside. Interestingly, while Atta is perceived by some to
are otherwise difficult for FMCG companies to enter. For be a low margin business, we believe it is now a high-single-
example, dairy, overall, is a large opportunity with revenue size digit margin business (with a 9% Ebit margin). Improving scale,
of US$120bn (c.Rs9trillion) making it potentially the largest rising premium compared to peers, less need for promotions
consumer opportunity. Other large FMCG companies don’t and increasing captive production should help drive strong
fully realise this potential as the dairy business needs strong margin expansion in the Atta business.
back-end support and scale for it to be profitable. A new
entrant wanting to build a dairy business will need to take time  Providing visibility for an improvement in asset turnover:
to build a procurement network - something that ITC can do ITC’s fixed asset turnover is at a decade low, partly explained
relatively quickly. ITC has an option of direct procurement and by significant upfront investments in building up capacity, a
can also leverage its existing brands, thereby improving the lower share of outsourcing, the category mix and significant
potential to make returns in an otherwise tough business. ITC back-end investments. We expect capex intensity to reduce
currently sources two-thirds of its agri requirements directly considerably with improvements in the share of value added
from farmers and the rest from the open market. Recent farm products in the overall mix. We believe that a rational plan for
sector reforms, including the APMC bill, should open new improvement in asset turnover from the management of the
opportunities for ITC as well as bring tax savings, in our view. FMCG business should help address investor concerns.
Alternatively, an increase in margins to justify large
 Share of value add products to improve: Investors have investments could also address this issue.
rightfully been sceptical about the inherently lower margins in
some of ITC’s categories, particularly ‘Atta’ flour which has  Divestment of the non-core lifestyle business: ITC’s lifestyle
low gross margins. The share of higher value added brands like retail business has not done well and has not been a core
Sunfeast, Bingo and Yippee is however moving up and offer focus of management. This business, which used to drive 28%
significantly higher margins. of the FMCG business in FY08, lost its shine and now
contributes only 2% to FMCG segment sales. In the last five
 Acquisitions: So far, ITC has been relatively passive in terms of years, the overall retailing industry has transformed, with a
its M&A strategy. With greenfield capacity in place, any further surge in new brands and formats. In an attempt to revive the
efforts to drive growth could come from M&A. The company business, ITC has made strategic calls in the past couple of
has about US$4.5bn in liquid assets (16% of current market years to cut down the store network and monetise brands but
cap). Valuations have been one of the big deterrents for its has not seen any material improvement in the business. The
M&A strategy, but with several category incubations done and company is looking to incrementally monetise the business.
Britannia: a case study

Britannia’s consolidated margin almost tripled from 5.2% in on premiumisation and innovation. In our view, more than 50%
FY12 to 14.3% in FY17 on the back of consolidated of the margin expansion was driven by higher in-house
manufacturing units, increased in-house manufacturing manufacturing (reflected in lower conversion charges).
(leading to a correction in asset turnover), a focus on brand- Britannia’s gross block has tripled over FY16-FY20. Its stock
building, filling product gaps, eliminating waste by has gained almost 2.4x in the past five years, a significant part
implementing best management practices, distribution of which was due to the expansion of its PE multiple, in line
expansion in relatively weak areas (Hindi heartland) and a focus with other consumer companies.

Change 1: Opportunity for a faster scale-up of revenues

Covid has increased We think ITC is well placed to benefit from rising demand for health and hygiene
demand for health and products, a segment that makes up about 75% of its FMCG revenue. With wider
hygiene products capacity and in a constrained environment ITC has achieved about 34% growth for
its health and hygiene portfolio in Q1FY21. An example of recent growth in this
segment can be seen with ITC’s production of hand washing products - according
to the company’s CEO, they are producing five to six times the amount that they
used to.
Figure 36
75% of the FMCG portfolio ITC’s portfolio has a strong focus on health and hygiene
could benefit from trends
driven by Covid
Source: ITC, CLSA
“The surge in demand may not There has been a sharp acceleration in packaged food sales given the increased
be sustained but it has given focus on hygiene and more people working from home. We believe ITC is well
impetus to the penetration of placed to benefit from the steady migration of consumers from the unorganised
packaged foods.” segment and the limited competition.
Sanjiv Puri, CEO ITC
We expect about 8% growth for the base business (excluding the Sunrise
acquisition) for 21CL, with inorganic growth of around 4% (from the integration of
the Sunrise spice business). Overall, FMCG segment growth for 21CL is pegged at
about 12%. Over the medium term, given the conducive setting we see double-digit
revenue growth for the segment being sustained.

Figure 37
ITC’s foods and beverages offering and outlook

Categories Brands Category positioning Revenue Cagr Outlook (our view)
expectation -
3Y (%)
Atta Aashirvaad In the organised space, Aashirvaad is a 11 Faster adoption of packed food to help.
household name when it comes to Atta. The Incremental focus to scale up value added
company has recently explored value added offering is likely to help the company expand
offerings. margin in the category.
Biscuits Sunfeast In biscuits, ITC has a better position in the 11 Continued push into the premiums category is
premium and cream/filled segment likely to aid ITC. With a wider portfolio now
compared to peers. Attempts to garner share (after entry into sub-segments of the biscuits
in cookies and milk biscuits from category category), we expect ITC to turn aggressive
leaders have not yielded good results so far. and gain share from regional and unorganised
players.
Noodles Yippee ITC has been focusing on the kids segment, 14 While its focus on kids continues to reward,
and Pasta where the category leader is fairly passive we expect the company to be aggressive with
given its kids specific policies. The Maggi youth-centric launches. After the My range of
crisis helped ITC gain share, which it has noodles launched in FY19, there has not been
sustained over the years. any material innovation from the company.
Snacks Bingo ITC has leveraged its chef pool to drive 9 With sustained innovation, aided by agri-back
innovation, which has encouraged consumers end and chef pool, we see steady market share
to the brand. gains for ITC.
Juices B Naturals ITC is aggressively leveraging its agri- (10) Slowdown in premium juice is a medium term
backend infra to offer differentiated pulp- headwind. With recovery in the category, we
based juices. Its innovations in variants and expect ITC to do well in the long term.
packs have done well.
Spices Aashirvaad, The company has a presence in 17 states. 60 We think a scale up of the spices business
Sunrise With Sunrise, it now has full basket of spices. (incl. would also help ITC to enter into household
inorganic) kitchens.
Dairy Aashirvaad, The company has recently expanded its dairy na Addressing consumer demand and improved
(Milk, Ghee, Sunfeast portfolio with entry into the milk pouch penetration of value added dairy, there has
Paneer, Curd, Wonderz segment in Bihar and West Bengal and entry been a surge in new launches. Here ITC is
shakes) into milk shakes. It sells ghee through leveraging its backend to gain share. Value
ecommerce, where it is the No.1 selling added offerings are likely to be margin
product in the category. accretive, but a pouch milk scale up would
dilute margins.
Chocolate Fabelle After a successful launch in the premium na Unlike in the premium segment, we see intense
end, ITC has recently entered the mass-end competition in the mass end. ITC will have to
segment. match this with aggression with new launches.
Coffee Sunbean Addressing consumer demands for coffee in na Product is still in the pilot phase in North India.
a paste format, ITC has forayed into the Incrementally, the company is leveraging the
category under Sunbean. The product largely ecommerce opportunity. We see innovation
sells though hotels and ecommerce. taking some time to settle in the market.
Source: CLSA

Figure 38
ITC’s home and personal care offering and outlook

Categories Brands Category positioning Revenue Cagr Outlook (our view)
expectation - 3Y
(%)
Soap Savlon, Vivel, After multiple attempts to scale up its offering 15 The company’s push to connect brand with purpose
Superia, Fiama- pan-India, ITC has taken the regional route and has is likely to help. ‘Women empowerment’ has been
Di-Wills some success. chosen as a theme to connect the brand, which has
been a success factor in the category.
Deodorant Engage Steady innovation and connecting to youth has 3 More innovation is likely to help ITC maintain/gain
helped ITC retain its top 3 position. Pocket perfume share in the category. Low category penetration
and dual spray perfumes work well with youth. provides ITC an opportunity to scale up the franchise.
Body Wash Fiama Di Wills, Under Fiama-Di-Wills, ITC has been gaining share 11 With covid-19, we see hygiene factors helping
Vivel in the category. Its focused approach has shown accelerate adoption in the body wash/shower gel
through sustained variant launches. category.
Hygiene Savlon Hand wash and sanitiser push boosted by Covid-19. 45 Given brand legacy, we see ITC gaining materially in
the long term, from tactical and regional players.
Floor cleaner Nimyle Small presence in floor cleaning under acquired 35 Differentiated natural proposition is likely to aid
brand Nimyle. Covid-19 likely to aid its pan-India market share gains from unorganised. Also pan-India
brand positioning foray to provide scale.
Skin care Charmis, Limited presence in the category under acquired na Setting is not perfect for the segment, but with the
Dermafique Charmis and organic ecommerce focused onset of winter we expect Charmis to see recovery.
Dermafique brand. ITC is currently focusing on north India to position
Charmis brand.
Source: CLSA
Figure 39
FY20 - New product launches (over 60 new products launched)
Source: ITC, CLSA
Figure 40
New launches during lockdown
Source: ITC, CLSA

Figure 41
Packaged food¹ (Rs2.1tn/US$28bn) - In-home consumption accelerated adoption of organised offerings, ITC to benefit
80 (Rsbn)
Basic consumption (US$25bn)
Immunity boosting 70
Hygiene and safety are a major focus during and after
essentials (US$2bn) 60 the pandemic. There will be an increaseed adoption of
Immunity has been a products in this area.
key focus during 50
Covid-19. We expect 40
continued focus on 500 (Rsbn)
30
immunity, which will
help players with 20 400
Ayurvedic offerings 10 300
and health foods.
0 200
Health food drinks Honey Chyawanprash 100
0
Instant Pasta
Cake
Bread
Baby foods
Instant Noodle
Coffee
Tea
Spices
Soup
Salty Snacks
Biscuits
Atta
Ketchup
Confectionaries
Tetra pack milk

Premium (US$3bn)
Increased spending on health and hygiene need
will hurt the premium discretionary segment.
Immunity offerings
160 (Rsbn) Premium 5%
140 offerings
10%
120
100
On-the-go
80
13%
60
40 In-home
consumption
20
72%
0
Ice cream Juice - Nectar Breakfast
and 100% Juice cereals
¹ packaged food does not include dairy (sized at c.Rs9tn) and staples. Source: CLSA
Figure 42
Home and personal care (Rs1.2tn/US$17bn) categories - value-for-money hygiene a clear focus over the medium term
140 (Rsbn)
Hygiene essentials (US$8.2bn)
Other hygiene 120 Hygiene habits are likely to boost spending on key
(US$2.8bn) categories and per-capita spending on soaps and
100
Not all the hygiene detergents.
segments may 80
show acceleration,
60
given limited usage 300 (Rsbn)
in daily life and 40
250
premium
20
positioning. 200
0 150
Toothpaste Shampoo Face wash
100
50
Discretionary
18% 0
Discretionary (US$3bn)
Higher spending on hygiene needs could Detergents Soap Dish Toilet Hand Sanitiser
wash cleaner wash
deter spending on discretionary segments.
Hygiene
Needs based category -
essential essentials
16% 49% 120 (Rsbn)
160 (Rsbn)
140 Needs-based 100
essentials
120
(US$2.7bn) 80
100 Other hygiene Certain seasonally
categories 17% dependent 60
80
60
essentials may be
40
immune to
40
hygiene trends. 20
20 Like skincare
0 needs in winter. 0
Hair Hair Body Air Hair Male Skin care Household Deodorant
oil colour wash care conditioner grooming insecticides
Source: CLSA

Change 2: Value accretive acquisitions

Management expected to ITC has been relatively passive and rational in terms of its M&A strategy. Their main
pursue acquisition aim has been to leverage agri-business synergies to the full through greenfield
opportunities capex. With this capacity now in place and about US$4.6bn in liquid assets (16% of
current market cap), we expect management to pursue acquisition opportunities to
help realise their long-term growth ambitions. Valuations have been one of the big
deterrents for its M&A strategy, but with several category incubations now
complete we see a better backdrop where ITC can look to acquire regional
businesses and then use its distribution network to scale them up (as it did with the
recent acquisition of the Sunrise brand).
Acquisition of the Sunrise brand: a bold approach

Sunrise fit the bill as an We think ITC is likely to look for certain criteria when approaching M&A
acquisition opportunities. In their acquisition of Sunrise for example, they likely considered:
 Portfolio gap: Sunrise filled a gap in ITC’s portfolio with its blended spices
(under the organic Aashirvaad brand ITC has a portfolio of unblended spices).
 Potential to scale up nationally: Aashirvaad is a leader in the south, while Sunrise is
a leader in the east. ITC is now looking to leverage its national brand equity.
 Fits with its procurement and processing strategy: Can leverage Agri-backend.
 A better margin business: Sunrise has a c.18% Ebitda margin.
 Helps the company widen its reach.
Figure 43
Food and personal care acquisitions

Brand Segment Year Deal size Owner Deal valuation Comment
Mint-O Confectionery 2002 na Candico na At the time of acquisition, the organised confectionary
market was sized at c.Rs11bn, where Minto was the
second largest player after Nestlé’s Polo.
Homlite Safety 2005 Rs2bn Swedish 0.65x ITC acquired a controlling stake from Swedish Match AB,
and Ship matchstick Match AB EV/Sales who had decided to exit the country. For FY05, Wimco
had turnover of Rs1.3bn.
B Naturals Juices 2015 Rs10bn Balan 2.5x Penetration of segment at the national level is only
Natural Food EV/Sales around 5%. Deal is valued at c.2.5x EV/Sales, based on
estimated sales of c.Rs400mn, as per media reports.
Savlon Hygiene 2015 Rs2.5-3bn Johnson & 2.8-3.3x ITC has entered into asset purchase agreements with
Shower Personal care Johnson EV/Sales Johnson & Johnson India, and Johnson & Johnson Pte,
and Singapore, for purchase of Savlon and Shower to Shower
Shower trademarks and other intellectual property, respectively,
primarily for use in India. While Savlon is a niche player in
the Indian antiseptic market, Shower to Shower is a
leading player in the prickly heat powder market. As per
Industry estimates, revenue in FY14 stood at c.Rs900mn
(for both brands), of which c.Rs650mn from Savlon
Antiseptic Soap and Hand washes.
Charmis Personal care 2017 na Colgate na ITC has relaunched offerings in 2018 with focus only in
Palmolive north India. It has two offerings - Charmis Deep
Nourishing Cold Cream and Charmis Daily Nourishing
Soft Cream.
Nimyle Floor Cleaner 2018 na Arpita Agro na The second largest brand in the floor cleaning segment in
Products West Bengal and Odisha. Floor cleaning category is sized
at Rs7.5bn, and is dominated by Reckitt Benckiser's Lizol.
ITC has acquired only the brand rights. The company had
turnover and Pat of Rs350mn and Rs250mn respectively,
in FY15.
Sunrise Spices 2020 Rs23bn Sunrise Foods 3.9x EV/Sales Sunrise has a turnover of around Rs5.9bn and Ebitda is at
(with Rs1.5bn Pvt. Ltd. 19x EV/Ebitda c.Rs1.05-Rs1.1bn for FY20. Sunrise has manufacturing
contingent facilities spread across India, including modern factories in
consideration) Kolkata, Agra, Jaipur, Bikaner, Sumerpur and Erode.
Outside India it has sales in Bangladesh and Nepal.
Source: ITC, Media, CLSA

Figure 44
Foods and beverages category - growth strategy (our view)

Category Size¹ Key brands - Strategy Key players M&A potential
(Rsbn) ITC
Atta 170 Aashirvaad Focus would be to leverage brand Private players Unlikely
equity of Aashirvaad
Biscuits 350 Sunfeast With wider presence across sub- Britannia, Parle, Anmol, Can acquire regionally
segments, focus would be to scale up Surya Foods, Mrs Bector, strong franchisee, but this
organic business Saj Industries, Unibic wouldn’t fit with the M&A
strategy
Noodles 60 Yippee Focus would be to scale up organic Nestle, Capital Foods, Unlikely
brand Yippee with new variants Patanjali
Snacks 320 Bingo Sustained innovation critical in the Pepsi Co, Haldiram, Balaji Can look to acquire
segment Foods, Prataap Snacks regional snack options
Juices 60 B Naturals Focus would be to drive acquired Dabur, Pepsi Co, Hector Can look to enter drinks
brands Beverages segment with a regionally
strong brand
Spices 150 Aashirvaad, Look to scale up acquired brands MTR Can acquire regionally
Sunrise strong brands in the north
and west
Pasta 25 Yippee Look to scale up organic brands Nestle Unlikely
Dairy 9,000 Aashirvaad, Focus is to widen presence with Britannia, Hersey, Cavin, Can look to acquire
Sunfeast increased direct sourcing Amul regional companies with
Wonderz direct sourcing
Salt 80 Aashirvaad Non-core offering Tata Consumer Unlikely
Chocolate 150 Fabelle Focus is to scale up Fabelle organic Mondlez, Nestle Unlikely
brand
Coffee 50 Sunbean Focus would be to scale up Nestle, HUL Unlikely

differentiated offering under Sunbeam.
With growth would look to enter the
instant coffee powder segment
Tea 400 na After coffee, ITC can look to enter the Tata Consumer, HUL Inorganic foray possible.
tea segment. We see in-organic forays Numerous regional players
into the segment under pressure due to
recent inflation
Health Food 75 na Can look to enter immunity boosting HUL, Nestle, Zydus, Can look to acquire
Drinks health food drinks segment Abbott regionally strong brands
from south India
Soup and 35 na Can leverage agri-back end to leverage HUL, Nestle, Marico Can acquire a private
Ketchup in-home consumption opportunity brand
Edible oil na na Exited the category many years back Marico, Agro Tech, Emami Unlikely
given low margin profiles Agro
Bread 120 na ITC can look to enter the segment with Modern Foods, Britannia, Can look to acquire a
regional brand acquisition. Regional Mrs Bector regionally strong brand
players are struggling to survive in the
pandemic
Ice Cream 140 na ITC with direct sourcing back-end can Amul, HUL, Vadilal, Lotee Can look to acquire
look to acquire regionally strong players regionally strong brand
¹ Organised category size. Source: CLSA

Figure 45
Home and personal care category - growth strategy (our view)

Category Size¹ Key brands - Strategy Key players M&A potential
(Rsbn) ITC
Soap 230 Superia, Vivel, After weak response to its aggressive HUL, GCPL, Reckitt Historical reliance on
Fiama Di Wells, stance in the category, ITC has been Benkiser, Wipro organic brand to continue
Savlon calculative and regionally trying to
expand share
Deodorant 40 Engage ITC has already created leading Vinni Cosmetics, HUL Engage will be the only
position in the category. It would look brand from ITC
to expand share with
innovation/variant extensions
Body Wash 13 Fiama Di Wills, ITC has gained share in the modern Colgate Palmolive, Look to expand organic
Vivel channel and is likely to sustain its Beiersdorf, HUL brands
organic foray
Sanitiser Savlon With strong brand equity and wide Reckitt Benckiser, Focus would be to scale up
20
distribution, ITC has scaled up the HUL, Dabur acquired brand
Hand wash Savlon, Fiama brand aggressively in the pandemic
30
Di Wills
Floor cleaner 22 Nimyle Focus is to leverage natural Reckitt Benckiser, Focus is to scale up
differentiators in the category HUL acquired brand
Skin care 100 Charmis. Focus would be to expand regional and Beiersdorf, HUL Focus is to scale up
Dermafique channel specific presence acquired brand
Talc 20 Shower & Focus would be to scale up acquired HUL, Zydus, Emami In prickly heat (growing
Shower brand segment) focus would be to
scale up acquired brand
Shampoo 65 na Its previous attempt in the segment did HUL, P&G, Patanjali, Can pursue dual strategy of
not go well. But with good traction of Cavin Care, L’Oréal, organic and inorganic
shower gel and hand wash under Dabur brands
Fiama, company can look for a re-entry
Hair 10 na Company can extend premium HUL, P&G, L’Oréal Can pursue dual strategy of
conditioner Fiama brand organic and inorganic
brands
Detergents 250 na Given high competitive intensity, we HUL, P&G, RSPL Unlikely
expect ITC to maintain its distance
Hair oil 140 na We expect forays into in-organic form Marico, Dabur Can acquire regional and
private brands
Toilet Cleaner 20 na Company can extend Nimyle. Reckitt Benckiser, Unlikely
It can also look to acquire HUL
regionally brewing brands
Dish wash 35 na Company can enter category under HUL, Jyothy Labs Can acquire regional and
Nim wash brand and acquire a regional private brands
player or a private label brand
Toothpaste 120 na Looks unlikely given high Colgate, HUL, Dabur Can acquire natural brands
concentration of growth in naturals
Face wash 25 na Can extend soap range Himalaya, HUL, Can pursue dual strategy of
Beiersdorf organic and inorganic
brands
Male 5 na In skin care it has a nascent HUL, Emami, Marico, Unlikely
grooming positioning. We see category Beiersdorf
extensions some way off
Air care 10 na Post disinfectant spray, it can extend GCPL, Dabur, P&G, Can look for inorganic.
to fragrance categories Reckitt Benckiser Depending on opportunity
¹ Organised category size. Source: CLSA

Change 3: Strengthening the food and beverage franchise

Following the right After a muted response to its home and personal care products, for the past decade
strategies ITC has been focussed on growing its food and beverage franchise. The decision to
focus on foods was strategically sound, given the wide penetration of categories
with a large unorganised share, limited competition in the organised space, and
consumers trading up as the economy grew.
Strategically managing Strategically focussed on businesses with limited competition. ITC only has
competition in biscuits and competition in biscuits and noodles (see figure 47). In biscuits, while it has a wider
noodles sub-category presence, the focus has been on filled biscuits (20% of the category;
No.1 player with 34% share) and premium segments (over Rs200-300/kg realised
versus about Rs130/kg overall for the category). In noodles, it has focussed on
opportunities in the kids segment (Nestle as a policy does not push Maggi for kids),
and has recently launched the My range of noodles for youths/teenagers.
With a strong agri backend and the third-widest distribution reach in FMCG, we
think ITC is eying a significant scale up of these categories to drive margins and
returns.
Figure 46
Key foods and beverages categories and ITC presence
500 (Rsbn)
400 Tea
Biscuits
Salty Snacks
300
200
Atta
Confectionaries
Spices Chocolate
Bread
100 Milk shake
Salt Honey Health Food
Ice Cream
Drinks
Coffee
Cake
Juice - Nectar
and 100% Juice
0 Instant
Noodle Instant Pasta
Baby foods - Baby foods -
Super Premium
infant cereal fromula milk
Edible Oil Chyawanprash
Ketchup
(Rs/kg)
(100)
(100) 0 100 200 300 400 500 600 700 800 900 1,000
Note 1: Categories where ITC is present are shaded blue. New categories it has entered are light blue. Note 2: Bubble size represents category size. Source: CLSA

