Description
In this report we look at the opportunity in the dairy sector in India, which is currently worth USD10.8bn and expected to grow at a 15% CAGR over the next five years (as per Euromonitor estimates). We highlight the regional dynamics of the market and the opportunity for ITC (particularly in eastern India).
Rating
Remains
Buy
Target price
Remains
INR 392
Closing price
20 August 2014
INR 345
Potential upside
+13.6%
Anchor themes
Cigarettes will continue to drive
profits for the company in the
medium term, but profit
contribution from the FMCG
business will likely see a
substantial increase in the next
five years.
Nomura vs consensus
We are ~4% ahead of consensus
on FY16F earnings estimates.
Research analysts
India Consumer Related
Manish Jain - NFASL
[email protected]
+91 22 4037 4186
Anup Sudhendranath - NSFSPL
[email protected]
+91 22 4037 5406
Key company data: See page 2 for company data and detailed price/index chart
ITC ITC.NS ITC IN
EQUITY: GENERAL CONSUMER
Plenty of opportunity to milk
How big can the dairy opportunity be for ITC?
Action: Attractive opportunity in dairy sector
In this report we look at the opportunity in the dairy sector in India, which is
currently worth USD10.8bn and expected to grow at a 15% CAGR over the
next five years (as per Euromonitor estimates). We highlight the regional
dynamics of the market and the opportunity for ITC (particularly in eastern
India). Press reports have indicated that the company has been looking to
enter the segment, and with a large unorganised and under-penetrated market
to tap, we believe the dairy business could be a very attractive opportunity for
the company in the medium term. In our report More than a smoke, dated 12
J une 2014, we have highlighted that the company could generate more than
INR18bn in profits by 2018F from the FMCG business. The dairy business, we
think, can add to that number and presents another lever for the company to
scale up its FMCG business. We maintain our Buy rating on ITC with a TP of
INR392.
Catalysts: Scaling up the FMCG business will drive profit margin higher
and reduce dependence on cigarettes going forward
Valuations: ITC trades at 21.6x FY16F vs. sector average of 27.7x
ITC trades at a significant discount to the sector average at current levels.
With uncertainty on the tobacco tax increases now out of the way for another
year, we believe the stock will see a period of steady returns in the next year.
We expect the company to deliver another year of solid earnings growth in
FY15 and, with FMCG business profitability showing an improvement (albeit
gradually), we expect the stock to close the gap with sector average
valuations. ITC continues to be our top pick in the large cap space within the
India consumer sector. The opportunity in the dairy sector can be another
medium-term growth driver for the company, which will add to the
attractiveness of the stock, in our view.
Year-end 31 Mar FY13 FY14F FY15F FY16F
Currency (INR) Actual Old New Old New Old New
Revenue (mn) 316,275 380,585 380,585 443,346 443,346 512,979 512,979
Reported net profit (mn) 76,081 90,474 90,474 107,212 107,212 126,339 126,339
Normalised net profit (mn) 76,081 90,474 90,474 107,212 107,212 126,339 126,339
FD normalised EPS 9.63 11.45 11.45 13.57 13.57 15.99 15.99
FD norm. EPS growth (%) 24.0 18.9 18.9 18.5 18.5 17.8 17.8
FD normalised P/E (x) 35.8 N/A 30.1 N/A 25.4 N/A 21.6
EV/EBITDA (x) 24.3 N/A 19.7 N/A 16.7 N/A 14.2
Price/book (x) 11.2 N/A 10.1 N/A 9.1 N/A 8.8
Dividend yield (%) 2.0 N/A 2.4 N/A 2.8 N/A 4.3
ROE (%) 34.0 35.3 35.3 37.7 37.7 41.4 41.4
Net debt/equity (%) net cash net cash net cash net cash net cash net cash net cash
Source: Company data, Nomura estimates
Global Markets Research
22 August 2014
See Appendix A-1 for analyst certification, important disclosures and the status of non-US analysts.
