EQUITY RESEARCH

REPORT

25th Feb

2023
Prepared by:
Aniruddh Madrewar
Rating: Hold CMP: 381 TP: 387 NSE: ITC
Valuation Excel Sheet Link: Click here
Investment Thesis:
I believe that the stock is correctly priced as the target price is 387 and the current price is 381. The
data is from the Annual Report 2022 of ITC. ITC has a brand value in the market. It has a 30% market
share in FMCG. It has an 80% market share in the tobacco industry. ITC has a great Research and
Development team and hires great talent. It has created its own ecosystem of raw materials,
manufacturing, branding, and selling. It has applied an excellent business model of backward
integration to reduce dependency on suppliers. It has used a great strategy in its CSR policy it has
helped and engaged farmers and these farmers are the suppliers to the ITC. Recently the
government has announced 10 lakh crores of injection in the economy in infrastructure this will
boost the overall economy and all the sectors. An 11% increase in agriculture credit will boost the
agriculture sector. So I think the stock will generate returns for the shareholders.

Company Analysis:
ITC was established in 1910, ITC has diversified businesses in Agriculture, Paperboards &specialty
papers, Packaging Business, ITC Hotels, ITC Infotech, and FMCG. Initially, Its Name was Imperial
Tobacco Company of India Limited. In 1970 the name was changed to Indian Tobacco Company
later changed to I.T.C. and finally ITC.
The company has done great work by implementing Backword Integration in several of its business
divisions. Initially, it was producing just cigarettes then it started doing its own packaging. Later it
launched its own stationery brand. It sources the majority of raw materials in FMCG from its own
Agriculture business. And it also exports these raw materials.
By implementing backward integration ITC has not only improved its supply chain management but
also created new revenue streams and increased its competitiveness in the market.

FMCG-Cigarettes:
Revenues are growing by 16.7% YoY and EBIT by 17%. Margins expanded by 0.11% to 63.4%. ITC is
having a market share of nearly 79% in the cigarette market in India. Per capita consumption of
Cigarettes in India is 89 which is much lower compared to China(2043), Japan(1583), USA(1017) so
there is the potential for growth of the cigarette market and Cigarette an inelastic product even if
the price is increased the demand will not fall proportionally. ITC’s 36% of Revenue comes from
cigarettes and 80% of profits come from the same. So we can see a lot of dependency on this
segment. This is the cash cow for ITC but there is a risk of government sanctions. So, to overcome
this, ITC is diversifying its business and decreasing its dependency on it and it has a lot of cash to do
so. it has a portfolio of brands including, Insignia, India Kings, Classic, Gold Flake, American Club,
Wills Navy Cut, Players, Scissors, Capstan, Berkeley, Bristol, Flake, Silk Cut, Duke & Royal. It has
launched its 5 cigarettes package as many consumers buy loose cigarettes. This has a very big
competition between the unorganized and illegal sectors of tobacco.
In the Budget speech by our finance Minister Nirmala Sitaraman, she announced that they are going
to increase NCCD(National Calamity Contingent Duty) on cigarettes by 16%. Even though it looks
very high as a percentage of the price of cigarettes but it is on NCCD which was earlier Rs 0.44 per
stick which has been increased to Rs 0.51 per stick. The market panicked and the stock started to
decline but later when people got to know about this the stock shot up. This small difference can be
transferred to consumers by increasing price by just 1%-2%. And this is an opportunity for ITC to
increase prices even more by stating the reason for the tax. And as the customer is inelastic there
will not be any loss of customers.
FMCG-Others:

Revenues are growing by 18% YoY and EBIT by 44%. Margins are expanding by 1.2% each year.
ITC is India’s Leading FMCG marketer. It has a 30% market share in it. Its FMCG Business consists
of Foods, Personal Care, Education and stationery Products, Incense Sticks and Safety Matches,
Hygiene, and Protection & Care. Some of these brands like Aashirwad, Sunfeast, Bingo,
Mangaldeep, and Classmate are No 1 in its category. It had acquired many brands like Savlon,
Sunrise Pure, Nimyle, and B Natural. To increase its presence in all FMCG products. ITC is
betting big on millets and is bringing its agri, foods, and hospitality businesses together to give a
mega push to this "superfood". The Company is augmenting its portfolio of millet-based
products with new millet noodles, pasta, dosa, and idli mix, ragi vermicelli; multi-millet-based
cookies, confectionery, and snacks. It has an online app to purchase its all products called the
ITC e-store. ITC is to acquire Yoga Bar in the next 5 years to expand its SKUs.