A focus on value accretive segments

Expanding into categories ITC’s food business is concentrated in categories with limited added value ( Figure
that have high value 16). About 90% of the revenue from its F&B portfolio comes from items that
accretion generate less than Rs300/kg. We see this as one of the factors that has resulted in
slower margin growth.
However, the company is looking to expand into categories that have high value
accretion, such as chocolate, coffee, spices and salty snacks. In the base categories,
new launches are at the premium end.
Figure 47
F&B category info and company presence - no major competition except for Biscuits (focusing on premium) and Noodles (youth segment)
Size Rs/kg Penetration Unorganised Revenue contribution (%)
(Rsbn) (%) share (%)
ITC -FMCG Britannia Nestle Dabur Emami HUL Marico
Foods and beverages as a % of overall FMCG revenue 81 100 100 47 8 28 21

Tea 400 470 99 50 32
Biscuits 350 133 92 35 25 80 0
Salty Snacks 320 276 95 50 10
Atta 170 52 99 90 38
Confectionaries 150 185 40 40 3
Chocolate 150 800 40 40 1 12
Ice Cream 140 365 70 30 11
Bread 120 89 40 50 10
Honey 35 332 40 70 17
Chyawanprash 10 325 30 60 15 13
Health Food Drinks 75 458 10 10 1 39
Juice - Nectar and 100% Juice 60 100 40 10 4 32
Instant Noodle 60 171 75 75 10 23 0
Coffee 50 1,700 70 20 12 11
Cake 42 250 30 30 0 6
Baby foods - formula milk 30 825 40 0 15
Baby foods - infant cereal 25 667 20 5 14
Breakfast cereals 25 379 5 5 1 0
Instant Pasta 25 385 5 30 1 2 0
Ketchup 25 147 20 40 1 4
Super Premium Edible Oil 20 145 20 10 18
Tetra pack milk 15 60 10 0 10
Pouch milk 7,000 50 99 75 0
Soup 10 1,000 5 50 1 4
Spices 150 367 99 80 2
Salt 80 40 99 70 1
Milk shake 100 175 10 25 0
Ghee 2,250 575 75 50 1
Other 5 4 9¹ 36² 88³ 0 34
Foods and Beverages 11,902 74 54 100 100 92 100 100 100 18
¹ For Nestle Others comprises of curd and Milkmaid; ² For Dabur others comprises of healthcare, digestive and glucose; ³ For Emami others is healthcare;
4
For Marico others is oats. Source: CLSA

Figure 48
ITC has established Key brands in foods and beverages and possible category extensions
F&B brands in the past Mother brands Sub-brands Category presence Possible extensions
couple of decades
Aashirvaad Aashirvaad Atta (Wheat Flour), Spices, Staples
Salt, Value added flour
Aashirvaad Svasti Dairy Dairy category extensions
Focus will now be on Sunfeast Bounce Biscuits and cakes - Variant extension, Croissants,
building established brands Sandwich Bread, Wafers
Yippee Noodles, pasta Oats, Muesli, Soup, Ketchup
Mom's magic Biscuit - Cookies Variant extension
Farmlite Biscuit - Digestive and Variant extension, Rusk
protein
Dark Fantasy Biscuit - Premium Premium biscuits
Nice Biscuit - Sugar Variant extension
Hi Fi Biscuit - Cookies Variant extension
Snacky Biscuit - Salty Variant extension
Wonderz Milk Dairy (shake) Other value added
B Natural Nectar and 100% Juices Drinks
Bingo Starter, Mad Angles, Salty Snacks Regional namkeens
Tedhe Medhe, No Rulz
Fabelle Chocolate Premium shakes, Ice Cream
Candyman Confectionaries Variant extension
Sunbean Coffee Instant coffee, Tea
ITC Master Chef Read to Cook Expand range
Farmland Vegetable and Fruits Add new categories
Source: ITC, CLSA
Figure 49
For Savlon, the company Key brands in Home and Personal Care and possible category extensions
expects to end FY21 with Mother brands Category presence Possible extensions
consumer price revenue of
Rs10Bn, 4x the FY20 level Vivel Soap, Body wash Shampoo, Hair conditioner, Body
lotion, Face wash
Superia Soap, Shampoo Mass-end offerings
Fiama Soap, Body wash, Hand wash, Bath Premium: Shampoo, Hair conditioner,
Accessories, Essential Oils, Body Oil, Body lotion, Face Wash
Body talc
Savlon Antiseptic liquid, Soap, Disinfectant, Air sanitiser, Fabric sanitiser,

Hand Wash, Sanitiser, Wipes, Spray Laundry sanitiser
Nimyle Floor cleaner Variant extensions, Toilet cleaner
Engage Deodorant, Perfume Variant extensions
Essenza Di Willis Perfume Variant extensions
Charmis Skin care Extension into skin care sub

categories
Dermafique Skin care Extension into cosmetics
Shower & Shower Prickly heat talc Variant extensions
Nim wash Extension of Nimyle Extension into other hygiene

categories like dish wash
Source: ITC, CLSA

Change 4: Multiple margin drivers

Investor concerns about Investors have rightfully been concerned about the inherently lower margins in
low margins can be some of ITC’s categories. However, we would point out that the benefit of ITC
mitigated having incubated a much larger category basket compared to peers, an improving
sales mix, falling incubation costs, operating leverage benefits, and its ability to
move into new categories with limited incremental investments, should offset some
of the concern.
Figure 50 Figure 51
Estimated Ebitda across different segments for FY20 Estimated Ebitda across different segments for FY23CL
Lifestyle Lifestyle
Personal care Match stick
Match stick Agarbatti
Spices Confectionary
Agarbatti Other foods
Confectionary Personal care
Other foods Snacks
Snacks Stationary
Noodles Spices
Stationary Noodles
Biscuit Biscuit
Atta (Rsbn) Atta (Rsbn)
(1) 5 (1) 8
Focus on growth to help With a sustained focus on growth and bridging the margin gap with category
margins expand leaders, we expect the steady margin expansion to continue. We note that in wheat
flour, the company has a high-single digit Ebit margin (in our view), which could be
expanded to mid-teen levels. Similarly, in biscuits, noodles and snacks, while gross
margin is on par with category leaders, the Ebit margin is in mid-single digits, which
the company is now looking to expand. We also expect renewed efforts in ITC’s
home and personal care strategy, leveraging the increased demand for hygiene
products. It has aggressively positioned inorganic brands such as Savlon and Nimyle
in the current setting, which are healthy margin businesses. We see c.400bps
expansion in Ebitda margins over FY20-23CL for the overall FMCG segment.
Figure 52 Figure 53
ITC - FMCG revenue growth trend ITC - FMCG Ebitda margin trend
30 (%) 15 (%)
26
11.0
25 23 24 9.7
10 8.8
21 7.1
6.1
20
4.0
16 5 3.2
2.0 2.3 2.5
15 0.6
12
11 11 11
10 0
10 8 8 8
(1.7)
(5)
5 3 (4.6)
(7.4)
0 (10)
21CL
22CL
23CL
21CL
22CL
23CL
FY12
FY10
FY11
FY13
FY14
FY15
FY16
FY17
FY18
FY19
FY20
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18
FY19
FY20

Change 5: Asset turnover to improve

Capex needs set to decline Once the two new ICML are completed, we expect a material decline in annual
organic capex needs for the FMCG business. Along with the faster scale up of the
FMCG business, this should help a recovery in asset turnover for the company.
Figure 54
FMCG business asset turnover trend (based on available segment data)

Revenue 36,339 44,716 55,256 69,828 80,992 90,113 97,044 104,829 113,210 125,053 128,442
Gross block 10,563 11,684 14,411 18,058 22,669 29,384 36,726 48,260 56,597 69,808 78,194
Assets turnover (x) 3.7 4.0 4.2 4.3 4.0 3.5 2.9 2.5 2.2 2.0 1.7
Capex 1,664 1,121 2,728 3,646 4,611 6,715 7,342 11,534 8,336 13,211 8,386
as a % of revenue 4.6 2.5 4.9 5.2 5.7 7.5 7.6 11.0 7.4 10.6 6.5
Source: ITC, CLSA
Figure 55
ITC have been aggressive Capex as a % of revenue

with capacity additions
20 (%)
18
16
16
14
12
11
12 11
11
10
10 9
8 7 8 7
8 7
6 6
6 5 5 5
5 4
3
4 3
2
0
FY04
FY11
FY20
21CL
22CL
23CL
FY03
FY05
FY06
FY07
FY08
FY09
FY10
FY12
FY13
FY14
FY15
FY16
FY17
FY18
FY19
Source: ITC, CLSA
Figure 56
Asset turnover to improve Asset turnover: we expect slow but steady improvement
7 (x)
6 5.7
5.4
5.3
5 4.7
4.5
4.2 4.3
4.0 4.0
4 3.7 3.7
3.5
2.9
3 2.6
2.5
2.2
2.0 1.9
2 1.7 1.8 1.8
1 .7
0
FY06
FY11
FY20
FY02
FY03
FY04
FY05
FY07
FY08
FY09
FY10
FY12
FY13
FY14
FY15
FY16
FY17
FY18
FY19
21CL
22CL
23CL
Note: Asset turnover = Turnover/gross block; Gross Block = Cumulative capex in the ‘FMCG’ business of ITC.
Source: ITC, CLSA

Section 2: Cigarettes: A cash cow for ambitious goals ITC - BUY
Cigarettes: A cash cow for ambitious goals

Profits from cigarettes Despite multiple headwinds, ITC’s cigarette business has maintained profit growth
providing cash to grow the momentum which in turn has helped create steady free cashflow. We expect this
FMCG business to continue and for it to offer strong support for the seeding/growth of ITC’s FMCG
business.
The outlook for the cigarette business

Tax breaks and innovation ITC’s core cigarette business, which was thriving until FY13, has come under
helped with a volume pressure from regulatory tightening and steady increases in taxation. Cigarette
recovery volumes contracted about 18% between FY13-18, but were given some respite
after the introduction of the GST that ensured no tax increases from July 2017 to
January 2020. This was reflected in improved business performance over FY19-
FY20, with absolute volumes recovering by 6% (if we adjust for the lockdowns this
year it would be a 9% absolute volume recovery). Innovation, in the form of capsule
cigarettes, also helped the volume recovery (now 13-14% of category volume, of
which ITC has a c.60% share).
Figure 57
ITC - Cigarette business performance
(Rsbn) FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20 21CL 22CL 23CL
Net sales 106 123 140 155 168 175 182 187 207 212 172 201 207
% growth 13.4 16.6 13.4 10.6 8.7 4.1 4.2 2.8 10.6 2.4 (18.7) 16.5 3.0
Volume growth (%) (2.8) 6.3 1.0 (2.4) (7.6) (8.6) 1.5 (2.9) 6.5 (0.6) (18.0) 12.0 0.0
Ebitda 60 71 86 101 114 120 128 136 148 151 130 152 156
Ebitda margin (%) 56.4 57.7 61.3 65.4 68.1 68.6 70.1 72.6 74.3 75.6 75.7 75.6 75.5
% growth 16.7 19.4 20.4 18.1 13.1 4.8 6.4 6.5 8.9 2.2 (13.8) 16.3 2.9
Depreciation (2) (2) (2) (3) (2) (2) (2) (2) (2) (3) (3) (3) (3)
Ebit 58 69 83 99 112 118 125 133 146 149 128 149 153
Ebit margin (%) 54.5 56.0 59.6 63.8 66.6 67.2 68.7 71.2 73.0 74.2 74.1 74.2 74.2
PBT 55 65 81 95 106 108 116 123 136 138 118 140 145
Tax rate (%) 31.4 30.7 30.7 31.3 31.4 35.4 34.2 33.4 32.4 25.4 25.4 25.4 25.4
PAT 38 45 56 65 73 70 77 82 92 103 88 105 108
% growth 18.5 20.1 23.9 17.4 11.4 (4.2) 9.5 6.8 11.9 12.4 (14.3) 18.6 3.6
EPS (Rs) 3.23 3.84 4.71 5.49 6.07 5.80 6.31 6.71 7.47 8.38 7.15 8.43 8.69
Capex (3) (6) (5) (8) (5) (2) (3) (1) (1) (1) (1) (1) (1)
FCF¹ 35 40 50 57 69 71 77 85 94 107 91 107 110
% growth 26.8 15.7 24.9 14.6 20.7 3.4 8.4 10.6 10.5 13.1 (14.9) 16.9 2.6
Capital employed 31 36 50 57 58 53 55 33 36 29 30 32 33
RoCE (%) 190 207 195 185 194 211 231 301 420 456 429 479 472
¹ FCF = Ebit (1-tax rate) + Depreciation - Capex. Source: ITC, CLSA

Figure 58
ITC - Summary cigarette P&L (per stick analysis)

(Rs/stick) FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20 21CL 22CL 23CL
Volume (bn sticks) 84 82 87 88 86 79 72 73 71 76 75 62 69 69
% growth (3) 6 1 (2) (8) (9) 1 (3) 7 (1) (18) 12 0
Gross sales¹ 2.06 2.43 2.56 2.96 3.40 3.85 4.48 4.63 5.03 6.05 6.10 6.68 6.98 7.32
% growth 18 6 16 15 13 16 4 9 20 1 10 5 5
Excise duty/GST 0.95 1.13 1.14 1.37 1.59 1.73 2.06 2.15 2.41 3.42 3.44 3.89 4.08 4.33
as a % of gross 46 47 45 46 47 45 46 46 48 57 56 58 58 59
Net revenue 1.11 1.29 1.42 1.59 1.81 2.13 2.42 2.48 2.62 2.63 2.65 2.79 2.90 2.99
% growth 17 10 12 13 18 14 3 5 0 1 5 4 3
Ebitda 0.61 0.73 0.82 0.98 1.18 1.45 1.66 1.74 1.91 1.95 2.01 2.11 2.19 2.25
% growth 20 12 19 21 23 15 5 10 2 3 5 4 3
Ebitda margin (%) 55 56 58 61 65 68 69 70 73 74 76 76 76 76
Ebit 0.59 0.71 0.79 0.95 1.15 1.42 1.63 1.71 1.87 1.92 1.97 2.07 2.15 2.22
% growth 20 13 19 21 23 15 5 10 2 3 5 4 3
Ebit margin (%) 53 55 56 60 64 67 67 69 72 73 74 74 74 74
¹ Gross revenue is after adjusting for VAT and supply chain margins. Source: CLSA
Figure 59
Legal Cigarette industry volume market share

CY10 CY11 CY12 CY13 CY14 CY15 CY16 CY17 CY18 CY19
ITC Ltd 77.7 78.0 80.1 80.2 79.8 79.3 79.1 79.2 79.3 78.8
Godfrey Phillips India Ltd 12.6 12.3 11.0 11.1 11.0 11.0 11.0 11.0 10.9 11.5
VST Industries Ltd 7.7 7.7 7.5 7.2 7.5 7.6 7.7 7.7 7.7 7.7
Philip Morris India Ltd 0.4 0.5 0.6 0.7 1 1.1 1.1 1.2 1.2 1.3
Golden Tobacco Ltd 0.6 0.5 0.4 0.3 0.3 0.3 0.3 0.3 0.3 0.3
Others 1 0.9 0.4 0.4 0.4 0.7 0.8 0.6 0.6 0.5
Source: Euromonitor, CLSA
Figure 60
Competition increased in Volume market share for key brands - Legal Cigarettes
2019 but had little impact Brand Company CY14 CY15 CY16 CY17 CY18 CY19
on ITC’s volume leadership
Gold Flake ITC 36.3 36.5 36.6 36.6 36.7 36.2
Wills Navy Cut ITC 17.1 16.9 16.7 16.8 16.8 16.9
Scissors ITC 9.2 9.0 8.9 8.9 8.9 8.9

During the pandemic ITC Four Square Godfrey Phillips 6.7 6.5 6.4 6.4 6.5 7.1
has recovered some of its
loss of volume Bristol ITC 4.3 4.1 4.1 4.1 4.1 3.9
Charms VST Industries 3.8 3.8 3.9 3.9 3.9 3.8
Capstan ITC 3.5 3.4 3.3 3.3 3.4 3.3
Classic ITC 3.0 2.9 2.8 2.8 2.9 2.9


Tax hikes and Covid mute the outlook

Volumes contracted 13% A 13% effective tax increase in February 2020 put pressure on the cigarette
YoY in Q4FY20 and 40% business, followed by added pressure from the lockdowns that followed shortly
YoY in Q1FY21 after. In Q1FY21 with the delayed resumption of operations, ITC registered its
steepest quarterly cigarette volume decline of c.40%. For Q2FY21, management
noted continued pressure on distribution amid sporadic lockdowns at local levels.
Our volume assumptions factor in near-term demand and supply headwinds

We expect a c.18% volume decline for 21CL, on the back of a weak Q1, continued
pressure on the supply chain from lockdowns, no addition of new smokers, and a
surge in illegal supplies. From a low base we expect a recovery of c.12% for 22CL.
For 23CL we expect stable volumes.
Figure 61
Legal industry volume ITC - Annual cigarette volume growth

declined 20% over FY11-
FY20; illegal cigarette 15 (% YoY)
Sharp double digit tax 12.0
volume grew 36% increases drove c.18%
volume decline in 6 years
10 8.4
7.1 7.1 7.2
6.3 6.5
4.2
5 3.1
1.0 1.5
FY20 cigarette volume 0.5 -
declined 0.6% YoY 0
(0.7) (0.6)
(2.9) (2.8) (2.4) (2.9)
(5)
(7.6)
(10) -8.44 (8.6)
(15)
(20) (18.0)
FY01
FY08
FY16
FY02
FY03
FY04
FY05
FY06
FY07
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY17
FY18
FY19
FY20
21CL
22CL
23CL
Source: Company, CLSA
Tax impact: annual mid-single digit hikes

We expect mid-single digit We expect mid-single digit annual cigarette tax hikes per stick for the category for
tax hikes for cigarettes for 22CL and 23CL. Overall on an absolute tax outgo, for 21CL we expect a 7% drop in
22CL/23CL tax outgo (18% volume drop, 13% tax increase), but driven from an ad-valorem
component to the tax structure, overall cigarette tax outgo for ITC would be c.18%
for 22CL (c.12% YoY volume growth and c.5% tax increase per stick) and 6% for
23CL (flat volume YoY and 6% tax hike per stick).
Figure 62
Cigarettes - current tax structure

Cigarette length GST (%) GST compensation cess Basic Excise Duty (BED) NCCD - New
Small (Up to 65mm) 28 5% + Rs2,076/1,000 sticks Rs5/1,000 sticks Rs440/1,000 sticks
Regular (>65mm to 70mm) 28 5% + Rs2,747/1,000 sticks Rs5/1,000 sticks Rs440/1,000 sticks
Longs (>70mm to 75mm) 28 5% + Rs3,668/1,000 sticks Rs5/1,000 sticks Rs545/1,000 sticks
Kings (>75mm) 28 36% + Rs4,170/1,000 sticks Rs10/1,000 sticks Rs735/1,000 sticks
Note 1: NCCD - National Calamity Contingent Duty. Note 2: Basic excise duty was re-introduced in FY20 Union Budget. Source: GoI, CLSA

Figure 63
Overall tax constitutes Broad split of cigarette price (RSFT segment)

c.53% of the consumer
price 8 (Rs/stick)
7
Higher ad-valorem 6
component would lead to
increases in tax 5
0
MRP Trade GST GST cess Excise Net Costs Ebit
margin realisation
Source: CLSA
Steady tax increases have a direct effect on illegal supply

In line with WHO guidelines, key regulation under COTPA (Cigarettes and Other
Tobacco Products, Prohibition of Advertisement and Regulation of Trade and
Commerce, Production, Supply and Distribution Act, 2003) has been strengthened
in the past decade. This, along with steady tax increases, increased pressure on
volumes for the industry.
Figure 64
Cigarette industry volume Cigarette industry volume and growth trends

declined at a Cagr of 0.8%
in the past 18 years 105 (bn sticks) Cigarette Growth (RHS) (%) 8
6
100
4
95 2
0
90
(2)
85 (4)
(6)
80
(8)
75 (10)
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
Overall cigarette consumption steady, illegal volume continues to surge

ITC have said that while legal industry volume declined 20% over FY11-FY20, illegal
volume grew 36%. Amid the pandemic, the share of illegal further expanded to 25%
from about 24% in CY19.