Nomura | ITC 22 August 2014
2
Key data on ITC
Relative performance chart
Source: Thomson Reuters, Nomura research
Notes:
Performance
(%) 1M 3M 12M
Absolute (INR) 0.2 1.2 9.4 M cap (USDmn) 45,313.6
Absolute (USD) -0.3 -2.0 14.8 Free float (%) 67.0
Rel to MSCI India -3.5 -7.7 -30.4 3-mth ADT (USDmn) 44.1
Income statement (INRmn)
Year-end 31 Mar FY12 FY13 FY14F FY15F FY16F
Revenue 265,442 316,275 380,585 443,346 512,979
Cost of goods sold -101,263 -121,182 -145,566 -169,144 -196,655
Gross profit 164,178 195,093 235,020 274,202 316,324
SG&A -59,311 -70,485 -81,216 -92,474 -102,777
Employee share expense -19,443 -21,456 -26,680 -31,568 -37,000
Operating profit 85,425 103,152 127,124 150,160 176,547
EBITDA 92,880 111,743 137,229 160,868 187,797
Depreciation -7,455 -8,591 -10,105 -10,707 -11,250
Amortisation 0 0 0 0
EBIT 85,425 103,152 127,124 150,160 176,547
Net interest expense -696 -872 -800 -900 -86
Associates & J CEs 0 0 0 0 0
Other income 5,711 8,776 9,105 11,105 12,105
Earnings before tax 90,440 111,057 135,429 160,365 188,566
Income tax -28,458 -34,121 -44,014 -52,119 -62,227
Net profit after tax 61,982 76,936 91,414 108,246 126,339
Minority interests -643 -855 -941 -1,035 0
Other items 0 0 0 0
Preferred dividends 0 0 0 0
Normalised NPAT 61,340 76,081 90,474 107,212 126,339
Extraordinary items 1,242 0 0 0
Reported NPAT 62,581 76,081 90,474 107,212 126,339
Dividends -40,885 -54,398 -64,689 -76,656 -116,232
Transfer to reserves 21,697 21,683 25,785 30,555 10,107
Valuations and ratios
Reported P/E (x) 43.6 35.8 30.1 25.4 21.6
Normalised P/E (x) 44.4 35.8 30.1 25.4 21.6
FD normalised P/E (x) 44.4 35.8 30.1 25.4 21.6
Dividend yield (%) 1.5 2.0 2.4 2.8 4.3
Price/cashflow (x) 32.1 38.0 24.5 23.1 18.7
Price/book (x) 13.3 11.2 10.1 9.1 8.8
EV/EBITDA (x) 29.3 24.3 19.7 16.7 14.2
EV/EBIT (x) 31.8 26.3 21.3 17.9 15.1
Gross margin (%) 61.9 61.7 61.8 61.8 61.7
EBITDA margin (%) 35.0 35.3 36.1 36.3 36.6
EBIT margin (%) 32.2 32.6 33.4 33.9 34.4
Net margin (%) 23.6 24.1 23.8 24.2 24.6
Effective tax rate (%) 31.5 30.7 32.5 32.5 33.0
Dividend payout (%) 65.3 71.5 71.5 71.5 92.0
ROE (%) 33.3 34.0 35.3 37.7 41.4
ROA (pretax %) 33.6 35.3 37.6 39.2 42.4
Growth (%)
Revenue 17.8 19.2 20.3 16.5 15.7
EBITDA 21.0 20.3 22.8 17.2 16.7
Normalised EPS 26.5 24.0 18.9 18.5 17.8
Normalised FDEPS 26.5 24.0 18.9 18.5 17.8
Source: Company data, Nomura estimates
Cashflow statement (INRmn)
Year-end 31 Mar FY12 FY13 FY14F FY15F FY16F
EBITDA 92,880 111,743 137,229 160,868 187,797
Change in working capital -1,290 -7,588 5,870 -32 8,397
Other operating cashflow -6,565 -32,474 -31,650 -42,949 -50,208
Cashflow from operations 85,025 71,682 111,449 117,887 145,985
Capital expenditure -23,397 -26,385 -17,500 -12,500 -10,000
Free cashflow 61,628 45,297 93,949 105,387 135,985
Reduction in investments -3,390 -7,745 -15,000 -20,000 0