Agriculture:
Revenue is down by 37% YoY but EBIT grew by 35%. Margins are expanding at 6.5% YoY.
Performance was driven by growth in exports of leaf tobacco and value-added Agri products
like spices and Aqua. Segment Revenue for the current quarter reflects the impact of
restrictions imposed on wheat and rice exports by the Government. ITC's pre-eminent position
as one of India's leading corporates in the agricultural sector is based on the strong and
enduring farmer. A unique rural digital infrastructure network, coupled with a deep
understanding of agricultural practices and intensive research, has built a competitive and
efficient supply chain that creates and delivers immense value across the agricultural value
chain. One of the largest exporters of agri products from the country, ITC sources the finest
Indian Feed Ingredients, Food Grains, Marine Products, Processed Fruits & Coffee.
The unique e-Choupal model creates a significant two-way multi-dimensional channel that can
efficiently carry products and services into and out of rural India while recovering the
associated costs through agri-sourcing-led efficiencies. This initiative now comprises about
6100 installations covering over 35000 villages and serving over 4 million farmers. Currently,
the 'e-Choupal' website provides information to farmers across the 10 States of Madhya
Pradesh, Haryana, Uttarakhand, Uttar Pradesh, Rajasthan, Karnataka, Kerala, Maharashtra,
Andhra Pradesh, and Tamil Nadu.
It also produces tobacco leaves. It uses them for its production of cigarettes and also exports
these leaves. British American Tobacco is the Largest Export partner of these leaves. ITC is
projecting to export up to Rs 2,335 crore of raw tobacco to British American Tobacco (BAT) next
fiscal year, a 17% increase from the estimated shipments in fiscal 2023.
Finance Minister also said that India will be the next millet hub and ITC is diving into millets. The
government has increased the agricultural credit target by over 11 percent over the last year's
allocation to Rs 20 lakh crores for the new financial year. This will also help the Agriculture
business grow. and also the government is injecting 10 lakh crores into the economy in
infrastructure so this will also help boost agriculture in India.
Hotels:

The hotel business of ITC is not a big contributor to its revenue but it is growing very fast at the
rate of 50% YoY. EBIT grew by 189% and the margin expanded by 9.84%. India’s hospitality
sector is growing at a rate of 8% per year. ITC has many brands of hotels including ITC Hotels,
Mementos by ITC Hotels, Welcomhotel, Storii by ITC Hotels, Fortune Park Hotels, and
WelcomHeritage Hotels. Among these, some are joint ventures and some are fully owned by ITC.
ITC believes in keeping this asset light so it just manages the existing hotel chains and uses its
brand name. It does partnerships with the hotel owners to manage hotels on a percentage basis.
The Quality and experience of the hotel are very high as they hire the best talent in the country.

Paperboards & specialty papers:

Revenues grew by 12.7% YoY and EBIT grew by 35% YoY. Margins expanded by 4.38% YoY to
26.3%. Value Added Paperboard (VAP) recorded strong YoY growth aided by higher realizations
and the Fine Paper segment performed well driven by a pickup in the Publications and
Notebooks segments. Sequentially, global pulp prices witnessed some moderation towards the
end of the quarter, even as other input costs remained elevated.
ITC is providing services in a large cross-section of industry requirements - from FMCG cartons
to electrical insulation papers to Bio-based Barrier Coated Board, to decorative laminate bases
to writing and printing papers, and much more. ITC straddles the entire spectrum of
paperboards - from 100% virgin, food-grade boards which are from renewable and sustainable
sources to 100% recycled boards.
Financial Ratio Analysis:
The dividend Payout ratio for ITC is 68% on average for the last 9 years which implies it is
consistently generating cash for the shareholders. Which is a great thing about a company.PB
ratio is 7.59 which is higher but the brand value justifies it. The company has NO DEBT Which is a
great thing about a company. ROA is nearly 18%. ROE is 22% percent which is higher than its
peers. The current Ratio is nearly 3 which is good for short-term investors. Net Profit Margin is
30%.

STRENGTH:
Company Has No Debt.
Increasing Revenue Each and Every Year.
Has Diversified Business, Shows the sustainability of the company.
It is a Cash cow so can go on acquiring new firms to increase market share.
Monopoly in the Tobacco industry.
Strong brand presence & excellent product advertising
Over 6500 E-Choupal CSR activities and sustainability initiatives enhance its brand image
reaching over 4 million farmers
Excellent research and development facilities ensure that the brand manufactures high-
quality products
It also runs an exclusive D2C platform, ITC e-Store, enabling consumers to access more than
700 FMCG products across 45 categories.

Weakness:
ITC has strong competition in the FMCG segment and hence market share growth is slow.
The hotel industry has not been able to create a huge market share.
ITC is heavily reliant on its cigarette business for its revenue. Although it has tried to
diversify its FMCG segment, cigarettes still account for around 40% of revenues and about
80% of operating income.
ITC has a low margin of 1%-2% in the FMCG Segment which is low compared to its
competitors of 14%-15%.
ITC's ESG Schore is 28 which comes in Medium Risk. But ITC is performing better than its
peers.

Valuation:
I have used Discounted Cash Flow (DCF) Valuation Method to Value the stock. I have used the
Free Cash Flow Approach. The intrinsic value Based on the Discounted Cash Flow (DCF)
valuation of ITC stock gives a value be Rs 387, which is equal to the current market value of
381(as per closing price on 25th Feb 2023). This indicates that the stock is correctly valued and
there is no investment opportunity.
My valuation is based on various estimates of sales growth rate, market return, and the risk-free
rate. I have used these estimates to project the future cash flows of ITC and discount them back
to their present value. By doing so, I have taken into account the time value of money and the
risk associated with the company's future cash flows.
In conclusion, based on my DCF valuation on Free Cash Flow, I recommend investing in ITC
stock as it is currently correctly valued.