Figure 65
Illegal cigarettes in 2019 Cigarette Industry volume mix: Amid steady tax increases, Illegal industry continues to expand
made up about 24% of the
category (%) Legal Illegal
100
11 12 13 15 15 16 16 17 18
90 19 21 23 24 24 24
80
70
60
50
40
30
20
10
0
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
Our numbers build in an extended impact on cigarette business volumes

Multiple demand and While we expect an 18% volume decline for FY21, we see a partial recovery in FY22
supply headwinds offer a with 12% volume growth. We don’t expect a complete recovery due to:
grim outlook
 The work-from-home phenomenon has created a good setting for smokers to
quit (in general about 30% of consumers drive about 70% of consumption, in
our view) and no addition of new smokers (Covid-19 is a respiratory disease).
 Supply chains have been disrupted by lockdowns and as many sole proprietors
have shut their kiosks. ITC is looking at onboarding grocery stores, but this might
not compensate for the loss of business, in our view.
 Sustained tax increases have made legal cigarettes expensive, resulting in
consumers shifting to illegal options.
Figure 66
Tax increases over ITC - Cigarette volume

FY12 to FY18 saw cigarette
volumes contract 90 (bn sticks)
Over FY12-FY18 cigarette

85 taxation almost trebled on a
comparable basis
80
13% tax increase in Feb and
lockdowns to drive a 15% 75
sales decline for FY21
70
65
60
55
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18
FY19
FY20
21CL
22CL
23CL

Figure 67
Any tax increase has been ITC - cigarette annual price hikes
passed on to consumers
25
Tax pass throughs have made
cigarettes 3.3x more expensive
20
15
10
21CL
22CL
23CL
FY06
FY10
FY03
FY04
FY05
FY07
FY08
FY09
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18
FY19
FY20
Source: CLSA
Figure 68
12% cigarette revenue Cagr ITC - cigarette revenue growth

over the past 25 years
30 (% YoY)
20Y revenue
25 Cagr at c.15%
20
15 6Y revenue
Cagr at c.5%
10
(5)
FY03
FY18
FY01
FY02
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY19
FY20
21CL
22CL
23CL

Ebit is likely to grow in mid-to-high single digits

We expect a sharp 18% volume erosion in FY21, with a partial volume recovery in
FY22 (c.12%). We expect the segment to sustain its mid-to-high single digit Ebit
growth over the medium term.
Figure 69
Ebit growth has slowed to ITC - cigarette Ebit growth

mid-to-high single digits
since FY16 25 (% YoY)
20
15
10
(5)
(10)
(15)
FY12
FY17
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY13
FY14
FY15
FY16
FY18
FY19
FY20
21CL
22CL
23CL
Further margin expansion Ebit margin looks like it may have reached its limit: So far, the management
could be difficult approach of completely passing on the effect of any tax increase has been rewarded
with improvements in margin profile. However, with the share of illegal surging and
the expected resumption of annual tax hikes, we think the company could limit price
hikes in order to balance volumes and margins. We therefore expect any margin
expansion to be difficult.
Figure 70
ITC’s price-led margin ITC - cigarette business Ebit margin (on net sales)
expansion strategy likely
to end 80 (% YoY)
75
70
65
60
55
50
45
40
FY07
FY16
FY05
FY06
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY17
FY18
FY19
FY20
21CL
22CL
23CL
Source: ITC, CLSA

Tax increases may not materialise

There are good reasons for Depleting central and state revenues have created a lot of chatter about the need
regulators not to increase for tax increases on cigarettes. After sharp increases for alcohol, the market is
taxes factoring in another round of tax increases for cigarettes. We think the following
factors could deter regulators from increasing taxes:
 A tax increase would put further pressure on already stressed volumes: We
think a tax increase would add one more headwind for the industry, which is
currently reeling from lockdowns and likely to face net consumer exits. For FY21
the central government raised taxes by 13%, with ITC passing only 10% of this
through to consumers. This is unlike in the past when ITC was able to hike prices
and sustain/expand margins. Also, given the c.18% expected cigarette volume
decline for 21CL, we see absolute tax outgo to decline by 7% for ITC, the first
time in its history.
Legal industry volume  Surveillance now critical to garner tax revenue: In order to follow WHO
declined 20% in FY11- guidelines, there have in the past been multiple restrictions put in place to curb
FY20; illegal cigarette consumption. However, a lack of surveillance made these measures ineffective.
volume grew 36%
With the sharp surge in illegal (c.25% of category) and its impact on legal
volumes (c.40% volume decline for ITC in Q1FY21), we see surveillance as
critical to support the exchequer’s revenue. Tax on recovered volume would
make sense for the regulator.
We expect a mid-single  Stable taxation results in improved tax collection: Over FY13 to FY17, while
digit annual cigarette tax tax increases saw a c.15.7% Cagr, tax collection saw only a 4.7% Cagr. However,
hike for 22CL and 23CL amid steady taxation up until January 20, tax collection grew at a Cagr of c.10%
for the cigarette industry.
 Sharp surge in illicit supplies in recent years: The share of legal cigarettes in
total tobacco consumption contracted from c.23% in FY72 (c.21% in FY82) to
c.9% today (versus the 90% global average), while overall consumption has
expanded over this period. In terms of tax collection, cigarettes contribute
c.80% to overall tobacco tax collection. Further tax increases would make illicits
more attractive, in our view, meaning a negative impact on base tax collection.
Unlike in the alcohol industry where state machinery is instrumental in managing
supply chains, in cigarettes it is largely unorganised.
Figure 71
ITC’s indirect tax payments ITC - Overall absolute indirect taxes pay-out
stood flat YoY in FY20
400 (Rsbn) Total tax out-go Growth (RHS) (%) 30
350 25
300 20
250 15
200 10
150 5
100 0
FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20
Source: ITC, CLSA

Figure 72
Cigarette industry: Tax dependence gradually abating

(Rsbn) FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19
Tax from cigarettes industry 128 153 176 218 235 258 278 285 303 348
% growth 5 19 15 24 8 10 8 2 6 15
as a % of indirect tax 5.2 4.3 4.4 4.6 4.7 4.7 3.9 3.3 3.3 3.7
India tax collection statistics
Indirect tax collection (Rsbn) 2,475 3,553 3,960 4,784 5,012 5,459 7,098 8,661 9,170 9,439
% growth (13) 44 11 21 5 9 30 22 6 3
- Excise duty 1,036 1,377 1,456 1,765 1,702 1,900 2,881 3,821 2,594 2,320
- Custom duty 833 1,358 1,493 1,653 1,721 1,880 2,103 2,254 1,290 1,178
- Services, other tax 605 818 1,011 1,365 1,589 1,680 2,114 2,586 860 125
- GST 0 4,426 5,816
Direct tax collection (Rsbn) 3,770 4,453 4,932 5,650 6,375 7,047 7,408 8,497 10,020 11,366
% growth 13 18 11 15 13 11 5 15 18 13
- Corporate tax 2,447 2,987 3,228 3,563 3,947 4,289 4,532 4,849 5,712 6,636
- Income tax 1,323 1,391 1,703 2,015 2,429 2,668 2,876 3,648 4,308 4,730
Total tax collection (Rsbn) 6,245 8,006 8,892 10,434 11,387 12,506 14,506 17,158 19,190 20,805
% growth 1 28 11 17 9 10 16 18 12 8
Source: GoI, Tobacco Institute of India, CLSA
Hefty contribution to the exchequer: ITC’s payout in terms of taxes has been high
given the high taxation structure for cigarettes. With steady increases in indirect
taxation, the company’s indirect payout expanded to c.41% of gross revenue.
Figure 73
Indirect taxes form 40.7% ITC - Indirect tax pay-out

of the overall gross sales
value for FY20 350 (Rsbn) Excise (%) 42
VAT, Others
300 GST 41
% of gross sales value (RHS)
250 40
200 39
150 38
100 37
50 36
0 35
FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20
Source: ITC, CLSA
42% of adult Indian males Regulatory tightening continues to shrink the organised cigarette share of overall
consume tobacco tobacco consumption: The organised cigarette contribution to overall tobacco
consumption in the country shrank from 23% in FY72 to 9% today. According to
the Global Adult Tobacco Survey India 2016-17, while 42% of adult Indian males
consume tobacco only 7% of them smoke cigarettes (compared to 14% who smoke
bidis and 30% who use smokeless tobacco).

Figure 74
Cigarette consumption in Cigarette industry as % of total tobacco consumption

overall tobacco 25 (%)
consumption is shrinking
20
15
23
21
10 20
17
15
5 9
0
FY72 FY82 FY92 FY03 FY09 FY20
Source: ITC, CLSA
Cigarettes are a dying category: Looking at global trends, the increased awareness
of health issues has led to fewer people smoking cigarettes. Across most
geographies (ex-China), cigarette volumes have been declining at a Cagr of 2%. In
India, with an increasing share of illegal cigarettes, any harsh regulatory action
would lead to an acceleration of this erosion.
Figure 75
Outside China, consumption Cigarette industry - per capita consumption (no of sticks) by country continues to shrink
contracted across 2,500 FY11 FY14 FY20
geographies at a c.2% Cagr
2,043
2,028
1841
2,000
1711
1,646
1,583
1,500
1,196
India’s share of world

1,017
1028
cigarette consumption only

about 2% 1,000
468
468
363
500
99
96
89
0
Japan USA China Pakistan India
Note: FY20 data is based on Tobacco Atlas, 6 th Edition, American Cancer Society, 2018. Source: ITC, CLSA
Figure 76
Overall tobacco Tobacco - Per capita tobacco consumption (grams/year)

consumption in India is 60% (grams/year)
1,400
lower than world average 1,256
1,145
1,200
1,000
743
800
600 468 461 438
400
200
0
USA China World Avg India Nepal Pakistan
Note: World Cigarettes - ERC Statistics, Tob Board & Industry Estimates - gms. Source: ITC, CLSA

Section 3: Positive outlook, compelling valuations ITC - BUY
Positive outlook, compelling valuations

Long-term positives being We believe that, at current valuations, regulatory concerns for ITC are now baked
missed by the market in and the market is ignoring the long-term positives. An increasing focus on ESG
remains an issue for tobacco stocks but notwithstanding its core cigarette business,
ITC has set solid ESG standards. Valuations at 6.5x FY22 implied PE for the
cigarettes business are now one of the lowest globally (a 30% discount to the global
peer average). We upgrade ITC to BUY with a target price of Rs220/share.
Significant tailwinds for the ITC's FMCG business is focused on profitability and we expect about 400bps
FMCG business margin upside over 23CL, with falling capital intensity and even as meaningful
contribution to overall profitability from this business is still some time away. Value
accretive acquisitions (such as the recently acquired Sunrise portfolio), a path
towards profitable growth for the FMCG business and improving capital allocation
(hotels moving towards an asset light model) may provide a much needed new
narrative for ITC.
Base case implies 36% total shareholder return with 12-month target of Rs220
Figure 77
SOTP valuation - Base case

Segment Valuation Unit Mar 22 Multiple Rs/sh Segment value Segment value Remarks
methodology (Rsbn) estimate (x) (Rsbn) (US$bn)
Cigarette PE Net profit 104.3 12 102 1,252 17.0 c.55% discount to its 10Y Avg. PE
FMCG others EV/Sales Sales 160.0 5 65 800 10.9 c.45% discount to FMCG peers
Agri-business EV/Ebitda Ebitda 9.8 6 5 59 0.8 In-line with peers
Paperboards & EV/Ebitda Ebitda 16.8 11 15 185 2.5 In-line with peers
packaging
Hotels EV/Ebitda Ebitda 2.8 10 2 28 0.4 c.30% discount to Hotel peers
Net cash Net cash 351.9 1 29 352 4.8 Cash as at Mar 21
Fair value 218 2,675 36.3
Target price 220
Current price 170 2,133 28.5
Upside 30
Total shareholder return 36
Note 1: Current price considered as of close of business on 7 October 2020. Note 2: Cigarette EPS is arrived after adjusting for corporate overheads and without
considering other non-operating income. Source: CLSA
Our numbers build in an  Cigarettes business valued at Rs102/share, on 12x March 2022 earnings:
18% volume decline Acknowledging heightened investor concerns around regulatory issues,
for FY21 particularly the incremental volume impact from large tax increases, we value
the cigarettes business at -2x standard deviation below its 5-year average
multiples. Our numbers build in an 18% volume decline for FY21, a longer time
for volumes to recover (FY23 volume assumption 8% lower than FY20), and
further increases in taxes (though unlikely in our view as further tax hikes would
lead to a decline in revenue for the exchequer). We believe a premium to global
averages is justified for ITC’s cigarette business given its strong moat (>75%
market share), higher proportion of other tobacco forms such as bidis providing
a conversion opportunity and mix improvement, and pricing power (price hikes
have historically been ahead of inflation).

ITC - BUY
Connecting data with best ideas
Company cashflow
Operating profit and cashflow
200,000 (Rsm) Op profit Op cashflow We see steady improvement in operating profit which
180,000
will be reflected in the operating cashflow. FY21 is likely
to be impacted by Covid-19, but growth will resume
160,000 from FY21. Receivable days has been volatile in the past
140,000
three years (17-30 days required), and we expect this to
settle at around 20 days over the medium term. On the
120,000 inventory side, we see a reduction from 65 days to about
100,000
62 days over the medium term. Payable days are likely to
inch up by a couple of days to around 30 days over the
80,000 medium term.
60,000
40,000
20,000
0
18A 19A 20A 21CL 22CL 23CL
Net profit, capex and free cashflow

200,000 (Rsm) Free cashflow Net profit Capex Earnings over FY15-FY20 saw a Cagr of 8%. We expect
earnings growth of 6% over FY20-23CL.
150,000 ITC's earnings to FCF conversion has remained healthy at

an average level of around 75% over the past five years.
We expect this trend to be sustained over the medium
100,000 term. In the long term, with reduced capital expenditure
needs, FCF will improve and earnings will expand.
50,000
(50,000)
18A 19A 20A 21CL 22CL 23CL
Net cash/share
40 (Rs/share) ITC had net cash of Rs335bn as at March 2020, 15% of
its current market capitalisation. The company revised its
35 dividend policy in December 2019 and is now looking to
distribute 80-85% of profit as dividend. We expect the
30 net cash position to expand gradually. While most
expansionary capex will be in its base business in the
25 next two years, we expect the company to fund growth
needs with in-organic moves.
20
15
10
0
18A 19A 20A 21CL 22CL 23CL
chirag.shah@clsa.com 9 October 2020

ITC - BUY
CG WATCH
Environmental, social & corporate governance (ESG)
CLSA ESG score Environmental & social (E&S)
In general, ITC scores above average within its country and ITC scores at par with the country average and slightly
sector peer groups. It scores well in many categories, which better than the Asia Pacific average. Its scorecard is
is unsurprising as the company is proactive in this area. negatively impacted by the cigarette business, where we
see significant social costs associated with consumption of
Given high revenue dependence on cigarettes, ITC has these products.
proactively been working on ESG metrics. The company has
published sustainability reports on an annual basis since ITC is looking to address this through diversification. Now,
2004. In the past two decades, ITC has undertaken a series more than 50% of revenue is from non-cigarette businesses.
of initiatives in the areas of carbon emissions, renewable With this increasing, we expect the issue to be addressed.
energy, water conservation, animal husbandry, and
empowering women.
Board composition Conclusion

ITC has 14 board members of which 10 are independent ITC is a professionally-managed company with no
directors. The company conducts an annual election of all shareholder having a controlling stake. Its largest
directors and requires directors with experience, shareholder is British American Tobacco Plc (through
qualification and diversification. subsidiaries) with 29.5%. ITC is a category leader in the core
cigarette business with >75% market share, and the
The firm has an audit committee (eight members), a CSR and business has healthy margins. Strong cash generation in the
sustainability committee (eight members), a nomination & core business is helping ITC create different vectors of
compensation committee (five members), a security holders growth. The long-term goal put forward by management is
relationship committee (four member), an independent Rs1trillion revenue from FMCG by FY30.
director committee (seven members), and a corporate
management committee (eight members). While there is no undue political interference, the core
business is influenced by regulatory actions.
Score versus country average

50 (ppts)
40
30
20
10
(10)
(20)
Discipline Transparency Independence Responsibility Fairness E&S Wtd ESG score
Criteria Score (%) Country avg (%) Country rank Asia Pac avg (%) Sector rank
Discipline 67 58 40 66 119
Transparency 90 80 51 69 68
Independence 58 46 32 49 85
Responsibility 100 56 1 71 1
Fairness 75 88 107 83 162
E&S 68 68 78 67 100
Wtd ESG score 77 66 17/162 67 64/272
9 October 2020 chirag.shah@clsa.com

We expect an industry-  FMCG business valued at Rs65/share, on 5x March 2022 sales: Our target value
leading 30% Ebitda Cagr for for the FMCG business of c.US$11bn (30% of overall value) is based on 5x
the FMCG business FY22CL EV/sales, implying a c.45% discount to the FMCG average (c.20% to
Britannia). We expect an industry-leading 30% Ebitda Cagr for the FMCG
business over FY20-23CL. While ITC’s margin profile for the FMCG business
even in FY23CL would be lower than its peers, we highlight that the benefits of
ITC having incubated a much larger category basket compared to peers, an
improving sales mix, falling incubation costs, operating leverage benefits, and its
ability to move into new categories with limited incremental investments , offer
significant long-term growth visibility and partially offset the lower margin
profile.
Figure 78
FMCG company valuation snapshot (Bloomberg consensus)

Name Mkt cap EV/Sales (x) EV/Ebitda (x) EV/Ebit (x)
(US$m)
Hindustan Unilever 73,305 11.4 10.0 43.0 36.2 47.4 39.9
Nestle 22,658 11.4 10.2 47.5 41.2 52.8 45.3
GCPL 10,878 7.4 6.8 33.3 29.7 35.9 32.1
Britannia 13,291 6.8 6.3 36.7 35.1 40.0 38.0
Dabur 13,508 10.2 9.0 47.3 40.9 53.8 45.8
Marico 6,949 6.3 5.7 29.9 27.0 33.0 29.8
P&G 4,703 9.8 8.3 42.8 35.6 45.7 38.4
Colgate 5,708 8.4 7.7 29.6 26.8 34.6 31.2
Emami 2,271 5.9 5.3 21.5 19.2 29.6 24.8
Industry 153,271 10.1 9.0 41.4 35.8 45.9 39.5
Note: Based on closing price on 7 Oct 2020. Source: Bloomberg, CLSA
We estimate that the PV of capital employed in the FMCG business since inception
implies 1.6x on FY20 sales (including initial losses and upfront investments) -
significantly lower than recent M&A benchmarks.
Figure 79
Consumer staple stocks are FY22 EV/sales valuation for FMCG stocks under coverage
trading at 5-10x FY22
EV/sales with weighted 11 (x)
average at 9x (ex-ITC) 10.0 10.2
10
9.0 9.0
9
8 7.7
7 6.8
6.3
6 5.7
5.3
5.0
5
4
ITC Emami Marico Britannia GCPL Colgate Dabur Sector HUL Nestle
Note: EV/Sales for peer companies based on Bloomberg consensus. Source: Bloomberg, CLSA

Figure 80
We value ITC’s FMCG ITC’s target price under different scenarios (based on EV/sales for FMCG)
business at Rs65/share
290 (based on EV/sales for ‘FMCG’) TP (LHS) As a % of TP (%) 50
Sector avg 265
270 45
254
40
250
235 35
230 Base case 220
30
210 201
25
186
190 181 20
170 15
150 10
2x 2.5x 3.5x 5x 6x 7.5x 8.5x
Source: CLSA
ITC a clear leader in the  Paper & Packaging business valued at Rs15/share, on 11x Mar 22 Ebitda:
value-added product Contrary to popular perception, ITC’s paperboard business is less cyclical due to
segment its backward-integrated nature. ITC is a clear leader in the value-added product
segment and it has consistently consolidated its preferred supplier position
amongst leading end-use customers and brands. Demand, although impacted
recently due to Covid-19, comes from the largely stable FMCG and
pharmaceuticals sectors. An EV/Ebitda multiple of 11x is reasonable for such a
relatively stable-growth business compared to peers.
Figure 81
We value ITC’s Paper Paper company valuation snapshot (Bloomberg consensus)

business at 11x Ebitda Name Mkt cap EV/Sales (x) EV/Ebitda (x) EV/Ebit (x)
(US$m)
Essel Propack 1,158 2.7 2.5 12.9 11.3 20.1 17.1
Huhtamaki Ppl 331 1.0 0.9 10.0 7.7 na na
JK Paper 229 1.2 0.6 10.6 10.0 26.5 4.0
Industry 1,719 2.2 1.9 12.1 10.5 17.1 12.0

 Hotels business valued at Rs2/share, on 10x Mar 22 Ebitda: With a large part
of the capex spend for hotels already done, the company is looking to
incrementally optimise investments and drive revenue and profitability.
Management has noted that it will go asset light for hotels, where the focus
would be on managed properties. We note that the business has now achieved
reasonable scale with 109 properties and more than 10,250 rooms under four
distinct brands that straddle the value chain. While we expect the business to
be significantly impacted due to extended lockdowns, a shift towards an asset
light model could create value in the long-run. However, we value the hotels
portfolio at 10x EV/Ebitda, a significant 30% discount to its listed peers.

Figure 82
We value ITC’s Hotel Hotels company valuation snapshot (On Bloomberg consensus)
business at 10x Ebitda, 30% Name Mkt cap EV/Sales (x) EV/Ebitda (x) EV/Ebit (x)
discount to peers (US$m)
Indian Hotels 1,731 5.0 3.4 68.0 15.1 nm 28.4
Delta Corp 436 5.2 3.1 22.2 8.5 23.9 10.7
Lemon Tree Hotels 321 12.2 7.0 38.6 17.1 208.1 27.5
Mahindra Holidays & Resorts 326 2.2 1.8 24.5 12.1 nm 48.3
Industry 2,814 5.5 3.6 52.5 14.0 27.4 27.9

Expecting a dividend  Dividend yield looks attractive: The large pile of cash and liquid investments at
yield of c.6% ITC’s disposal (US$4.6bn as at March 2020, c.16% of market cap) means the
dividend payout can be ramped up further. ITC’s updated dividend policy
(effective FY20) now states that the medium-term payout would be 80-85%
(compared to an average 57% over past three years), which implies a dividend
yield of c.6% on the stock at current market price.
 Key upside sensitivities: Given the cigarette division’s steady income growth
and potential future volume growth, its PE could rerate upwards on the back of
a stable regulatory tax environment. Also, as in the case of its peers such as
Britannia, a margin expansion in ITC’s FMCG business could lead to significant
rerating. We don’t see any immediate upside from business structuring/
demerger possibilities in the near term but a hive-off of non-core businesses,
and a move towards asset light models should help drive further investor
confidence.
ITC has put in place solid  Key risks to our call: Higher-than-expected rises in cigarette tax, entry into low
ESG standards margin/long gestation categories in the FMCG business, a sustained economic
slowdown, an extended lockdown permanently damaging volumes for the
cigarette business, and a technical stock overhang from the government’s
SUUTI stake sale are key risks to our call. An increasing focus on ESG remains
an issue for tobacco stocks, although we highlight that notwithstanding its core
cigarette business, ITC has set solid ESG standards.
Covid-19 bringing negatives  Covid-19 likely to negatively affect FY21, but benefit FMCG: Outside FMCG,
and positives we see a Covid-driven operational impact. In cigarettes, we expect a material
impact of a c.18% volume decline in FY21. In Q1FY21, volumes plummeted 40%
YoY. We see both demand (restricted movement, no category recruitment and
extended lockdowns helping some users quit) and supply (convenience store
closures) putting pressure on the business in the near term. We expect ITC’s
FMCG business to continue to benefit from health and hygiene trends with 75%
of the FMCG portfolio set to benefit from the demand acceleration brought
about by Covid (in Q1FY21, the company registered 34% growth for the
relevant 75% of the portfolio). Its other businesses, including paper, hotel and
agri, are highly correlated to economic growth and are likely to be impacted in
FY21.

Figure 83
FMCG makes up 30% of our Target price contribution by segment

target price Net cash
13%
Hotels
1%
Paperboards &
packaging
7%
Cigarette
Agri business 47%
2%
FMCG others
30%
Source: CLSA
Figure 84
ITC has built a war chest for ITC’s liquid asset position and other income contributions to profit before tax
M&A opportunities 400 (Rsbn) Liquid assets (LHS) Other income contribution to PBT (%) 20
350 18
16
300
14
250 12
200 10
150 8
6
100
4
50 2
0 0
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18
FY19
FY20
Source: ITC, CLSA
Key assumptions: snippets from our model

Cigarette volumes impacted  Cigarettes: We expect an 18% volume decline for FY21, affected by extended
by Covid lockdowns and the unavailability of convenience stores. For FY22, with
improved supplies and our expectations of a mid-single digit tax hike, we expect
volumes to see a recovery of 12% from the low base of FY21. We expect flat
volumes for FY23, also with mid-single digit annual tax hikes.
Plenty of tailwinds for  FMCG business: We expect an 11% revenue Cagr for FY20-FY23. The business
FMCG is likely to benefit from Covid-19 as 75% of its portfolio covers in-demand
health and hygiene products. However, the remaining 25% is likely to take some
time to recover. Our estimate for FY21 takes into account the Sunrise
acquisition in FY21 (10 months) and we expect a 4% sales contribution from the
acquisition. With organic growth of 8%, we see 12% growth in FY21. We expect
margin expansion to continue and build a 400 bps Ebitda margin expansion over
FY21-23, on the back of business growth, an improving sales mix, falling
incubation costs, operating leverage benefits, and its ability to move into new
categories with limited incremental investments.

Hotels won’t recover fully  Other businesses: We expect high-single digit growth and steady margins for
until FY24 the agri-business. Given its highly seasonal nature, there could be volatility in
agri-business performance. For hotels, we expect a significantly delayed
recovery as both leisure and business travel is likely to remain impacted over
the near-to-midterm. We estimate a 45% revenue decline for FY21 and expect
a complete business recovery only by FY24 with the resumption of economic
growth. With cost savings in place, we expect gradual margin recovery. In paper
and packaging, while FMCG and healthcare are likely to drive revenues, we
expect demand pressure for other parts of the business in the near term. Over
the medium term we expect a gradual business recovery.
Capex to average about  Balance sheet assumptions: We expect capex spend to average about Rs20bn
Rs20bn for the next per year for the next three years. Net working capital requirements would be
three years around 52 days, relatively high compared to FMCG peers due to its high wheat
inventory holding. In the absence of any in-organic acquisitions liquid assets are
likely to grow annually.
Figure 85
We see volume decline of Key assumptions - Segment

18% for the cigarette FY19 FY20 21CL 22CL 23CL
business in FY21, partial Cigarette
recovery of c.12% in FY22 Gross revenue (Rsbn) 459 460 413 484 507
Growth (% YoY) 28.0 0.2 (10.2) 17.1 4.8
Indirect tax (Rsbn) 259 260 241 283 300
As a % of gross 56.6 56.5 58.3 58.5 59.2
Net revenue (Rsbn) 199 200 172 201 207
Growth (% YoY) 28.0 0.2 (10.2) 17.1 4.8
Volume (m sticks) 76 75 62 69 69
Volumes (% YoY) 6.5 (0.6) (18.0) 12.0 -
Net realisation (% YoY) 2.2 0.9 9.5 4.6 4.8
Ebitda (Rsbn) 148 151 130 152 156
Ebitda (% YoY) 8.9 2.2 (13.8) 16.3 2.9
Ebit 146 149 128 149 153
Ebit margin (%) 73.0 74.2 74.1 74.2 74.2
Ebit (% YoY) 9.1 2.1 (14.0) 16.6 3.0
Estimated PAT (Rsbn) 92 103 88 105 108
Estimates EPS (Rs) 7.47 8.38 7.15 8.43 8.69
FMCG
We expect organic growth Revenue (Rsbn) 125 128 144 160 178
of c.8% for FY21, inorganic Growth (% YoY) 10.5 2.7 12.2 11.0 11.0
Ebitda (Rsbn) 8 9 12 15 19
growth of c.4%
Ebitda growth (% YoY) 66.5 20.5 35.7 22.3 28.2
Ebitda margin (%) 6.1 7.1 8.6 9.5 11.0
Hotels
Revenue (Rsbn) 17 18 10 14 17
Growth (% YoY) 17.5 10.3 (45.0) 40.0 20.0
Ebitda (Rsbn) 4 4 (2) 3 3
Ebitda growth (% YoY) 19.8 12.2 nm nm 19.6
Ebitda margin (%) 22.5 22.9 (20.2) 19.5 19.5
Agri-business
Revenue (Rsbn) 94 102 111 119 129
Growth (% YoY) 16.5 9.0 8.0 8.0 8.0
Ebitda (Rsbn) 8 9 9 10 11
Ebitda growth (% YoY) (7.4) 1.6 5.1 7.7 7.8
Ebitda margin (%) 9.0 8.4 8.2 8.2 8.2
Paperboards
Revenue (Rsbn) 59 61 57 62 67
Growth (% YoY) 13.4 4.2 (7.0) 10.0 8.0
Ebitda (Rsbn) 16 17 14 17 18
Ebitda growth (% YoY) 18.9 6.2 (14.9) 18.8 8.5
Ebitda margin (%) 26.7 27.2 24.9 26.9 27.1
Source: ITC, CLSA

Figure 86
We expect capex to Key assumptions - Balance sheet

gradually decline FY19 FY20 21CL 22CL 23CL
Capex (Rsbn) 27.6 23.1 21.5 20.1 18.7
Working capital days 65 54 52 52 52
Inventory days 62 65 62 62 62
Receivable days 30 17 20 20 20
Payable days 28 28 30 30 30
Liquid assets (Rsbn) 257 338 358 410 457
Source: ITC, CLSA
Figure 87
We expect an OP Cagr of ITC - Profit and loss statement

5% over FY20-23CL (Rsbn) FY19 FY20 21CL 22CL 23CL
Net revenue
Cigarette 199 200 172 201 207
FMCG 125 128 144 160 178
Hotels 17 18 10 14 17
Agri 94 102 111 119 129
Paper 59 61 57 62 67
Inter-segment (49) (59) (59) (65) (71)
Overall 444 451 435 492 526
Ebitda
Cigarette 148 151 130 152 156
FMCG 8 9 12 15 19
Hotels 4 4 (2) 3 3
Agri 8 9 9 10 11
Paper 16 17 14 17 18
Unallocated (11) (11) (9) (8) (8)
Overall 173 179 155 188 200
Ebit
Cigarette 146 149 128 149 153
FMCG 4 4 7 10 14
Hotels 2 2 (5) (1) (0)
Agri 8 8 8 9 10
Paper 12 13 10 12 13
Unallocated (11) (11) (10) (10) (9)
Overall 161 164 138 170 181
P&L
Ebit 161 164 138 170 181
Interest (0) (1) (1) (1) (1)
Financial income 24 29 33 40 48
PBT 184 193 171 209 228
Tax (60) (49) (43) (53) (58)
Earnings likely to see a Cagr Adjusted PAT 125 144 127 156 170
of 6% over FY20-23CL Exceptional - 7 - - -
Reported PAT 125 151 127 156 170
Number of shares (m) 12,259 12,292 12,323 12,354 12,385
Adjusted EPS ( Rs/Sh) 10.17 11.72 10.33 12.61 13.72
Source: ITC, CLSA

Figure 88
Earnings likely to see a Cagr ITC - Summary profit and loss statement
of 6% over FY20-23CL (Rsbn) FY19 FY20 21CL 22CL 23CL
Net revenue 444 451 435 492 526
Other operating income 6 5 5 6 7
Total income 450 456 440 498 533
Cogs (173) (172) (179) (195) (210)
Gross profit 277 284 262 303 323
Staff costs (27) (27) (27) (29) (31)
A&P spends (10) (10) (10) (12) (13)
Other operating expenses (67) (68) (69) (74) (80)
Ebitda 173 179 155 188 200
Depreciation (13) (16) (17) (18) (19)
Ebit 160 163 138 170 181
Interest (0) (1) (1) (1) (1)
Financial income 25 30 33 40 48
PBT 184 193 171 209 228
Tax (60) (49) (43) (53) (58)
Adjusted PAT 125 144 127 156 170
Exceptional - 7 - - -
Reported PAT 125 151 127 156 170
Number of shares 12,259 12,292 12,323 12,354 12,385
Adjusted EPS (Rs/sh) 10.17 11.72 10.33 12.61 13.72
Source: ITC, CLSA
CLSA earnings estimates versus consensus

We capture the effects of a We believe investors are expecting further tax increases on cigarettes. Our earnings
delayed volume recovery, estimates build in a much longer time for volume recovery (our FY23 volume
reflected in our lower-than- assumption is 8% lower than FY20) and we expect flat margins over the next three
-consensus earnings
years. This is reflected in our estimates being 5-7% below consensus. A stable tax
expectations
regime could however provide significant upside to our expectations.
Figure 89
ITC - Price to earnings
35 (x) ITC 10Y Average +2SD -2SD
30
25
20
15
10
Oct 10 Oct 11 Oct 12 Oct 13 Oct 14 Oct 15 Oct 16 Oct 17 Oct 18 Oct 19 Oct 20
Source: Bloomberg, CLSA

Bull case implies 56% total shareholder return, valuation of Rs255

Total shareholder return We arrive at a valuation of Rs255 for our bull case which implies a total shareholder
of 56% return of about 56% over the current market price, including the dividend for FY21.
Our bull case includes these assumptions:
 Cigarettes: No tax hike until FY23, which means a volume recovery of c.12%
over FY22-23 from the low base of FY21, where we expect volume erosion of
18%. We expect 100bps expansion in the Ebit margin. This scenario assumes a
40% valuation discount to its historical trading average (26x for the past 10
years).
Expecting fast revenue  FMCG: We expect accelerated revenue growth at c.15%. We expect a 400bps
growth margin expansion over FY21-23CL. We assign a 33% discount to the sector
EV/Sales multiple.
Figure 90
SOTP valuation - Bull case

Cigarette PE Net profit 103.8 14.0 118 1,453 19.7 c.45% discount to its 10Y Avg. PE
FMCG others EV/Sales Sales 176.1 6.0 86 1,056 14.4 c.33% discount to FMCG peers
Agri business EV/Ebitda Ebitda 9.8 6.0 5 59 0.8 In-line with peers
Paperboards & EV/Ebitda Ebitda 16.8 11.0 15 185 2.5 In-line with peers
packaging
Hotels EV/Ebitda Ebitda 2.8 10.0 2 28 0.4 c.30% discount to Hotel peers
Net cash Net cash 349.4 1.0 28 349 4.7 Cash as at Mar 21
Fair value 255 3,130 42.5
Upside 50
Total shareholder return 56
Note 1: Current price considered as of close of business on 7 Oct 2020. Note 2: Cigarette EPS is arrived after adjusting for corporate overheads and without
Figure 91
34% contribution Bull case: Valuation contribution by segment

from FMCG
Net cash
11%
Hotels
1%
Paperboards &
packaging
6%
Cigarette
Agri business 46%
2%
FMCG others
34%
Source: CLSA

Bear case implies -12% total shareholder return, valuation of Rs140

We arrive at a valuation of Rs140, which implies -12% total shareholder return,
including dividend for FY21. We have made these assumptions:
We assume a cigarette  Cigarettes: We expect low double-digit annual tax hikes which would likely
volume recovery of only 7% affect volume recovery. We assume volume recovery will be only 7% over FY22-
for FY21 23 from a low base of FY21, where we expect volume erosion of 18%. We
expect volume pressure will result in an Ebit margin contraction of about 140bps
over FY20-23CL. This scenario assumes a 70% valuation discount to its
historical trading average (26x for the past 10 years).
Slower margin expansion  FMCG: We expect growth at about 10%. We have assumed slower margin
for FMCG (260bps) expansion for the business over FY21-23CL. We assign a c.70%
discount to the sector EV/Sales multiple.
Figure 92
SOTP valuation - Bear case

Cigarette PE Net profit 97.4 7.0 55 682 9.3 c.75% discount to its 10Y Avg. PE
FMCG others EV/Sales Sales 158.5 2.5 32 396 5.4 c.70% discount to FMCG peers
Agri business EV/Ebitda Ebitda 9.9 6.0 5 60 0.8 In-line with peers
Paperboards & EV/Ebitda Ebitda 16.0 11.0 14 176 2.4 In-line with peers
packaging
Hotels EV/Ebitda Ebitda 14.1 2.0 2 28 0.4 c.40% discount to Hotel peers
Net cash Net cash 348.8 1.0 28 349 4.7 Cash as at Mar 21
Fair value 140 1,690 23.3
Upside (18)
Total shareholder return (12)
Note 1: Current price considered as of close of business on 7 Oct 2020. Note 2: Cigarette EPS is arrived after adjusting for corporate overheads and without
Figure 93
FMCG makes up 24% of our Bear case: Valuation contribution by segment

bear case valuation
Net cash
21%
Cigarette
Hotels 40%
2%
Paperboards &
packaging
10%
FMCG others
Agri business 24%
3%
Source: CLSA

Another strong FCF business feeding a value creating business?

Unlikely that any part Cross synergies and ITC’s big ambitions for FMCG may restrict any demergers.
of the FMCG business will However, the scaling up of the FMCG business could provide yet another example
be spun off (similar to Reliance) of a low growth but large FCF-generating business successfully
seeding a high-growth value-creating business. As we saw in the case of Reliance,
a demerger may not be necessary to create value. Along with this, the cigarettes
business has been able to continually fund the aspirations of the FMCG business.
We believe the following factors may deter ITC from a demerger in the near term:
 Supply chain: creating a separate supply chain network would be a daunting and
expensive task. As per our checks, pilot projects undertaken by ITC to separate
distributors have not done that well;
Cigarette business critical  Aggressive top line expansion would require continued cashflow support from
for FMCG business support the core business;
 Backward Integration from paper and agri is a competitive advantage;
 Talent pool: a separate business would not be able to leverage the talent pool,
which is usually shared between segments;
 Gestation costs for new businesses can be better supported by a combined entity;
Combined entities could  Tax benefits: for a new entity, given the losses made in its initial years, tax
pay less tax benefits will be delayed. A combined entity benefits from the losses through a
lower tax pay-out;
 The FMCG business relies on cigarette distribution, agri-sourcing and in-house
packaging.
Figure 94
Segment inter-dependence A simplified representation of material flow in ITC’s businesses

makes ITC strong
Source: ITC, CLSA

Figure 95
Synergies across its FMCG business cycle

businesses offer
significant benefits
Source: ITC, CLSA
Cigarette business valued at 6.5x March 22 earnings

ITC share price impacted by Prospects for legal cigarettes in India deteriorated in the past decade, affected
the deteriorating prospects primarily by steady increases in taxation and the implementation of WHO
for cigarettes recommendations. These issues, along with increasing ESG awareness, have been
reflected in ITC’s share price performance. The implied valuation of the cigarette
business (at c.6.5x PE for March 2022) is a discount of c.30% to the global peer
average. It is also below its own -2x SD average of the past five years. Regulatory
headwinds in the cigarette business could restrict a material rerating but the recent
stock price correction already bakes in further tax increases (although we think they
are unlikely).
Reverse SOTP implies cigarette business valuation of 6.5x March 2022 PE

Cigarette business valued at A reverse SOTP valuation, based on our base case valuation for the non-cigarette
6.5x March 2022 earnings businesses, shows the cigarette business is effectively valued at 6.5x March 2022
earnings, based on the current market price.

Figure 96
On our reverse SOTP we Reverse SOTP for ITC

see cigarette business (Rsm) Comments
valued at 6.5x March 22 ITC’s current market capitalisation and enterprise value
earnings
Price (Rs/share) 170 Current share price
Shares (m) 12,323 As of Mar 21CL
Market capitalisation 2,094,898
Add: Debt 3,298 As of Mar 21CL
Less: Cash (351,873) As of Mar 21CL
Enterprise value 1,746,322
Valuation of FMCG segment
Revenues 159,971 Mar 22CL
EV/Sales (x) 5 45% discount to FMCG peers
Enterprise value 799,853 (a)
Valuation of Hotels segment
Ebitda 2,759 Mar 22CL
EV/Ebitda (x) 10 30% discount to Hotel peers
Enterprise value 27,593 (b)
Valuation of Agri business segment
EV/Ebitda (x) 6 In-line with peers
Enterprise value 58,567 (c)
Valuation of paperboard, paper and packaging segment
EV/Ebitda (x) 11 In-line with peers
Enterprise value (d) 185,033 (d)
Implied valuation of cigarettes
Total EV 1,746,322 (f)
Less: Other businesses 1,071,046 (g) = (a)+(b)+(c)+(d)
Core cigarette business value 675,276 (f)-(g)
Core cigarette business value (Rs/sh) 54.80
Cigarette earnings (Rs/share) 8.5 Mar 22CL
Implied PE (x) 6.5 Mar 22CL
Note: Based on 7 Oct 2020 closing stock price. Source: CLSA
Implied cigarette valuation is a 30% discount to global peers

Figure 97
ITC’s core cigarette FY22/Mar 22 PE for global tobacco companies

business is trading at a
discount of c.30% 16 (x)
13.6
14
11.3
12 11.0
9.4
10 8.5 9.1
7.9 8.2
8 6.5
6 5.3
4
2
0
Gudang Garam
Phillip Morris
Imperial Tobacco
ITC
Average
Kt&G Corp
BAT Malaysia
Altria Group
Japan Tobacco Inc

BAT Plc
Note: ITC’s 6.5x PE is on implied basis for cigarette business. Source: Bloomberg, CLSA

Cigarette valuation gradually derated on the back of GST and ESG concerns
Taxes and ESG concerns Based on a similar SOTP methodology as shown in Figure 96, we have created a
have driven a derating long-term 1-year forward PE chart for the cigarette business (Figure 98). We can
see a sharp derating of the business since the implementation of the GST in July
2017, while at around the same time ESG concerns also began to contribute to the
derating.
Figure 98
ITC’s cigarette 1 year ITC’s one-year forward core cigarette PE

forward PE at c.9x
(x) ITC (core cigarette) 1-yr fwd PE (x) 5Y average +2SD -2SD
40
35
30
25
20
15
10
0
Oct 15 Apr 16 Oct 16 Apr 17 Oct 17 Apr 18 Oct 18 Apr 19 Oct 19 Apr 20 Oct 20
Source: ITC, Bloomberg, CLSA
February’s tax hike accelerated the derating

The valuation gap with Historically, ITC has enjoyed a valuation premium to global peers given a number of
peers has closed tailwinds including growth prospects for its core cigarette business (which bucks
the global trend) and steady margin expansion. In line with global trends, ITC’s stock
has derated amid an increasing investor awareness of ESG concerns. In February
2020, the central government raised the effective tax rate by 13%, accelerating the
derating process and closing the valuation gap that ITC had with global peers.
Figure 99
Cigarette valuation now at a ITC’s core cigarette 1-year fwd PE versus cigarette companies in developed and emerging markets
discount to emerging and
developed market peers (x) ITC (core cigarette) Developed Emerging markets
40
GST implementation
effective Jul 17
35 13% effective tax
hike in union budget
Introduction of
ad-valorem charge
30
25
20
GST rate hike
concerns
15
10
5
Oct 15 Apr 16 Oct 16 Apr 17 Oct 17 Apr 18 Oct 18 Apr 19 Oct 19 Apr 20 Oct 20
Note 1: Developed markets includes Phillip Morris International, BAT, Altria and Japan Tobacco; Note 2: Emerging
market includes BAT Malaysia, KT&G and Gudang Garam. Source: ITC, Bloomberg, CLSA

Historical cigarette valuation premium has narrowed

No tax hikes expected until ITC’s cigarette business valuation premium (c. 70% to both developed and emerging
volumes stabilise market peers) has gradually narrowed to a 7% premium to emerging market peers
and 7% discount to developed market peers. In the current setting amid declining
government revenues, there is talk of a GST hike. If this happens it is likely to hurt
the recovery of cigarette volumes and lead to a further surge in the share of ille gal
products (25% of the market today). As we have mentioned, we see a low
probability of any near term cigarette tax hikes. Instead, we expect annual tax hikes
of mid- to high-single digits only after cigarette volumes stabilise.
Figure 100
Premium/(discount) of ITC’s core PE versus regional peers
180 (%) Developed Emerging markets
160
140
120
100
80
60
40
20
0
(20)
Oct 15 Oct 16 Oct 17 Oct 18 Oct 19 Oct 20
Source: ITC, Bloomberg, CLSA
Figure 101
Global tobacco company valuations

Company Mkt cap CMP PE (x) EV/Ebitda (x) EV/Sales (x) RoE (%)
(US$bn)
FY21E FY22E FY21E FY22E FY21E FY22E FY21E FY22E
Phillip Morris International 117.58 US$75.5 14.9 13.4 11.7 10.6 5.1 4.7 (68.5) (80.9)
Altria Group Inc 73.59 US$39.6 9.2 8.7 8.6 8.2 4.8 4.7 118.2 107.8
British American Tobacco Plc 81.53 GBp2,760.0 8.4 7.9 9.0 8.6 4.3 4.1 11.1 11.2
Japan Tobacco Inc 37.59 Ұ1,991.5 12.3 11.2 7.3 6.9 2.2 2.1 11.2 13.0
Imperial Tobacco Group Plc 16.57 GBp1,359.5 5.3 5.1 7.2 6.9 3.1 3.1 27.2 43.3
Kt&G Corp 9.85 ₩83,100 10.0 9.6 5.4 5.1 1.7 1.6 12.4 12.3
Gudang Garam Tbk Pt 5.60 Rp42,950 9.4 8.4 5.6 5.1 0.7 0.7 16.2 17.0
British American Tobacco Bhd 0.69 RM10.04 11.6 11.3 9.5 9.3 1.6 1.6 64.3 63.2
Average 9.9 9.2 7.8 7.3 3.1 3.0 18.2 17.7
ITC Ltd - Overall 28.46 Rs169.5 16.5 13.5 11.7 9.4 4.0 3.5 19.7 23.1

Figure 102
Performance of global and domestic tobacco listed companies

Company Mkt cap 1 month 3 month 6 month 1 year 3 year 5 year 10 year
(US$bn) (%) (%) (%) (%) Cagr (%) Cagr (%) Cagr (%)
Phillip Morris International 117.58 (5) 4 1 (2) (12) (2) 3
Altria Group Inc 73.59 (9) (1) 3 (6) (14) (7) 5
British American Tobacco Plc 81.53 7 (10) (6) (2) (17) (6) 2
Japan Tobacco Inc 37.59 1 1 0 (15) (19) (14) 4
Imperial Tobacco Group Plc 16.57 3 (8) (13) (26) (24) (17) (3)
Kt&G Corp 9.85 0 5 8 (19) (8) (5) 2
Gudang Garam Tbk Pt 5.60 (9) (8) (11) (13) (14) 0 (2)
British American Tobacco Bhd 0.69 (1) (5) (7) (45) (39) (30) (15)
ITC 28.46 (10) (13) (7) (33) (14) (6) 4
VST Industries 0.70 1 3 20 (9) 5 16 19
Godfrey Phillips India 0.64 (2) (7) (8) (3) (4) 8 10
Net present value also suggests significant upside

NPV methodology implies We have also used a net present value (NPV) methodology to evaluate the fair value
Rs110/share for cigarettes, of ITC. We arrive at an NPV of Rs110/share for the cigarette business based on
Rs60/share for FMCG cigarette Ebit growth of 4% in the next 10 years. This appears pessimistic and in
the absence of any tax shocks ITC should be able to deliver at least high-single or
even double-digit growth. We arrive at an NPV of Rs60/share for the FMCG
business. ITC has set an ambitious target of Rs1trillion in revenue by FY30 from the
FMCG business and our NPV assumes a 14% revenue Cagr, implying a 53% discount
to the company’s target. For the balance of the business, we assign a 1x capital
employed multiple on FY21CL.
Figure 103
NPV-based share price calculation
(Rsbn) Assumptions
Cigarette business valuation
NPV (FY21-30CL) 732 Terminal growth (%) 3.0
NPV of terminal value 620 Cost of equity (%) 12.0
Cigarette EV 1,353
Cigarette (Rs/sh) - Mar 21 110
Ambitious Rs1tn revenue FMCG business valuation

target for FMCG NPV (FY21-30CL) 111 Terminal growth (%) 7.0
NPV of terminal value 629 Cost of equity (%) 10.2
FMCG EV 740
FMCG (Rs/sh) - Mar 21 60
For other business, we Other businesses

assign a 1x capital Combined FY21 capital employed 158
employed multiple Multiple (x) 1
on FY21CL
Other business (Rs/sh) - Mar 21 13
ITC justified valuation
Business valuation 192
Net cash (1x Mar 21) 29
Justified value - Mar 21 220
Current price 170
Upside (%) 29
Note: Current price considered as of close of business on 7 Oct 2020. Source: CLSA

Cigarette business NPV at Rs110/share

For the cigarette business we see a March 2021 fair value of Rs110/sh based on
our NPV approach.
Figure 104
FCF analysis of the cigarette business
(Rsm) 21CL 22CL 23CL 24CL 25CL 26CL 27CL 28CL 29CL 30CL
Ebit 127,721 148,983 153,395 161,065 169,118 177,574 186,453 195,775 205,564 215,842
Corp. other exp. (3,903) (3,827) (3,506) (3,681) (3,866) (4,059) (4,262) (4,475) (4,699) (4,934)
Adjusted Ebit 123,818 145,156 149,889 157,383 165,252 173,515 182,191 191,300 200,865 210,909
Depreciation (2,726) (2,726) (2,726) (2,776) (2,826) (2,876) (2,926) (2,976) (3,026) (3,076)
Adjusted Ebitda 126,544 147,882 152,614 160,159 168,078 176,391 185,116 194,276 203,891 213,984
Tax on Ebit (31,165) (36,536) (37,727) (39,613) (41,594) (43,674) (45,857) (48,150) (50,558) (53,086)
Capex (1,325) (1,352) (1,379) (1,434) (1,491) (1,551) (1,613) (1,677) (1,745) (1,814)
FCF 94,053 109,994 113,509 119,112 124,993 131,166 137,646 144,448 151,589 159,084
NPV 88,872 92,799 85,504 80,111 75,059 70,327 65,894 61,742 57,851 54,207
Source: CLSA
Key assumptions - cigarettes

COE of 12% is higher than  We assume cost of equity at 12% (risk free rate at 6%, Beta 0.7x and country
FMCG premium of 8.45%); higher than the FMCG business to factor in regulatory risks
and ESG concerns.
 We assume 3% as the terminal growth rate, which has to be viewed in the context
of: a) high inflation in India, which is also reflected in our cost of equity; b)
proportion of other tobacco forms such as bidis providing a conversion opportunity;
c) mix improvement and pricing power (price hikes being ahead of inflation).
Depreciation is likely to  We assume corporate expenses, depreciation and capex to rise at the same rate as
remain higher than capex Ebit. There is no need for expansionary capex in the business, as cigarettes is a
declining volume category. As such, depreciation is likely to remain higher than capex.
 Based on the above, we derive cigarette Ebit growth of 4% in the next 10 years;
this appears pessimistic and in the absence of any tax shocks, ITC should be able
to deliver at least high-single or even double-digit growth.
Ebit Cagr of 6% in the past  We note that over the past decade, ITC’s cigarette Ebit Cagr was c.12% while it
five years was c.6% in the past five years despite rising volume pressures.
FMCG business NPV at Rs60/share

Anticipating FMCG revenue ITC’s FMCG business has been in investment mode for many years and has set itself
of Rs472billion by FY30 an ambitious target of achieving Rs1 trillion in revenue by FY30. Our NPV
calculation builds in FY30 revenue of Rs472bn, with a 53% Cagr and margins
progressively moving towards 16% over FY30, and a terminal growth rate of 7%.
NPV calculation of investments in FMCG since FY02

FMCG capex largely in the We have analysed cumulative investments and cash profit/(loss) for the last 19
money with 7% Cagr return years. We estimate that at a 10% discount rate, the total present value of
investments is about Rs204bn (as at March 2020). On FY20 revenues, this implies
1.6x on FY20 sales - much lower than the going rate of about 5-7x at which
acquisitions have been taking place in the sector in recent years. Assuming a value
of 5x 23CL EV/sales, the implied ROI for the FMCG business vis-à-vis its value
would be a 7% Cagr (over FY02-20); we expect this to move up as the business
gains scale and capital intensity comes down.

Figure 105
FMCG present value of investment (at 10% WACC) in the business (FY02-FY10)
(Rsm) FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10
Ebitda (723) (1,189) (1,694) (1,881) (1,586) (1,819) (2,214) (4,170) (2,678)
Ebit (734) (1,224) (1,744) (1,952) (1,718) (2,020) (2,635) (4,835) (3,495)
Tax rate (%) 33.25 33. 31.3 31.3 30.2 31.2 31.8 32.4 32.5
Cash profit/(loss) (479) (781) (1,148) (1,270) (1,067) (1,188) (1,377) (2,605) (1,543)
Cumulative PV of cash profit (a) (2,930) (7,272) (13,076) (18,910) (23,366) (27,877) (32,630) (40,804) (45,207)
Capital employed 580 804 2,121 2,623 4,893 9,623 18,267 20,866 17,191
PV of capital employed (b) 3,547 4,991 11,897 14,528 24,560 43,284 74,581 84,827 76,670
PV of investment (b-a) 6,477 12,263 24,973 33,438 47,926 71,162 107,211 125,632 121,876
Note: Cash profit = Ebitda - Ebit x (tax rate). Source: Company, CLSA
Figure 106
FMCG present value of investment (at 10% WACC) in the business (FY11-20CL)
FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20
Ebitda (2,044) (922) 442 1,650 2,117 3,062 2,647 4,556 7,587 9,140
Ebit (2,976) (1,955) (813) 218 341 1,018 281 1,641 3,862 4,231
Tax rate (%) 31.4 30.7 30.7 31.3 31.4 35.4 34.2 33.4 32.4 25.4
Cash profit/(loss) (1,110) (321) 691 1,582 2,010 2,702 2,551 4,008 6,335 8,066
Cumulated PV of cash profit (a) (48,085) (48,841) (47,359) (44,277) (40,716) (36,365) (32,631) (27,296) (19,631) (10,758)
Capital employed 18,971 19,890 25,319 33,835 39,879 49,110 57,067 57,167 60,758 65,609
PV of capital employed (b) 83,707 88,310 102,636 122,022 135,875 154,034 169,147 173,159 182,012 192,749
PV of investment (b-a) 131,792 137,151 149,995 166,299 176,591 190,399 201,778 200,456 201,643 203,507
Note: Cash profit = Ebitda - Ebit x (tax rate). Source: Company, CLSA
Figure 107
FCF analysis of the FMCG business
(Rsm) 21CL 22CL 23CL 24CL 25CL 26CL 27CL 28CL 29CL 30CL
Ebit 7,000 9,000 12,000 19,463 25,370 31,210 38,129 46,341 56,064 67,617
Corp. other exp. (2,774) (2,589) (2,545) (2,850) (3,192) (3,575) (4,004) (4,485) (5,023) (5,626)
Adjusted Ebit 4,226 6,411 9,455 16,613 22,178 27,635 34,125 41,856 51,041 61,991
Depreciation (2,774) (2,589) (2,545) (2,850) (3,192) (3,575) (4,004) (4,485) (5,023) (5,626)
Adjusted Ebitda 9,626 12,082 15,409 22,902 28,771 34,533 41,373 49,485 59,096 70,473
Tax on Ebit (1,064) (1,614) (2,380) (4,182) (5,582) (6,956) (8,589) (10,535) (12,847) (15,603)
Capex (6,500) (7,000) (6,000) (5,500) (5,000) (5,000) (5,750) (6,250) (7,000) (7,000)
FCF 2,063 3,468 7,029 13,221 18,189 22,577 27,034 32,700 39,249 47,869
NPV 1,965 2,997 5,511 9,403 11,737 13,217 14,358 15,756 17,157 18,984
Source: CLSA
Key assumptions - FMCG

COE justified by strong  We assume a cost of equity at 10.2% (risk free rate at 6%, Beta 0.5x and country
brand and stable earnings premium of 8.45%) which we believe is justified due to the strong brand
visibility strength and relatively stable earnings growth visibility.
 We assume 7% as the terminal growth rate, which has to be viewed in the
context of strong opportunity in the organised foods and beverages space (a
large part is unorganised) and economic growth leading to sustained increase s
in per capita consumption (currently much lower than global).
 We assume corporate expenses and depreciation to rise at the same rate as Ebit.
Ebit growth of 45% in the  Based on the above, we derive FMCG Ebit growth of 45% over the next 10 years
next 10 years which is a reflection of the mid-teen topline and the potential for steady margin
expansion.

Attractive FCF and divided yield

Our estimates show FCF yield on the current price is pegged at c.5% for ITC, which
is relatively better than FMCG peers. On our target price of Rs220, FCF yield is
pegged at c.4% for FY22.
Figure 108
At the current price, ITC’s FCF yield across FMCG companies - FY22
FCF yield is the highest
(%)
6
5.4
3
2.5 2.5
2.2 2.1
1.9
2 1.7 1.6 1.6
0
ITC Colgate Marico Nestle Dabur HUL Emami Britannia GCPL
Note: Current price considered as of close of business on 7 Oct 2020. Source: Bloomberg, CLSA
Dividend yield is the best in Similarly, at current price with an 80-85% dividend payout, ITC offers a 6% dividend
our coverage universe yield, which is the best in our coverage universe. We think that with this, total
shareholder returns should be 36%.
Figure 109
ITC’s dividend yield remains Dividend yield across FMCG companies - FY22
attractive vs other
FMCG peers (%)
7
6.3
3
2.4
1.9 1.9
2
1.5
1.3 1.3 1.2
1 0.6
0
ITC Ltd Colgate HUL Marico GCPL Britannia Emami Nestle Dabur
Note: Current price considered as of close of business on 7 Oct 2020. Source: Bloomberg, CLSA

Strategic changes to capital allocation address some concerns

Moving to an asset ITC has made significant front-end manufacturing investments in its FMCG
light model business. Along with this, the 39% cumulative share of capex from the hotels, paper
& packaging businesses in the past five years was concerning. We expect some of
these concerns to be addressed as the hotels business moves towards an asset light
model, asset turnover rates improve for the FMCG business, and the dividend
payout increases (80-85% of profit after tax). With a large part of the capex spend
in hotels, the company is incrementally looking to optimise investment there and
drive revenue and profitability. Management has noted that it will go asset light for
hotels, where the focus would now be on managed properties. With its strong
desire to accelerate expansion in FMCG, we see a large part of ITC’s capex
remaining in this segment. Overall, we see average capex spend falling from
c.Rs26bn in the past five years to c.Rs20bn for next three.
Figure 110
Past five years capex spend Annual capex trend

was Rs130bn: 37% FMCG,
21% hotels, 18% paper 23CL
22CL
21CL
FY20
FY19
Cigarettes
FY18
FY17 FMCG
FY16 Hotels
FY15 Agri business

FY14 Paperboards
FY13
FY12
FY11 (Rsm)
0 5,000 10,000 15,000 20,000 25,000 30,000
Figure 111
FMCG capex made up Capex spend in ‘FMCG’ segment

>30% of overall annual
spend in the past five years 14 (Rsbn) Other-FMCG capex % of overall capex (RHS) (%) 60
12 50
10
40
8
30
6
20
4
2 10
0 0
Source: ITC, CLSA

Figure 112
After spending on three Capex spend in hotel segment

properties, ITC plans to 12 (Rsbn) Hotel capex % of total (RHS) (%) 45
keep its business asset light
40
10
35
8 30
25
6
20
4 15
10
2
5
0 0
Source: ITC, CLSA
Figure 113
Operating cash flow ITC - Cash flow statement

continues to expand (Rsm) FY16 FY17 FY18 FY19 FY20
Profit before tax 144,341 155,030 168,517 184,442 191,668
Depreciation and amortisation 10,007 10,380 11,454 13,117 15,633
Interest expense 491 230 867 342 557
Interest income (8,516) (8,646) (9,178) (12,426) (14,389)
Dividend income (3,769) (2,489) (4,096) (4,159) (5,511)
Others 361 (2,987) (3,061) (4,148) (7,575)
Operating cash before WC changes 142,914 151,519 164,503 177,167 180,383
Changes in trade receivables (1,969) (8,591) (7,841) (6,995) 15,273
Changes in inventories (6,831) 6,558 6,268 (3,501) (4,508)
Changes in payables 6,281 2,663 20,774 5,678 (6,585)
Operating cash from operation, pre tax 140,396 152,150 183,704 172,349 184,563
Tax (48,277) (52,130) (57,196) (54,859) (46,501)
Operating cash flow 92,119 100,020 126,509 117,491 138,062
Capex (21,448) (29,445) (26,190) (27,686) (21,404)
Sale of properties 71 474 712 92 268
Net capex (21,377) (28,971) (25,478) (27,595) (21,136)
Net investments (27,113) (8,553) (52,423) (38,514) (53,945)
Dividend Income 3,769 2,489 4,098 4,159 5,511
ITC continues to park Interest received 7,163 7,204 6,914 11,129 14,373
excess cash in liquid Others 449 28 (23) 3 31
investments Investing cash flow (37,109) (27,803) (66,912) (50,818) (55,167)
Proceeds from issue of share capital 5,317 10,670 9,128 9,691 6,253
Interest paid (231) (218) (453) (867) (455)
Divided paid (59,785) (81,756) (68,803) (74,869) (84,222)
Others 48 (72) (71) 39 (484)
Financing cash flow (54,651) (71,376) (60,199) (66,006) (78,909)
Net increase in cash flow 359 841 (602) 667 3,986
Opening cash and cash equivalents 363 722 1,563 960 1,627
Closing cash and cash equivalents 722 1,563 960 1,627 5,614
Source: ITC, CLSA

Figure 114
Net working capital days Net working capital requirement

requirement reduced by
90 (days)
11 days to 54 days in FY20 84
82
80
80 78
76 75
70
70
65
60 57
54
52 52 52
We expect working capital 50

requirement of 52 days over
the medium term 40
39
30
FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20 FY21 FY22 FY23
Source: ITC, CLSA
Figure 115
ITC’s inventory days are Receivable, Payable and Inventory days’ trend
high compared to peers,
100 (days) Receivable days Inventory days Payable days
given high exposure to the
wheat flour business 90
80
70
60
50
40
30
20
10
0
FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20 FY21 FY22 FY23
Source: ITC, CLSA
Figure 116
Segment-wise capital employed trend over the last decade

(Rsm) FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20 10Y
Cagr (%)
Cigarettes 30,621 35,993 49,534 57,055 58,186 53,017 55,467 33,321 35,944 29,128 0
FMCG 18,971 19,890 25,319 33,835 39,879 49,110 57,067 57,167 60,758 65,609 14
Hotels 27,284 32,376 34,599 36,254 43,010 44,749 46,622 49,991 54,079 57,880 9
Agri Business 15,617 17,017 12,566 20,524 19,588 23,580 21,957 25,072 29,937 29,323 6
Paperboards 37,701 43,539 49,583 53,191 54,259 55,203 56,989 59,527 62,108 60,591 5
Segmental total 130,195 148,814 171,600 200,859 214,921 225,660 238,102 225,078 242,826 242,532 7
Liquid assets 62,346 71,822 86,744 96,006 123,644 158,567 180,254 221,164 256,557 338,229
Unallocated (33,008) (32,718) (35,466) (34,245) 34,313 32,338 35,054 67,759 80,115 59.481
Capital employed 159,533 187,919 222,879 262,620 372,878 416,564 453,410 514,001 579,498 640,292
Note: Segment capital employed = Segment Assets minus Segment Liabilities. Source: ITC, CLSA

Figure 117
Capex spend trend over the last two decades; expect overall capex spend to come off
30 (Rsbn) Paperboards Agri business Hotels FMCG Cigarettes
25 1
3 1
5
6 8
20
1
8
4 5
1
12
7 13
3 2
1
15 3 8
5
4 7 1
6
5
6
3 7 7
7
2
4
10 4 6
1 3 1
4
3
2 10
4
2 1 1
1
2 2 7 7 7
1 3 2
5
5 1 1 3 4
1 1 2 9
1 9 4 1
1
1 7 7 1
2 1 6 1 6 6 1 1 1 1
2 5 1 5 2
1
1 3
2 3 2 3 3 3
2 2 2 2
1 1
0
FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20 21CL 22CL 23CL
Source: ITC, CLSA
Figure 118
We see self-sufficiency in Non-cigarette Ebitda and Capex

the non-cigarette business
to fund growth needs 55 (Rsbn) Non-cig Capex Non-cig Ebitda
45
35
25
15
(5)
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18
FY19
FY20
21CL
22CL
23CL
Source: ITC, CLSA

Figure 119
Other FMCG and Hotels ITC - key capacity commissioning in last six years
make up the bulk of capex Year Segment Plant/Name of property Location
FY2015 FMCG Integrated Consumer Goods Manufacturing and Malur (Karnataka)
FY2015 Hotels ITC Grand Bharat Gurgaon (Haryana)
FY2015 Hotels My Fortune Bengaluru Bengaluru (Karnataka)
FY2016 FMCG Manufacturing facilities - Finger Snacks, Dhulagarh (West Bengal),
Dairy & Biscuits Munger (Bihar),
Mangaldoi (Assam)
Hotels: ITC is looking to go FY2017 FMCG Manufacturing facilities Uluberia (West Bengal),
asset light and focus on Mysore (Karnataka),
managed properties Guwahati (Assam)
FY2018 FMCG Integrated Consumer Goods Manufacturing and Panchla (West Bengal)
Logistics facility (ICML) and Kapurthala (Punjab)
FY2018 Hotels WelcomeHotel, Coimbatore (Operational in Oct 17) Coimbatore (Tamil Nadu)
FY2019 Hotels ITC Grand Goa (Acquired in Sep’18 and Cansaulim (Goa)
operational from Oct 18)
FY2019 Hotels ITC Kohenur (Operational from 1st Jun 2018) Hyderabad (Telangana)
FMCG: ITC has created FY2019 FMCG Integrated Consumer Goods Manufacturing and Pudukkottai (Tamil Nadu)
enough capacity, not much Logistics facility (ICML)
expansionary capex needed FY2019 FMCG New manufacturing lines across categories Kapurthala (Punjab),
such as Biscuits, Beverages, Noodles, Potato Trichy (Tamil Nadu),
Chips, Finger Snacks Panchla (West Bengal)
and Guwahati (Assam)
FY2019 Paper VAP Segment capacity augmentation (paperboards), Bhadrachalam
capacity increase of in-house pulp production (Telangana)
(expected to be commissioned by 2022)
FY2020 FMCG The manufacturing capability of ICML Trichy was Trichy, Tamil Nadu
augmented during the year with the
commissioning of state-of-the-art lines for Finger
Snacks, Atta and Biscuits
FY2020 Hotels ITC Royal Bengal (Operational from 1st Jun 2019) Kolkata (West Bengal)
Source: Company, Media, CLSA
Pre-tax return ratios continue to bounce back, albeit slowly

Figure 120
Tax adjusted RoE and RoCE Return ratios (post-tax)

expanded 80bps and 90bps
YoY respectively to 23.6% (%) RoAE RoCE
30
and 22.9% for FY20
28
26
24
22
Pre-tax RoE contracted
210bps YoY to 31.6%, due 20
to deteriorating asset 18
turnover
16
14
12
10
FY95
FY04
FY13
FY15
FY96
FY97
FY98
FY99
FY00
FY01
FY02
FY03
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY14
FY16
FY17
FY18
FY19
FY20
21CL
22CL
23CL
Source: ITC, CLSA

Figure 121
Return on capital employed by segment

(%) FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20
Cigarettes 163 190 207 195 185 194 211 231 301 420 456
FMCG (18) (16) (10) (4) 1 1 2 1 3 7 7
Hotels 9 10 9 4 4 1 1 2 3 3 3
Agri business 34 36 39 49 50 45 43 40 36 28 27
Paperboards 18 22 23 21 17 17 17 17 18 20 21
Overall 43 47 49 49 48 41 35 33 32 31 29
Source: ITC, CLSA
Figure 122
Du-pont analysis
FY15 FY16 FY17 FY18 FY19 FY20 21CL 22CL 23CL
Ebit margin (%) 33.5 33.9 33.6 35.3 34.7 35.1 30.5 33.3 33.0
Asset turnover (x) 1.1 0.9 0.9 0.8 0.8 0.7 0.7 0.7 0.7
Financial leverage (x) 1.0 1.0 1.0 1.0 1.0 1.0 1.0 1.0 1.0
Interest burden (x) 1.2 1.2 1.2 1.2 1.2 1.2 1.3 1.3 1.3
Tax burden (x) 0.7 0.6 0.7 0.7 0.7 0.7 0.7 0.7 0.7
RoAE (post tax) 30.2 23.6 23.5 22.6 22.8 23.6 19.7 23.1 23.5
Source: ITC, CLSA
Change in dividend policy also indicates a slowing capex trend

6% dividend yield The large pile of cash and liquid investments at ITC’s disposal (US$4.4bn as at
March 2020); c.14 % of market cap) means that the dividend pay-out can be ramped
up further. ITC’s updated dividend policy (effective FY20) now states the medium-
term payout would be 80-85% (versus an average of c.57% over the last three
years), which implies a dividend yield of 6% on the stock at current market price.
Figure 123
Payout for FY20 (on an Dividend pay-out

accrual basis) stood at 87%
of adjusted earnings 120 (%) Special
dividends
100
On reported earnings, 80
payout was 83% for FY20,
in line with the dividend
60
policy of 80-85%
40
20
0
FY05
FY07
FY20
21CL
22CL
23CL
FY00
FY01
FY02
FY03
FY04
FY06
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18
FY19

Increased focus on improving the ESG scorecard

A strong focus on As with its global peers, ITC has not been immune to ESG-related concerns. This
sustainability has been exacerbated by volume pressure in its core business and slowing down of
its margin expansion. Notwithstanding its core business, ITC has set solid standards
on sustainability. In the past two decades it has put in place a series of sustainability
initiatives around carbon emissions, renewable energy, water conservation, animal
husbandry, and the empowerment of women.
Ranked highly ITC has been ranked first globally amongst peers (comprising companies with
internationally for its market capitalisation between US$38bn and US$51bn) and overall third globally on
ESG focus ESG performance in the Food Products industry by Sustainalytics - a global ESG
ratings company. ITC has also been rated “AA” by MSCI-ESG - the highest among
global tobacco companies. For more details refer to Appendix 4.
Figure 124
ITC - A global exemplar in sustainability
Source: ITC, CLSA
Figure 125
ITC has been ranked first Top ESG ratings by Sustainalytics & MSCI
globally amongst peers,
and third overall
Source: ITC, CLSA

SUUTI sale may create a near-term technical overhang

The government may sell its The union government is reportedly looking at selling its holdings, including the
stake in ITC 7.9% stake it has in ITC through the Specified Undertaking of the Unit Trust of India
(SUUTI), in a bulk deal. This may create a technical overhang for the stock in the
near term.
Figure 126
The SUUTI stake sale ITC - Shareholding (Jun 20)

remains a technical
overhang
Others
22.3% BAT
29.5%
SUUTI
7.9%
MF LIC
9.5% FPI 16.3%
14.6%
Note: SUUTI = Specified Undertaking of Unit Trust of India. Source: BSE, CLSA
Figure 127
Earnings and balance-sheet risk scores (lower the better)

Score Comments
Earnings-quality flags
Capex indiscipline 0
Cash burn 0
Rising non-core or intangibles 0
Rising working capital 0
Poor cash conversion 1 In FY18, operating cashflow grew
ahead of PAT due to working capital
release (reduction in inventory and
increase in payable days).
Earnings-quality risk score (EQRS) 1/5
Balance-sheet-quality flags
Cash burn 0
Excessive leverage 0
Frequent fundraising 0
Liquidity concerns 0
Operational stress 0
Balance-sheet-quality risk score (BQRS) 0/5
Source: CLSA

Appendices ITC - BUY
Appendix 1: Detailed financials

Profit & Loss (Rsm)
Year to 31 March 2017A 2018A 2019A 2020A 2021CL 2022CL 2023CL
Revenue 389,792 397,045 444,327 451,361 434,866 491,780 526,284
Cogs (ex-D&A) (153,136) (152,398) (173,052) (172,351) (178,673) (195,205) (209,949)
Gross Profit (ex-D&A) 236,656 244,646 271,275 279,010 256,194 296,576 316,334
Research & development costs - - - - - - -
Selling & marketing expenses (17,905) (19,390) (22,638) (23,433) (23,483) (25,818) (28,156)
Other SG&A (52,995) (48,700) (53,927) (54,086) (56,021) (60,180) (64,656)
Other Op Expenses ex-D&A (24,443) (24,875) (27,284) (27,284) (27,284) (28,921) (30,657)
Op Ebitda 141,313 151,681 167,425 174,206 149,405 181,655 192,866
Depreciation/amortisation (10,380) (11,454) (13,117) (15,633) (16,633) (18,133) (19,133)
Op Ebit 130,932 140,227 154,308 158,574 132,772 163,523 173,733
Interest income 19,859 21,298 24,845 30,137 33,150 39,780 47,736
Interest expense (230) (867) (342) (557) (600) (650) (700)
Net interest inc/(exp) 19,630 20,432 24,504 29,579 32,550 39,130 47,036
Associates/investments - - - - - - -
Forex/other income 4,468 3,729 5,630 4,836 5,320 6,118 6,883
Asset sales/other cash items - - - - - - -
Provisions/other non-cash items - - - - - - -
Asset revaluation/Exceptional items - - - - - - -
Profit before tax 155,030 164,388 184,442 192,989 170,642 208,771 227,652
Taxation (53,021) (54,856) (59,798) (48,978) (43,306) (52,983) (57,774)
Profit after tax 102,009 109,533 124,643 144,012 127,336 155,788 169,877
Preference dividends 0 0 0 0 0 0 0
Profit for period 102,009 109,533 124,643 144,012 127,336 155,788 169,877
Minority interest 0 0 0 0 0 0 0
Net profit 102,009 109,533 124,643 144,012 127,336 155,788 169,877
Extraordinaries/others 0 2,700 0 7,349 0 0 0
Profit avail to ordinary shares 102,009 112,233 124,643 151,361 127,336 155,788 169,877
Dividends (81,736) (68,803) (74,869) (84,222) (125,078) (109,948) (133,135)
Retained profit 20,273 43,430 49,774 67,138 2,258 45,840 36,743
Adjusted profit 102,009 109,533 124,643 144,012 127,336 155,788 169,877
EPS (Rs) 8.4 9.0 10.2 11.7 10.3 12.6 13.7
Adj EPS [pre excep] (Rs) 8.4 9.0 10.2 11.7 10.3 12.6 13.7
Core EPS (Rs) 8.4 9.0 10.2 11.7 10.3 12.6 13.7
DPS (Rs) 4.8 5.2 5.8 10.2 8.9 10.8 11.8
Profit & loss ratios

Growth (%)
Revenue growth (% YoY) 6.9 1.9 11.9 1.6 (3.7) 13.1 7.0
Ebitda growth (% YoY) 5.8 7.3 10.4 4.1 (14.2) 21.6 6.2
Ebit growth (% YoY) 6.0 7.1 10.0 2.8 (16.3) 23.2 6.2
Net profit growth (%) 9.4 7.4 13.8 15.5 (11.6) 22.3 9.0
EPS growth (% YoY) 8.7 6.9 13.3 15.2 (11.8) 22.0 8.8
Adj EPS growth (% YoY) 8.7 6.9 13.3 15.2 (11.8) 22.0 8.8
DPS growth (% YoY) (16.2) 8.4 11.7 76.5 (12.3) 20.8 9.3
Core EPS growth (% YoY) 8.7 6.9 13.3 15.2 (11.8) 22.0 8.8
Margins (%)
Gross margin (%) 60.7 61.6 61.1 61.8 58.9 60.3 60.1
Ebitda margin (%) 36.3 38.2 37.7 38.6 34.4 36.9 36.6
Ebit margin (%) 33.6 35.3 34.7 35.1 30.5 33.3 33.0
Net profit margin (%) 26.2 27.6 28.1 31.9 29.3 31.7 32.3
Core profit margin 26.2 27.6 28.1 31.9 29.3 31.7 32.3
Op cashflow margin 25.7 31.9 26.4 30.6 28.4 27.1 27.2
Returns (%)
ROE (%) 23.5 22.6 22.8 23.6 19.7 23.1 23.5
ROA (%) 16.5 16.0 15.8 16.3 13.1 15.3 15.1
ROIC (%) 34.1 35.1 36.6 40.7 35.0 42.8 44.6
ROCE (%) 59.0 60.9 62.9 60.8 51.0 63.0 67.0
Other key ratios (%)
Effective tax rate (%) 34.2 33.4 32.4 25.4 25.4 25.4 25.4
Ebitda/net int exp (x) - - - - - - -
Exceptional or extraord. inc/PBT (%) 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Dividend payout (%) 56.6 57.4 56.6 86.6 86.1 85.2 85.7

Balance sheet (Rsm)

Cash & equivalents 180,254 221,164 256,557 338,279 351,873 397,819 439,400
Accounts receivable 22,075 23,570 36,462 20,920 23,828 26,947 28,837
Inventories 78,640 72,372 75,872 80,381 73,868 83,535 89,396
Other current assets 0 0 0 0 0 0 0
Current assets 280,969 317,106 368,892 439,580 449,569 508,301 557,634
Fixed assets 184,173 205,916 218,878 232,978 237,885 239,832 239,362
Investments 33,072 38,757 46,910 36,460 36,460 36,460 36,460
Goodwill 0 0 0 0 0 0 0
Other intangible assets 0 0 0 0 0 0 0
Other non-current assets 43,946 62,035 63,300 43,337 41,795 47,264 50,581
Total assets 542,160 623,813 697,979 752,354 765,709 831,858 884,037
Short term loans/OD - - - - - - -
Accounts payable 25,512 33,823 33,683 34,467 35,742 40,420 43,256
Accrued expenses 41,520 55,019 62,667 55,503 57,557 65,089 69,656
Taxes payable 784 460 451 748 775 877 938
Other current liabs 1,959 1,151 1,128 1,869 1,939 2,192 2,346
Current liabilities 69,775 90,453 97,929 92,588 96,013 108,579 116,197
Long-term debt/leases/other 258 180 111 3,298 3,298 3,298 3,298
Convertible bonds 0 0 0 0 0 0 0
Provisions/other LT liabs 18,717 19,179 20,441 16,177 17,176 18,177 19,177
Total liabilities 88,750 109,812 118,481 112,062 116,487 130,053 138,671
Share capital 12,147 12,204 12,259 12,292 12,323 12,354 12,385
Retained earnings 441,262 501,796 567,239 627,999 636,899 689,451 732,981
Reserves/others - 0 0 0 0 0 -
Shareholder funds 453,410 514,001 579,498 640,292 649,222 701,805 745,366
Minorities/other equity 0 0 0 0 0 0 0
Total equity 453,410 514,001 579,498 640,292 649,222 701,805 745,366
Total liabs & equity 542,160 623,813 697,979 752,354 765,709 831,858 884,037
Total debt 258 180 111 3,298 3,298 3,298 3,298
Net debt (179,995) (220,984) (256,446) (334,981) (348,576) (394,522) (436,103)
Adjusted EV 1,810,547 1,758,632 1,740,463 1,684,285 1,675,899 1,635,175 1,598,829
BVPS (Rs) 37.3 42.1 47.3 52.1 52.7 56.8 60.2
Balance sheet ratios

Key ratios
Current ratio (x) 4.0 3.5 3.8 4.7 4.7 4.7 4.8
Growth in total assets (% YoY) 8.4 15.1 11.9 7.8 1.8 8.6 6.3
Growth in capital employed (% YoY) 7.2 0.7 12.5 0.9 (1.2) 0.5 (0.5)
Net debt to operating cashflow (x) - - - - - - -
Gross debt to operating cashflow (x) 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Gross debt to Ebitda (x) 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Net debt/Ebitda (x) - - - - - - -
Gearing
Net debt/equity (%) (39.7) (43.0) (44.3) (52.3) (53.7) (56.2) (58.5)
Gross debt/equity (%) 0.1 0.0 0.0 0.5 0.5 0.5 0.4
Interest cover (x) 657.0 186.4 524.0 338.7 276.5 312.8 316.4
Debt cover (x) 387.1 703.2 1,055.6 41.9 37.4 40.4 43.5
Net cash per share (Rs) 14.8 18.1 20.9 27.3 28.3 31.9 35.2
Working capital analysis
Inventory days 195.3 180.8 156.3 165.5 157.6 147.2 150.3
Debtor days 18.2 21.0 24.7 23.2 18.8 18.8 19.3
Creditor days 57.0 71.1 71.2 72.2 71.7 71.2 72.7
Working capital/Sales (%) 7.9 1.4 3.2 1.9 0.4 0.4 0.4
Capital employed analysis
Sales/Capital employed (%) 169.9 171.9 171.1 172.3 168.0 189.1 203.4
EV/Capital employed (%) 789.0 761.4 670.0 642.9 647.4 628.9 618.1
Working capital/Capital employed (%) 13.5 2.4 5.5 3.3 0.7 0.7 0.8
Fixed capital/Capital employed (%) 80.3 89.1 84.3 88.9 91.9 92.2 92.5
Other ratios (%)
PB (x) 4.5 4.0 3.6 3.3 3.2 3.0 2.8
EV/Ebitda (x) 12.8 11.6 10.4 9.7 11.2 9.0 8.3
EV/OCF (x) 18.1 13.9 14.8 12.2 13.6 12.3 11.2
EV/FCF (x) 25.5 17.8 20.3 14.7 16.4 14.5 12.8
EV/Sales (x) 4.6 4.4 3.9 3.7 3.9 3.3 3.0
Capex/depreciation (%) 279.8 240.5 241.5 148.2 129.5 110.7 97.5

Cashflow (Rsm)
Operating profit 130,932 140,227 154,308 158,574 132,772 163,523 173,733
Operating adjustments - - - - - - -
Depreciation/amortisation 10,380 11,454 13,117 15,633 16,633 18,133 19,133
Working capital changes 4,579 13,084 (16,533) 4,180 4,880 (8,108) (4,916)
Interest paid / other financial expenses 230 867 342 557 600 650 700
Tax paid (53,021) (54,856) (59,798) (48,978) (43,306) (52,983) (57,774)
Other non-cash operating items 6,920 15,733 26,055 8,096 11,863 11,912 12,516
Net operating cashflow 100,020 126,509 117,491 138,062 123,442 133,127 143,392
Capital expenditure (29,040) (27,545) (31,682) (23,160) (21,540) (20,080) (18,663)
Free cashflow 70,980 98,964 85,808 114,902 101,902 113,047 124,729
Acq/inv/disposals - - - - - - -
Int, invt & associate div 22,083 2,145 15,591 45,728 31,655 37,767 44,943
Net investing cashflow (6,957) (25,400) (16,092) 22,568 10,115 17,687 26,280
Increase in loans (165) (79) (69) 3,186 - - -
Dividends (81,736) (68,803) (74,869) (84,222) (125,078) (109,948) (133,135)
Net equity raised/others 10,525 8,683 8,932 2,127 5,116 5,080 5,044
Net financing cashflow (71,376) (60,199) (66,006) (78,909) (119,962) (104,868) (128,090)
Incr/(decr) in net cash 21,687 40,910 35,393 81,722 13,595 45,946 41,581
Exch rate movements 0 0 0 0 0 0 0
Opening cash 158,567 180,254 221,164 256,557 338,279 351,873 397,819
Closing cash 180,254 221,164 256,557 338,279 351,873 397,819 439,400
OCF PS (Rs) 8.2 10.4 9.6 11.2 10.0 10.8 11.6
FCF PS (Rs) 5.8 8.1 7.0 9.3 8.3 9.2 10.1
Cashflow ratio analysis

Growth (%)
Op cashflow growth (% YoY) 8.6 26.5 (7.1) 17.5 (10.6) 7.8 7.7
FCF growth (% YoY) 6.4 39.4 (13.3) 33.9 (11.3) 10.9 10.3
Capex growth (%) 14.3 (5.2) 15.0 (26.9) (7.0) (6.8) (7.1)
Other key ratios (%)
Capex/sales (%) 7.5 6.9 7.1 5.1 5.0 4.1 3.5
Capex/op cashflow (%) 29.0 21.8 27.0 16.8 17.4 15.1 13.0
Operating cashflow payout ratio (%) 57.7 49.7 60.0 90.4 88.8 99.8 101.5
Cashflow payout ratio (%) 81.7 54.4 63.7 61.0 101.3 82.6 92.8
Free cashflow payout ratio (%) 115.2 69.5 87.3 73.3 122.7 97.3 106.7
DuPont analysis
Ebit margin (%) 33.6 35.3 34.7 35.1 30.5 33.3 33.0
Asset turnover (x) 0.7 0.7 0.7 0.6 0.6 0.6 0.6
Interest burden (x) 1.2 1.2 1.2 1.2 1.3 1.3 1.3
Tax burden (x) 0.7 0.7 0.7 0.7 0.7 0.7 0.7
Return on assets (%) 16.5 16.0 15.8 16.3 13.1 15.3 15.1
Leverage (x) 1.2 1.2 1.2 1.2 1.2 1.2 1.2
ROE (%) 23.5 22.6 22.8 23.6 19.7 23.1 23.5
EVA® analysis
Ebit adj for tax 86,153 93,434 104,280 118,330 99,077 122,023 129,642
Average invested capital 252,542 266,249 285,011 290,805 283,195 285,181 290,490
ROIC (%) 34.1 35.1 36.6 40.7 35.0 42.8 44.6
Cost of equity (%) 12.3 12.3 12.3 12.3 12.3 12.3 12.3
Cost of debt (adj for tax) 5.3 5.3 5.4 6.0 6.0 6.0 6.0
Weighted average cost of capital (%) 12.3 12.3 12.3 12.3 12.3 12.3 12.3
EVA/IC (%) 21.9 22.8 24.3 28.4 22.7 30.5 32.4
EVA (Rsm) 55,217 60,819 69,366 82,707 64,386 87,089 94,057

Appendix 2: Risk scores - EQRS/BQRS calculations

Flag FY0 FY-1 FY-2 FY-3
Earnings Quality Risk Factors
Capex indiscipline 0
Capex > net PPE change 0 (2) (2) 1 2
3Y (Capex - sales cagr) 0 (17.3)
Cash burn 0
Negative operating cashflow 0 138,062 117,490 126,508 100,020
Negative FCF 0 114,902 85,808 98,964 70,980
Rising non-core or intangibles 0
Intangibles 0 0.0 0.0 0.0 0.0
Non-operating income 0 1.07 1.27 0.94 1.15
Rising working capital 0
AR days 0 23.2 24.7 21.0 18.2
Inventory days 0 165.0 156.0 181.0 195.0
Poor cash conversion 1
Depreciation (% of net PPE) 0 7.6 7.1 7.4 7.0
Accruals: (net inc - OP CF) % of sales 1 1.3 1.6 (4.3) 0.5
Balance Sheet Quality Factors
Cash burn 0
Negative operating cashflow 0 138,062 117,490 126,508 100,020
Negative FCF 0 114,902 85,808 98,964 70,980
Excessive leverage 0
Leverage (high and rising) 0 1.2 1.2 1.2 1.2
Net debt to equity (high and rising) 0 (52.3) (44.3) (43.0) (39.7)
Frequent fundraising 0
Equity dilution 0 0.98 1.67 1.78 2.35
Debt-funded dividends and buybacks 0 4 0 0 0
Liquidity concerns 0
Debt-servicing cover (low and falling)
Cash ratio (low and falling) 0 3.65 2.62 2.45 2.58
Operational stress 0
AR + inventory days (rising) 0 189 181 202 213
ROE (low and falling) 0 23.6 22.8 22.6 23.5
Definitions of the factors we use to calculate final risk score

Definition Criteria
Earnings quality risk score (EQRS)
Capex > net PPE change Capex - change in net PPE - depreciation expense Positive number for the past three years
3Y (Capex - sales cagr) Last three-year capex versus sales Cagr Three-year capex Cagr exceeds sales Cagr by over 5ppts
Negative operating cashflow Operating cashflow Negative operating cashflow (last year)
Negative FCF Operating cashflow - capex Negative FCF for the past two years
Intangibles (rising) Intangible assets as a % of net PPE At a four-year peak
Non-op income (rising) Non-operating income as a % of sales At a four-year peak
AR days (rising) Accounts receivable * 365 / sales At a four-year peak
Inventory days (rising) Inventory * 365 / cost of goods sold At a four-year peak
Depreciation rate (falling) Depreciation as a % of net PPE At a four-year trough
Accruals (% of sales) (Net income - operating cashflow) / sales Positive ratio for the past two years
Balance sheet quality risk score (BQRS)

Negative operating cashflow Operating cashflow Negative operating cashflow (last year)
Negative FCF Operating cashflow - capex Negative FCF for the past two years
Leverage (high and rising) Total assets to equity Current leverage > 2x and at a four-year peak
NDE (high and rising) Net debt-to-equity Current NDE > 40% and at a four-year peak
Equity dilution New equity issued as a % of total equity New equity issuance for each of past three years >5%
Debt-funded dividends & buybacks Debt issuance * 100 / (dividends + buybacks) Current (dividend + buyback) payout more than 25% and
funded entirely by debt for the past three years
Debt-servicing cover (low & falling) Ebitda / (short-term debt + interest expense) Current debt-servicing cover <1x and at a 4-year trough
Cash ratio (low and falling) Cash and equivalents / current liabilities Current cash ratio < 0.5x and at a four-year trough
AR + inventory days (rising) (Accounts receivable * 365 / sales) + At a four-year peak
(Inventory * 365 / cost of goods sold)
ROE (low and falling) Net income as a % of shareholder equity Current ROE less than 15% and at a four-year trough
Source: CLSA. Click here for definitions of the factors we use in calculating risk scores .

Appendix 3: Key business update from FY20AR

Cigarettes
 To counter competitive pressure and recruit new customers, ITC has launched
innovative and differentiated offerings at the premium end such as Gold Flake
Indie Mint and Gold Flake Luxury. Gold Flake Neo and Classic Rich & Smooth has
been gradually rolled out to newer markets.
 The business also deployed focused offers under the American Club, Wave
(DSFT, to counter aggression of VST Industries under the Total brand), Player’s
Gold Leaf (RSFT, variants launched to counter aggression, Pall Mall (targeted at
North and West markets to counter aggression from Marlboro Compact), Navy
Cut, and Flake trademarks in strategic markets to bolster and strengthen its
standing in the market.
 In Q1FY21 the company launched a five-piece cigarette pack under the Flake
brand initially in the north-east region.
FMCG
Rural growth stood at 0.8x The FMCG business registered growth of 2.7% for FY20, affected by Covid-19
of urban markets in FY20 related business disruptions in March 2020. Adjusted for lifestyle retailing
compared to 1.4x in FY19 divestment, growth stood at c.5%. Profitability continued to expand with a 160bps
expansion in the Ebitda margin to 7.1%. Management noted margin expansion came
from enhanced scale, product mix enrichment, reduced distance-to-market and
other strategic cost management initiatives after absorbing the impact of sustained
investment in brand building, gestation costs of new categories and facilities and
the impact due to disruptions following the outbreak of the pandemic.
Health & hygiene in demand  Personal Care Products have done well, aided by increased demand for hygiene
products: Vivel/Fiama shower gels & body wash, Savlon/Fiama hand wash,
Savlon sanitisers & antiseptic liquids and Nimyle herbal floor cleaners saw good
traction. Subdued performance of Engage deodorants and Vivel Soaps was in
line with industry trends. During the year, Nimyle witnessed strong growth in
the east and also expanded its geographical footprint to the south, to become
the third largest brand nationally.
Personal products - New product launches (FY20)

Brand Comment

Fiama - body wash Augmented the Fiama body wash range with the launch of Fiama Scents in two variants, thereby strengthening the
brand’s ‘mood up-liftment’ value proposition.

Fiama - hand wash Launched a first-of-its-kind Fiama ‘mood uplifting’ handwash in the premium segment with three variants.
Savlon  Also launched two innovative products in record time - ‘Savlon Surface Disinfectant Spray’ and ‘Savlon Hexa’ hand
sanitising liquid for quick and persistent action.
Engage  Introduced Engage L’amante, a world-class range of masstige perfumes and received encouraging response from
consumers. Also launched a range of innovative 2-in-1 pocket perfume variants providing the consumer a choice of two
fragrances in a single pack to cater to different engagement occasions during the day.
Dermafique  Dermafique’s Hydration range was extended with the launch of two new variants tailor-made for summer skincare needs.
It is now available on all key ecommerce platforms and continues to receive encouraging consumer response .
Source: ITC, CLSA
 Branded Packaged Foods were robust: growth in the segment was led by
Aashirvaad atta, spices and salt, Dark Fantasy Choco Fills, Dark Fantasy Bourbon,

Bounce Layered Cakes, Bingo! Tedhe Medhe and potato chips, Yippee! Noodles,
Aashirvaad Svasti fresh dairy products and Candyman Fantastik wafer sticks.
Staples offering - Qualitative performance assessment and new launch

Brand/Segment Comments
Aashirvaad Atta  The Business continued to focus on growing the value-added portfolio, consisting of Multigrain, Select and Sugar Release Control
Atta, which posted robust growth driven by higher contribution in Modern Trade and ecommerce channels.
 New launches: The range of value-added products was augmented with the launch of Aashirvaad Nature’s Super Foods, a
differentiated range of products comprising Gluten Free Flour, Ragi Flour and Multi -Millet Mix which are naturally gluten free,
rich in dietary fibre and a source of protein.
 Aashirvaad Salt gained traction in key focus geographies and posted a healthy performance during the year .
Spices  Company expanded its geographical footprint to 17 states and recorded healthy volume growth .
 On 23rd May, 2020, the company entered into a Share Purchase Agreement (SPA) to acquire 100% of the equity share capital
of Sunrise Foods Private Limited (SFPL), an Indian company primarily engaged in the business of spices under the trademark
‘Sunrise’, subject to fulfilment of various terms and conditions as specified in the SPA.
Bingo - Snacks  Tedhe Medhe continues to be the most widely distributed snack brand in the country.
 New launches: The Tedhe Medhe range was augmented with the launch of two innovative variants - ‘Herby Spin’ and ‘Chatpata
Swing’. Starters, a baked and protein rich snack, launched during the year, is being scaled up. The ‘Bingo! No Rulz’ range was also
augmented with the launch of No Rulz Curlz, a corn-based baked snack in two flavours of Masala and Cheese.
Biscuits  Dark Fantasy Choco Fills sustained its high growth trajectory driven by superior product attributes, focused communication,
efficient distribution and consumer activation.
 The recently launched Bounce Cake variants continue to receive good response from consumers and are now available in all
target markets.
 New launch: Sunfeast Veda Marie Light, a healthy offering infused with five natural ingredients, strengthening the bran d’s ‘chai
ka perfect partner’ value proposition. Bounce Loops, was introduced during the year in three flavours - Vanilla, Chocolate and
Jam, with an open cream layer sprinkled with sparkles on the top.
Confectionery  Candyman Fantastik, a crispy wafer roll filled with choco crème, continues to make rapid strides and garner increasing consumer
traction across markets.
 New launch: The range was augmented with the introduction of ‘Candyman’ Fantastik Choco Mocha, a limited edition variant for
the gifting space.
Fabelle  Fabelle chocolates range was augmented with the launch of Fabelle Choco Deck Milk & Ruby Chocolate.
Sunbean  Sunbean gourmet coffee, which is available across all ITC Hotels and select ecommerce platforms, continues to receive excellent
response from consumers.
 Piloted in select markets in Delhi/NCR and has been well received by consumers. Encouraged by the positive res ponse, the
business has introduced the product in large jars and in single serve/multi use sachets .
Aashirvaad  The Aashirvaad Svasti fresh dairy portfolio comprising pouch milk, pouch curd and paneer, gained strong consumer traction on
Svasti the back of high quality standards and superior taste profile, in Bihar and West Bengal where the portfolio is currently avai lable.
 Aashirvaad Svasti Ghee continues to gain excellent product feedback and is witnessing good traction, especially in Modern Trade
and e-Commerce channels.
 Sunfeast Wonderz Milk’ range of milk shakes has received encouraging response and is being extended to other markets .
Source: ITC, CLSA
Stationary business  Educational stationary severely impacted in lockdown: While operations were
impacted by school closures impacted due to the continued closure of educational institutions, management
expect the business to bounce back strongly once the academic session resumes.
Educational stationary - achievements (FY20)

 New launch: During the year, the ‘Classmate’ product portfolio was augmented with the launch of
innovative variants, while the premium ‘Paperkraft’ portfolio was enriched with the launch of super
premium pens with world-class technology and leather-bound notebook organisers.
 Classmateshop.com, a first-to-market ecommerce initiative in the stationery industry that offers
consumers the option to personalise images to be printed on notebook covers, continues to receive
excellent response. The MyClassmate app was also developed.
 The Classmate and Paperkraft range of notebooks leverage world-class fibre lines at Bhadrachalam -
India’s first ozone treated elemental chlorine free facility - and embody the environmental capital built
ITC’s paper business.
 A dedicated manufacturing facility for notebooks, equipped with state -of-the-art machinery was
commissioned at Gollapudi, Andhra Pradesh.
Source: ITC, CLSA

Mangaldeep continues to  Incense sticks and agarbatti saw an accelerating trend of consumers looking
fortify its market standing for value for money: The trend of premiumisation that has gathered pace in
in the Agarbatti and recent years, saw some moderation during the year with affordability
Dhoop segment
considerations amidst the economic slowdown resulting in higher demand for
‘value for money’ packs. The Agarbatti industry witnessed a marked
deceleration in growth rates during the year, in line with the slowdown in
consumption in the broader economy.
AIM continues to be the Incense sticks and agarbatti - Achievements (FY20)

largest selling safety match Comments
brand in India
 Mangaldeep brand sustained its leadership position in the Dhoop category and consolidated its position as
the second largest brand in the Agarbatti category with all-round improvement in brand measures.
 New launch: The business launched the Mangaldeep Temple ‘Fragrance of God’ range of products
anchored on the core proposition of ‘bringing home the divinity of the temple’. A unique and
differentiated offer in the category, the ‘Fragrance of God’ agarbatti under each series constitute
fragrances derived from the favourite offerings of the presiding deity. The Business also introduced
an innovative ‘Lo smoke’ variant which emits 80% less smoke than regular agarbatti.
 Regulatory action: With effect from 1st April, 2020, GST rates for all safety matches irrespective of
process of manufacture (mechanised/semi-mechanised units and ‘handmade’ safety matches) have
been harmonised at 12% compared to 18% for mechanised/semi-mechanised and 5% for handmade
matches earlier. The harmonised rates offer a level playing field for all players.
Source: ITC, CLSA
New channels tapped to FMCG supply chain - Innovative channels tapped to reach consumers during the pandemic
reach consumers amid the
pandemic
Source: ITC, CLSA
Agri-business
ITC’s agri business registered growth of 9% for FY20, aided by 14% growth in the
non-tobacco business. Leaf tobacco sales declined 15% YoY in FY20. Lower tobacco
sales led to a 60bps Ebitda margin contraction to 8.4% in FY20.

Leaf tobacco (c.14% of segment revenue): A declining business

After declining for six years,  Stable global production YoY for CY19, after steady decline seen in the last
production of flue cured six years: After declining for six years in a row, global production of flue cured
tobacco is now stable tobacco in 2019 remained stable at around 3,470m kg. Crop production in
major producing countries like China, Brazil, Zimbabwe and India, stood flat
YoY, contributing to 80% of global flue cured supplies. Indian flue cured
tobacco supplies are stabilising at around 220-230m kg. However, it still
remains far below the levels of 2014, representing a drop of over 30%.
46 million livelihoods are  Reduced demand for Indian tobacco: Leaf tobacco exports have declined by
dependent on tobacco around 24% over the last six years - from 236m kg in 2013-14 to 180m in
2019-20. Management attributed this decline to factors including: a) a punitive
and discriminatory taxation and regulatory regime on cigarettes; b) declining
trend of global cigarette demand; c) excess production in certain geographies;
d) relative strength of the Indian rupee compared to currencies of competing
origins; e) lower export incentives; and f) heightened illicit trade in cigarettes.
Other commodities (86% of segment revenue): FMCG focus drove sales mix
 ITC leveraged its sourcing capabilities to commence supply of organic and
certified mango pulp with end-to-end traceability to the manufacturers of
branded baby food products in the US and European markets.
 ITC strengthened its milk procurement network for ‘Aashirvaad Svasti’ dairy
products with significant increase in daily milk collection. It expanded its
network in West Bengal and Bihar to support the growing requirement for fresh
dairy products and in Punjab towards supporting the increasing requirements
of Sunfeast Wonderz dairy beverages.
Spice exports growing  The spices business continued to expand in the markets of US, EU and Japan,
healthily leveraging its strong backward integration and customer focused strategies.
Exports of spices grew at a healthy pace driven by the addition of new
customers and forays into new markets.
 ITC leveraged its strong backward integration links to foray into the organic
spices segment, with the entire value chain certified by Control Union,
Switzerland, ensuring product authenticity and full compliance with stringent
norms in the US, EU and Indian markets. The organic range comprises over 35
products in whole, powder and sterilised form.
 ITC ventured into its own organic crop development programme covering
around 200 farmers in 4 states spread over 1,300 hectares producing over 600
tonnes during the year.
 The coffee business continued to augment its product portfolio with value-
added offerings including coffee certified by Rainforest Alliance, specialty and
monsooned coffee. Strategic presence in key coffee producing geographies,
knowledge of estate and region-specific characteristics and supply chain
linkages, has enabled ITC to source the right coffee grades for gourmet coffee
brand Sunbean.
Looking to scale up in bulk  New forays: during the year, the business forayed into bulk staples comprising
staples maida, sooji, pulses & besan, and bulk spices catering to the food services
channel, leveraging institutional capabilities of sourcing, product development
and application sciences. Market specific and customised products, tailored for
end-users, were launched across six major metro markets by developing an
ecosystem of custom manufacturing units and a network of channel partners.
Actions are in place to rapidly scale up the business.

 New launch under ITC Master Chef: Range of frozen snacks was augmented
with the launch of a unique range of kebabs for the retail segment. The frozen
snacks range, currently comprising 11 vegetarian and 6 non-vegetarian
delicacies, is available in over 50 cities and is gaining good consumer traction .
 Project e-Choupal 4.0 augments rural engagement programmes with
customised end-to-end services for farmers. Key features include real time
information on weather and markets, on-farm diagnostics, continuous crop
monitoring for building weather resilience, agronomic advisory, as well as
forward linkages to remunerative output markets.
The company has launched ITC’s Agri Commodity Business- Value-Added Segment
new staples products
Source: ITC, CLSA
With APMC reforms, ITC is E-choupal - strengthening agri value chain

likely to strengthen its
agri presence
Source: ITC, CLSA

Agri-business performance
Leaf tobacco 14,425 12,914 11,630 13,906 17,810 15,745 16,942 19,179 16,961 17,212 14,647
Growth (%) (10.5) (9.9) 19.6 28.1 (11.6) 7.6 13.2 (11.6) 1.5 (14.9)
Contribution 37.4 27.2 20.4 19.3 23.0 18.8 22.7 23.2 21.0 18.3 14.3
Others 24,196 34,566 45,323 58,101 59,711 68,060 57,627 63,466 63,715 76,754 87,760
Growth (%) 42.9 31.1 28.2 2.8 14.0 (15.3) 10.1 0.4 20.5 14.3
Net sales 38,621 47,480 56,953 72,007 77,521 83,805 74,569 82,646 80,677 93,965 102,407
Growth (%) 0.4 22.9 20.0 26.4 7.7 8.1 (11.0) 10.8 (2.4) 16.5 9.0
Inter-segment 14,740 18,284 21,875 21,777 26,220 27,084 30,675 29,117 35,157 33,296 43,363
As a % of net sales 38.2 38.5 38.4 30.2 33.8 32.3 41.1 35.2 43.6 35.4 42.3
Ebitda 4,818 5,890 6,647 7,647 8,724 9,527 9,837 9,549 9,154 8,477 8,617
Growth (%) 63.2 22.3 12.8 15.0 14.1 9.2 3.2 (2.9) (4.1) (7.4) 1.6
Ebitda margin (%) 12.5 12.4 11.7 10.6 11.3 11.4 13.2 11.6 11.3 9.0 8.4
Depreciation (340) (228) (216) (334) (376) (488) (506) (491) (667) (711) (728)
Ebit 4,478 5,663 6,432 7,313 8,348 9,040 9,330 9,058 8,486 7,766 7,889
Growth (%) 74.8 26.5 13.6 13.7 14.2 8.3 3.2 (2.9) (6.3) (8.5) 1.6
Capex 116 911 1,593 904 844 2,144 1,285 1,594 924 539 539
As a % of revenue 0 2 3 1 1 3 2 2 1 1 1
Capital employed 15,796 15,617 17,017 12,566 20,524 19,588 23,580 21,957 25,072 29,937 29,323
RoCE (%) 34.2 36.1 39.4 49.4 50.5 45.1 43.2 39.8 36.1 28.2 26.6
Note: Above table is before considering unallocated items. Source: ITC, CLSA
Paperboards, paper and packaging

ITC remains the clear leader For FY20, the company saw revenue growth of 4%, while Ebitda growth was 6%,
in the VAP segment aided by a 50bps expansion in Ebitda margin to 27.2%. Management said that
strategic investments in pulp import substitution, proactive capacity addition in the
Value Added Paperboard (VAP) segment, process improvements and a cost-
competitive fibre chain supported by effective go-to-market strategies helped ITC
deliver growth in revenue and improvement in profitability.
Paperboards & Specialty Papers (66% of segment revenue)

 Global demand for Paper & Paperboard in 2019 declined 2% on the back of
weak demand mainly in Asia and North America.
The regulatory environment  Despite a subdued operating environment and sluggish demand conditions, the
puts the Indian Paper and business achieved its highest ever volume of production and sales, crossing 8
Paperboard industry at a lakh tonnes, aided by strategic investments in augmenting VAP manufacturing
significant disadvantage
capacity, continuous focus on enhancing operational efficiency and innovations
across the value chain.
Imports from China, Asean  In the speciality paper segment, the business enhanced its presence in the
and South Korea rose
pharma leaflets and publishing segments.
sharply by 27% during FY20
 Capacity addition: Recent capacity augmentation in the VAP segment at the
Bhadrachalam mill has been fully absorbed and the line is operating at full
capacity, delivering superior quality board which has been well accepted in the
market.
 New launches: In line with its pursuit of providing sustainable packaging, ITC
introduced a recyclable barrier board ‘Filo’ series - a substitute for single-use
plastics in the food service segment. The biodegradable Omega Series,
launched as an alternative to plastic coated containers and cups, is gaining
significant customer franchise.

Innovative sustainable Packaging innovations

packaging products
Source: ITC, CLSA
Digital initiatives rolled out  Online procurement initiative: ITC pioneered initiatives in FY19 by introducing
a system of direct purchases of wood from farmers which they could pay for
online. Currently, c.15% of the total wood procurement is being sourced
through this system, which facilitates transparent price discovery and enhances
transactional efficiencies.
Smartphones impacting the  Outlook: Demand recovery is expected to be led by the packaging segment
demand for newsprint (driven by essential consumer goods, pharmaceuticals, food service and
ecommerce) while demand for writing & printing and newsprint segments is
expected to decline (due to the increasing adoption of digitisation and
smartphones).
Paper & Packaging business performance

Net sales 31,078 35,072 39,234 42,368 48,605 49,739 50,174 50,505 51,673 58,602 61,072
Growth (%) 17.4 12.9 11.9 8.0 14.7 2.3 0.9 0.7 2.3 13.4 4.2
Inter-segment 11,889 13,513 15,501 17,707 18,934 16,430 14,760 15,439 14,572 15,547 15,267
As a % of net sales 38.3 38.5 39.5 41.8 39.0 33.0 29.4 30.6 28.2 26.5 25.0
Ebitda 9,010 10,506 11,742 12,242 11,877 11,534 11,501 12,200 13,168 15,655 16,628
Growth (%) 28.5 16.6 11.8 4.3 (3.0) (2.9) (0.3) 6.1 7.9 18.9 6.2
Ebitda margin (%) 29.0 30.0 29.9 28.9 24.4 23.2 22.9 24.2 25.5 26.7 27.2
Depreciation (2,167) (2,313) (2,374) (2,602) (2,953) (2,320) (2,425) (2,541) (2,746) (3,262) (3,575)
Ebit 6,843 8,192 9,368 9,640 8,925 9,215 9,076 9,658 10,422 12,392 13,053
Growth (%) 34.5 19.7 14.3 2.9 (7.4) 3.3 (1.5) 6.4 7.9 18.9 5.3
Capex 2,081 2,495 5,938 6,903 6,629 1,541 3,498 5,606 9,100 2,587 2,479
As a % of revenue 7 7 15 16 14 3 7 11 18 4 4
Capital Employed 37,113 37,701 43,539 49,583 53,191 54,259 55,203 56,989 59,527 62,108 60,591
RoCE 18.3 21.9 23.1 20.7 17.4 17.2 16.6 17.2 17.9 20.4 21.3

Hotels: FY20 performance

Aided by inbound & domestic tourism, meetings & conventions and retail segments,
this segment saw good recovery in the second half FY20 (a GST rate reduction in
Sep 2019 also aided part of recovery), while the first half was impacted due to the
general election and sluggish economic activity. With the addition of new
properties, it has achieved revenue growth of 19% for 9MFY20. Segment Ebitda
grew at 34% YoY aided by higher Revpar and operational leverage. After the hit from
Covid-19 in Q4, its overall revenue and Ebitda growth narrowed to 10% and 12%
respectively.
FY20 new additions

 The business commissioned ITC Royal Bengal, Kolkata (455 rooms). Located
adjacent to ITC Sonar and in close proximity to the new business districts of
Kolkata, this ‘One of a Kind’ luxury hotel is an ode to the region’s cultural
heritage and lineage. Together, the two hotels offer one of the largest meetings
and conventions spaces in eastern India comprising 693 rooms & suites
(including 82 serviced apartments), appx. 1 lakh square feet of banqueting
space, a range of dining destinations and Kaya Kalp - The Royal Spa.
 The Welcomhotel portfolio was augmented with the addition of Welcomhotel
Amritsar (101 rooms). The brand continues to successfully build on the ‘asset-
right’ strategy and during the year opened a Welcomhotel conveniently located
close to the business districts at GST Road, Chennai.
 The company currently has three projects active and is likely to see more
commissioning over FY22 to FY23
 Assurance on safety: To reassure guests at ITC’s hotels, the ‘WeAssure’
programme has been launched to reinforce ITC Hotels’ commitment towards
health, hygiene and safety.
ITC Hotels has launched the WeAssure - Commitment to health, hygiene and safety
“WeAssure” programme to
ensure health and hygiene
Source: ITC, CLSA

Hotels segment performance

Net sales 8,507 10,008 10,062 10,742 11,328 11,870 12,861 13,417 14,175 16,655 18,373
Growth (%) (9.1) 17.6 0.5 6.8 5.5 4.8 8.4 4.3 5.7 17.5 10.3
Ebitda 2,945 3,518 3,626 2,403 2,652 2,394 2,429 2,800 3,124 3,743 4,199
Growth (%) (23.3) 19.5 3.1 (33.7) 10.4 (9.7) 1.5 15.2 11.6 19.8 12.2
Ebitda margin (%) 34.6 35.1 36.0 22.4 23.4 20.2 18.9 20.9 22.0 22.5 22.9
Depreciation (778) (852) (832) (1,027) (1,255) (1,903) (1,872) (1,690) (1,726) (1,966) (2,621)
Ebit 2,166 2,666 2,794 1,377 1,397 491 557 1,110 1,398 1,777 1,578
Growth (%) (31.5) 23.0 4.8 (50.7) 1.5 (64.9) 13.5 99.2 26.0 27.1 (11.2)
Capex 4,179 3,223 7,207 3,956 2,829 9,569 2,915 3,987 6,105 6,690 7,213
As a of revenue 49 32 72 37 25 81 23 30 43 40 39
Capital employed 24,574 27,284 32,376 34,599 36,254 43,010 44,749 46,622 49,991 54,079 57,880
RoCE (%) 9.3 10.3 9.4 4.1 3.9 1.2 1.3 2.4 2.9 3.4 2.8
Industry current Room ITC’s Hotel business has 109 properties and over 10,250 rooms under four distinct
inventory ~290,000 rooms, brands - ‘ITC Hotels’ in the Luxury segment, ‘Welcomhotel’ in the Upper-Upscale
of which ~69,000 rooms are segment, ‘Fortune’ in the Mid-market to Upscale segment and ‘WelcomHeritage’ in
in the Luxury and Upper- the Leisure & Heritage segment. The company is looking to go asset-light for future
Upscale segments endeavours, where it is looking to add managed properties.
Managed properties now ITC’s Hotel portfolio (109 hotel properties with 10,250 rooms)
account for more than 50%
The WelcomeHeritage
of room inventory (36 hotels, 900 rooms)
ITC Hotels (14 hotels,

The Fortune brand (43 4,200 rooms)
hotels, 3,200 rooms)
Welcomhotel (16 hotels,

2,000 rooms)
Source: ITC, CLSA
Asset light strategy for expansion, looking at alternative structure

Moving to an asset  ITC is looking to reduce the share of owned properties from over 50% now to
light model c.40%. Management noted that it would look to expand overall room capacity
to 14,000 rooms, with c.8,600 rooms in the managed category.
 Post undergoing three property capex (ITC Hotels in Ahmedabad,
Welcomhotels at Bhubaneshwar and Welcomhotels in Guntur), the company
aims to keep the business asset light.
 The hotel business has been part of the company since the amalgamation of
ITC Hotels and Ansal Hotel in 2004. Now management is looking at an
alternative structure for the business.
Excerpts from the CEO’s AGM speech

Three phases for growth Reimagining the Future will encompass three distinct phases which will coexist in
the journey ahead. First, a Survival phase as corporates brace to manage the current
crisis. Second, a Reboot phase as businesses align to the new normal with certain
segments experiencing demand destruction, some new trends emerging whilst
several pre-crisis trends accelerate. Third, as the crisis ebbs, corporates will have to
gear up for the next normal with some trends moderating, some remaining at an
elevated level, certain segments witnessing recovery, whilst new opportunities and
industry dynamics get constantly redefined.

Future readiness of ITC

Meeting evolving consumer  Purposeful Innovation for Consumers: ITC’s innovation engine is at work 24x7 to
demands develop future-ready products. This was leveraged by the company as it rapidly
introduced over 40 high quality, first-to-market products and variants during the
pandemic to meet emerging consumer demand. While these science-led
innovations witnessed encouraging consumer responses, the surge in demand for
ITCs portfolio of food and hygiene products required a substantive scale-up in
capacity, contributing to the robust performance evident in the Q1 results.
Digital initiatives proving  Reimagining Digital Transformation: Apart from ecommerce, digital entertainment,
their worth work-from-home conferencing, telemedicine, education, learning and skill
development, eservices, social media communications have all experienced
exponential surges. New technologies such as Industry 4.0, Artificial Intelligence,
Big Data, industrial Internet of Things (IoT) and Machine Learning are being
deployed by all businesses, including ITC’s supply chain and logistics to enhance
operational effectiveness. ITC’s Marketing Command Centre - Sixth Sense -
leverages cloud-technology, cutting-edge social-media engagement tools and a
digital marketing & analytics platform to drive contextual communication and rapid
product development. The Centre has developed into a real-time repository for
market trends. Based on the insights gained, several digital campaigns have been
rolled out and product variants developed.
Strong ESG focus  Rediscovering Sustainability: ITC’s Social Investment initiatives build capacities
for tomorrow through extensive vocational training, women empowerment
programmes and supplementary education. In addition, ITC’s extensive
interventions in agriculture help in empowering millions of farmers. ITC aspires
to meet 50% of its total energy consumption from renewable sources by 2030.
It intends to sequester over four times the CO2 emissions from its operations
as well as create rainwater harvesting potential equivalent to over five times its
net water consumption over the next decade.
 Building Next Generation Agriculture: It is critical that the latent power of Next
Generation Agriculture is unleashed to raise farmer incomes and drive a virtuous
cycle of consumption, investment and employment whilst insulating the farmers
from the threat of climate change by the large-scale promotion of sustainable
agricultural practices. Powered by ITC’s celebrated e-Choupal, and ITC’s social
investments, large-scale interventions have been implemented to enable
climate-smart agriculture, enhance productivity, promote value-addition,
expand market access and exports.
 Enabling Future-ready Innovation: ITC’s deep R&D capabilities are an

invaluable asset enabling it to seize emerging opportunities. With more than
350 highly qualified scientists, LSTC has set up futuristic Centres of Excellence
in Biosciences, Agrisciences and Materials and has filed over 900 patents.
Grooming the leaders of  Developing Entrepreneurial Talent: ITC believes in nurturing a talented pool of
tomorrow “proneurs” - entrepreneurial professionals who operate with a start-up mind-set
but with the crucial advantage of ITC’s institutional resources. This pool of
distributed leaders with wide experience across businesses are supported by a
culture of continuous learning that provides cutting-edge development support
to create the “proneurs‟ of the future.

Appendix 4: Excerpts from ITC’s sustainability report

Highly placed in ITC has been ranked first globally amongst peers (comprising companies with
sustainability rankings market capitalisation between US$38bn and US$51bn) and third overall globally on
ESG performance in the Food Products industry by Sustainalytics - a global ESG
ratings company. ITC has also been rated “AA” by MSCI-ESG - the highest among
global tobacco companies.
Economic performance
A top-10 tax payer  Amongst the top-10 tax payers in the country.
 Over the last five years, the value-added by ITC, (i.e. the value created by the
economic activities of ITC and its employees), aggregated to over Rs2.32trillion
of which nearly Rs1.66 trillion was accrued to the exchequer.
 Foreign exchange earnings in the last 10 years: US$7.2bn, of which c.55%
represents agri exports.
Social performance
 The focus on livelihood creation: Sustainable livelihoods for more than 6 million
people, many of whom represent the weakest in society.
 ITC’s globally celebrated e-Choupal, by providing a 360-degree intervention in
empowering 4mn farmers, has pioneered transformation in the agri sector.
 ITCs investments in creating national assets in the form of state-of the-art
Integrated Consumer Goods Manufacturing facilities as well as iconic premium
Luxury Hotels also drive value chains that enable significant generation of
livelihoods.
 Significant thrust on social sector investments under ‘Mission Sunehra Kal’
initiatives - Natural resource management, Sustainable livelihoods and
Community development programmes in the economic vicinity of operating
locations.
Empowering the population ITC - Social performance
Source: ITC, CLSA

Environmental performance
Meeting significant global  ITC is the only enterprise in the world of its size to have achieved and sustained
sustainability goals the three key global indices of environmental sustainability: being 'water
positive' (for 18 years), 'carbon positive' (for 15 years; sequestering over twice
the amount of CO2 that the company emits), and 'solid waste recycling positive'
(for 13 years).
 Around 41% of total energy consumed is from renewable sources - a creditable
performance given the expanding manufacturing base.
ITC’s Sustainability Targets for 2030

Ambitious targets in place  ITC targets to meet 50% of its total energy consumption from renewable
sources by 2030. It also aims to achieve a 50% reduction in specific emission
and 30% reduction in specific energy consumption over a 2014-15 baseline.
 Continuing its endeavours to enhance its carbon sequestering potential through
Social and Farm Forestry initiatives, ITC aims to sequester over four times the
CO2 emissions from its operations.
 To conserve water, a national priority, ITC plans to achieve a 40% reduction in
specific water consumption from 2014-15 as well as create rainwater harvesting
potential equivalent to over five times its net water consumption.
 As part of its waste management programme, the company aims to ensure that
100% of its packaging is reusable, recyclable or compostable in the next decade.
Supporting millions of  In India, where livelihood generation is an urgent priority, ITC aims to create
livelihoods sustainable livelihoods for over for 10 million people and multiply livelihoods
that will benefit over 50 million people by 2030.
ITC’s 2030 sustainability goals
Source: ITC, CLSA

Details of ITC’s sustainability initiatives

Social forestry initiative statistics
FY17 FY18 FY19 FY20 Cum. till date
No of new villages 276 182 90 205 5,292
No of new beneficiaries 10,823 12,708 12,325 14,632 136,189
Plantation area 38,915 39,504 33,982 35,193 364,240
Pulpwood (acres) 22,345 18,683 na na 227,000
Energy (acres) 16,570 20,327 na na 135,000
Bamboo (acres) 0 494 na na 894
Saplings planted (m) 76 72 636 813 7,579
Agro forestry area (acres) 21,553 19,683 10,379 4,359 116,677
Source: ITC, CLSA
Water stewardship statistics

Water-harvesting
Minor structures (no.) 1,621 1,949 2,543 2,433 14,527
Major structures (no.) 480 392 396 513 4,458
Total structures 2,101 2,341 2,939 2,946 18,985
Watershed area
Area treated (acres) 89,709 68,643 97,128 37,407 366,868
Critical irrigation area (acres) 46,482 29,536 39,977 84,705 766,834
Total watershed area (acres) 136,191 98,179 137,105 122,112 1,133,702
Water storage capacity (bn litres) 3.40 2.90 3.39 3.68 38.16
Direct beneficiaries (no.) 45,835 32,705 25,744 21,026 331,461
Employee person days (m) 0.34 0.15 1.62 1.23 59.84
Source: ITC, CLSA
Sustainable agriculture statistics

Minor irrigation
Group irrigation (no.) 24 31 247 127 1,237
Sprinklers (no.) 1,001 617 1,610 3,306 9,160
Sustainable agriculture
Demonstration plots (no.) 2,602 5,348 4,617 8,338 57,447
Area under demonstration plots (acres) 3,009 7,727
Compost units (no.) 3,931 2,731 3,169 5,572 45,966
Farmer field schools (functional nos.) 1,280 2,084 3,504 4,786 4,786
Farmer field students (functional nos.) 29,343 47,172
Agri business centres
No of centres (no.) 326 381 351 353 353
Source: ITC, CLSA
Low-cost toilet statistics

Individual household toilets (no.) 8,550 7,494 4,443 1,597 37,513
Source: ITC, CLSA

Animal husbandry statistics

No of cattle development centres (functional) 223 211 156 151 151
Breed improvement
No of artificial insemination (,000s) 228 202 146 138 2,505
No of pregnancies (,000s) 123 109 75 67 1,222
No of calfing (,000s) 101 79 62 56 869
Source: ITC, CLSA
Women empowerment statistics

Household income before project Household income post project (Rs/month) Total
(Rs/month) women
3,000-4,999 5,000-6,999 7,000-8,999 9,000-10,999 >11,000
<500 2 30 15 0 0 47
500-999 2,212 5,947 1,884 240 110 10,393
1,000-1,500 2,600 4,942 1,178 341 150 9,211
>1,500 95 180 95 40 20 430
No. of women 4,909 11,099 3,172 621 280 20,081
Source: ITC, CLSA
Ultra-poor women progress initiative

FY18 FY19 FY20 Cum. till date
Beneficiaries (no.)
Women selected 9,900 8,900 6,484 29,184
Women trained 9,900 8,900 8,358 28,458
Women provided assets 9,900 8,900 7,957 28,057
Women graduated 6,600 3,595 6,286 20,081
Enterprise (asset distribution)
On-farm assets 2,104 1,151 51 6,721
Off-farm assets 5,587 5,673 4,884 16,671
Mixed 2,209 2,076 422 4,665
Source: ITC, CLSA
Primary education statistics

Govt schools infra support (no.) 160 162 199 273 1,842
Children covered in read 49 45 115 84 775
India plus program (,000s)
Source: ITC, CLSA
Vocational training statistics

(No.) FY17 FY18 FY19 FY20 Cum. till date
Students enrolled 12,338 11,619 12,172 14,014 81,510
Students trained 11,344 10,584 10,550 12,156 64,459
Students placed 8,084 7,428 7,315 8,865 42,621
Source: ITC, CLSA

Appendix 5: Board of directors

15 member board, of which ITC - Board of directors
10 are independent Name Designation Background
directors Executive directors
Sanjiv Puri Chairman & Managing Mr. Puri Joined ITC in 1986 and has undertaken important
Director positions in the company since such as COO Cigarettes division
(2014) and CEO (2017) before being appointed Chairman in
2018; He is a alumnus of IIT and Wharton School of Business.
Supratim Dutta Chief Financial Officer Mr. Dutta was recently appointed CFO of ITC and has been part
of the company since 1990. He is a Qualified Chattered
accountant and Cost accountant.
Nakul Anand Executive director Mr. Anand was appointed as a whole-time director in 2011 and
oversees the Hospitality and Lifestyle retailing business; He is
an economics graduate from Delhi with an AMP degree from
Bond university.
Sumant Bhargavan Executive director Mr. Bhargavan was appointed as whole-time director in 2018
and is responsible for overseeing the FMCG business; He is an
alumnus of NIT Delhi.
Rajiv Tandon Executive director Mr. Tandon was appointed whole-time director in 2016 and is
responsible for Finance, Audit, IT functions and Investment
subsidiaries; He is a Qualified Chattered accountant.
Independent directors
Shilabhadra Independent director Mr. Banerjee was appointed as Independent director in 2014;
Banerjee Holds a master’s degree from St. Stephens college and M.Phil in
Social Sciences from University of Panjab.
Hemant Bhargava Non-executive director Mr. Bhargava Joined in 2018 to represent LIC; He holds a
master’s degree in economics from financial management from
Jamnalal Bajaj institute of management studies.
Arun Duggal Non-executive director Mr. Duggal was appointed since 2014; He is an alumnus of IIT
& Independent director and IIM.
Atul Jerath Non-executive director Mr. Jerath joined in 2020 to represent General insurances (public
sector) Association of India; He is a commerce graduate from Delhi.
David Robert Non-executive director Mr. Simpson was appointed since 2017 to represent Tobacco
Simpson Manufacturers Ltd., a subsidiary of British American Tobacco plc.
Sunil Behari Mathur Non-executive director Sunil Behari Mathur (75), has been on the ITC Board since July 29,
2005, first as a representative of LIC and then in his individual
capacity as a Non-Executive Independent Director.
Anand Nayak Independent director Anand Nayak (69), joined the ITC Board as a Non-Executive
Independent Director effective July 13, 2019.
Meera Shankar Non-executive director Meera Shankar (69), was appointed as a Non-Executive
Independent Director on the Board of ITC effective September 6,
2012. She served in the Prime Minister's Office for six years from
1985 to 1991 working on foreign policy and security matters.
Ajit Kumar Seth Independent director Ajit Kumar Seth (68), joined the ITC Board as a Non-Executive
Independent Director effective July 13, 2019. Seth is a retired IAS
officer with administrative experience of more than 41 years.
Nirupama Rao Non-executive director Mrs. Rao joined in 2016; She is Post-Graduate in English Literature
& Independent director and a Fellow Harvard University and Brown University.
Source: ITC, CLSA
Valuation details
We use a sum-of-the-parts methodology to value ITC due to its varied businesses.
We value the cigarettes business at 12x Mar-22CL. The FMCG business is valued
at 5x EV/sales. We value the Agribusiness, Hotels and Paper boards, paper &
packaging business at 6x, 10x and 11x EV/Ebitda.
Investment risks
An increase in illicit cigarettes, anti-smoking regulations, sharp GST/cess hikes, and
aggressive diversification in the healthcare sector are the risks to our positive view.
We expect Covid-19-related impact on financials, given high dependence on
tobacco.

Important disclosures ITC - BUY
Important notices
Companies mentioned
ITC (ITC IB - RS169.50 - BUY) KT&G (033780 KS - ₩83,800 - BUY)
Abbott India (BOOT IN - RS16,004.5 - BUY) Lemon Tree (LEMONTRE IN - RS27.8 - BUY)
Altria (N-R) LIC of India (N-R)
Anmol (N-R) L'Oreal (N-R)
Arpita Agro Products (N-R) Lotee (N-R)
Asian Paints (APNT IS - RS2,105.0 - O-PF) Mahindra Holidays (N-R)
Balaji Foods (N-R) Marico (MRCO IB - RS369.9 - U-PF)
Balan Natural Foods (N-R) Modern Foods (N-R)
BAT (N-R) Mondelez Intl (N-R)
BAT Malaysia (ROTH MK - RM10.04 - BUY) Mrs Bector (N-R)
Beirsdorf (N-R) MTR Foods (N-R)
Britannia Industries (BRIT IS - RS3,785.9 - O-PF) Nestle India (NEST IB - RS16,111.8 - SELL)
Capital Foods (N-R) P&G (N-R)
CavinKare (N-R) Parle (N-R)
Colgate (N-R) Patanjali (N-R)
Colgate India (CLGT IB - RS1,436.3 - U-PF) Phillip Morris International (N-R)
Crompton Consumer (CROMPTON IN - RS274.9 - O-PF) Pidilite (PIDI IS - RS1,493.7 - O-PF)
Dabur (DABUR IS - RS524.0 - BUY) Prataap Snacks Ltd (N-R)
Delta Corp (N-R) PVR (PVRL IS - RS1,263.5 - BUY)
Emami (HMN IS - RS350.4 - BUY) Reckitt Benckiser (N-R)
Emami Agro (N-R) Reliance Industries (RIL IB - RS2,238.9 - O-PF)
Essel Propack (N-R) Sajo Industries (N-R)
Godrej Consumer (GCPL IB - RS729.0 - O-PF) Sunrise Foods Private Ltd (N-R)
Gujarat Cooperative Milk Marketing Federation Ltd (N-R) Surya Foods (N-R)
Haldiram (N-R) Swedish Match (N-R)
Havells India (HAVL IB - RS680.6 - SELL) Tata Global Bev (N-R)
Hector Beverages (N-R) Titan (TTAN IB - RS1,253.2 - SELL)
Hershey (N-R) Tobacco Institute of India (N-R)
Hindustan Unilever (HUVR IB - RS2,139.8 - BUY) TTK Prestige (TTKPT IN - RS6,083.9 - BUY)
Huhtamaki Ppl (N-R) Unibic (N-R)
Imperial Brands (N-R) United Spirits (UNSP IB - RS529.8 - O-PF)
Indian Hotels (N-R) Vadilal (N-R)
Inox Leisure (INOL IS - RS281.4 - BUY) Varun Beverages (VBL IN - RS687.0 - BUY)
Japan Tobacco (2914 JP - ¥2,005 - O-PF) Vinni Cosmetics (N-R)
JK Paper (N-R) Voltas (VOLT IS - RS677.2 - O-PF)
Johnson & Johnson (N-R) Westlife (WLDL IN - RS388.8 - BUY)
Jubilant Food (JUBI IN - RS2,347.3 - U-PF) Wipro Consumer (N-R)
Jyothy Labs (N-R) Zydus Wellness Ltd (N-R)
Kansai Nerolac (KNPL IN - RS480.1 - SELL)
Analyst certification
The analyst(s) of this report hereby certify that the views expressed in this research report accurately reflect my/our
own personal views about the securities and/or the issuers and that no part of my/our compensation was, is, or will
be directly or indirectly related to the specific recommendation or views contained in this research report.

Important disclosures
Recommendation history of ITC Ltd ITC IB
Chirag Shah BUY O-PF
Other analysts U-PF SELL
Stock price (Rs)
No coverage N-R
400
350
300
250
200
150
Jan 18 May 18 Sep 18 Jan 19 May 19 Sep 19 Jan 20 May 20 Sep 20
Date Rec Target Date Rec Target

LATEST BUY 220.00 27 Jul 2018 BUY 390.00
12 Jun 2020 O-PF 220.00 17 May 2018 BUY 340.00
17 Jun 2019 BUY 365.00 04 Jan 2018 BUY 330.00
11 Jan 2019 BUY 400.00
Source: CLSA
The policy of CLSA and CL Securities Taiwan Co., Ltd. (“CLST”) is to only publish not in possession of any material, nonpublic information regarding the subject
research that is impartial, independent, clear, fair, and not misleading. company at the time of publication of the report. The analysts further confirm
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Key to CLSA/CLST investment rankings: BUY: Total stock return (including dividends) expected to exceed 20%; O-PF: Total expected return below 20% but
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What are the key details about ITC's FMCG segment?

What are the key details about ITC's FMCG segment?

What are some positives about ITC's cigarette business?

What are some positives about ITC's cigarette business?

ITC

Chirag Shah A new narrative emerging

FMCG: The new value driver

Major shareholders Positive outlook, compelling valuations; upgrade to BUY

What’s the angle? ITC - Rs169.50 - BUY

Bands (from the top): max, +1sd, avg, -1sd, min

150 Rainy day valuation implies 12%

2 chirag.shah@clsa.com 9 October 2020

Why BUY ITC

Source: ITC, CLSA

Revenue contribution trend by segments Ebit contribution trend by segments

Cigarette FMCG Agri business (%) Cigarette FMCG Agri business

Source: ITC, CLSA Source: ITC, CLSA

9 October 2020 chirag.shah@clsa.com 3

Multiple tailwinds ahead for the FMCG business

FMCG revenue growth trend

Source: ITC, CLSA

Divestment of non-core Turnaround in the Home

Bolt on acquisition Addressing white spaces Ability to play adjacencies

Source: CLSA Source: CLSA

4 chirag.shah@clsa.com 9 October 2020

FY10 FY15 FY20 23CL

Source: ITC, CLSA Source: ITC, CLSA

Cigarettes business remains a cash cow

90 (bn sticks) 80 (% YoY)

Source: ITC, CLSA Source: ITC, CLSA

9 October 2020 chirag.shah@clsa.com 5

Capital allocation issues slowly being addressed

Source: ITC, CLSA Source: ITC, CLSA

Long-term positives unfolding, valuations compelling

6 chirag.shah@clsa.com 9 October 2020

Japan Tobacco Inc

India Consumer - Coverage valuations

9 October 2020 chirag.shah@clsa.com 7

Key risks to our view

ITC: business snapshot

Cigarettes Paper, paperboard and packaging Agri business

Sales mix: 4% Ebit mix: 1%

8 chirag.shah@clsa.com 9 October 2020

Profit & Loss (Rsm)

9 October 2020 chirag.shah@clsa.com 9

FMCG: The new value driver

ITC’s FMCG business: an overview

FMCG revenue trend FMCG Ebitda trend

Source: ITC, CLSA Source: ITC, CLSA

10 chirag.shah@clsa.com 9 October 2020

ITC’s FMCG business has evolved

FMCG top line evolution

Source: CLSA Source: CLSA

FMCG segment revenue FMCG sub-segment Cagr FY08-FY20

9 October 2020 chirag.shah@clsa.com 11

Contribution of F&B 81 100 100

12 chirag.shah@clsa.com 9 October 2020

Source: Companies, CLSA

Source: ITC, CLSA

9 October 2020 chirag.shah@clsa.com 13