Net acquisitions
Dec in other LT assets -10,228 23,908 -5,000 0 0
Inc in other LT liabilities 0 0 0 0 0
Adjustments
CF after investing acts 48,010 61,461 73,949 85,387 135,985
Cash dividends -40,885 -54,398 -64,689 -76,656 -116,232
Equity issue 80 83 0 0 0
Debt issue -173 -165 0 0 0
Convertible debt issue 0 0 0 0 0
Others 0 0 0 0 0
CF from financial acts -40,977 -54,479 -64,689 -76,656 -116,232
Net cashflow 7,032 6,982 9,260 8,730 19,754
Beginning cash 24,269 31,301 38,283 47,543 56,273
Ending cash 31,301 38,283 47,543 56,273 76,027
Ending net debt -30,229 -37,375 -46,635 -55,365 -75,119
Balance sheet (INRmn)
As at 31 Mar FY12 FY13 FY14F FY15F FY16F
Cash & equivalents 31,301 38,283 47,543 56,273 76,027
Marketable securities 0 0 0 0 0
Accounts receivable 27,630 31,717 38,166 44,460 51,443
Inventories 64,281 75,221 90,715 105,674 122,272
Other current assets 1,316 6,241 7,510 8,748 10,122
Total current assets 124,528 151,461 183,933 215,155 259,863
LT investments 52,068 59,813 74,813 94,813 94,813
Fixed assets 97,152 138,854 141,249 143,041 141,791
Goodwill 3,141 3,165 3,165 3,165 3,165
Other intangible assets 0 0 0 0 0
Other LT assets 23,908 0 5,000 5,000 5,000
Total assets 300,798 353,293 408,160 461,174 504,633
Short-term debt 19 0 0 0 0
Accounts payable 49,961 53,721 71,946 83,811 105,407
Other current liabilities 44,787 53,391 64,248 74,843 86,598
Total current liabilities 94,767 107,112 136,194 158,653 192,004
Long-term debt 1,054 908 908 908 908
Convertible debt 0 0 0 0 0
Other LT liabilities 0 0 0 0 0
Total liabilities 95,821 108,020 137,102 159,561 192,912
Minority interest 1,571 1,799 1,799 1,799 1,799
Preferred stock 0 0 0 0 0
Common stock 7,818 7,902 7,902 7,902 7,902
Retained earnings 186,767 223,677 249,462 280,018 290,125
Proposed dividends
Other equity and reserves 8,820 11,895 11,895 11,895 11,895
Total shareholders' equity 203,406 243,474 269,259 299,814 309,921
Total equity & liabilities 300,798 353,293 408,160 461,174 504,633
Liquidity (x)
Current ratio 1.31 1.41 1.35 1.36 1.35
Interest cover 122.8 118.3 158.9 166.8 2,046.7
Leverage
Net debt/EBITDA (x) net cash net cash net cash net cash net cash
Net debt/equity (%) net cash net cash net cash net cash net cash
Per share
Reported EPS (INR) 7.92 9.63 11.45 13.57 15.99
Norm EPS (INR) 7.76 9.63 11.45 13.57 15.99
FD norm EPS (INR) 7.76 9.63 11.45 13.57 15.99
BVPS (INR) 26.02 30.81 34.08 37.94 39.22
DPS (INR) 5.23 6.88 8.19 9.70 14.71
Acti vity (days)
Days receivable 35.8 34.2 33.5 34.0 34.2
Days inventory 219.8 210.1 208.0 211.9 212.1
Days payable 174.7 156.1 157.6 168.1 176.1
Cash cycle 81.0 88.2 84.0 77.9 70.3
Source: Company data, Nomura estimates
Nomura | ITC 22 August 2014
3
ITC has had several success stories in the food segment
In our report More than a smoke, dated 12 J une 2014, we discussed ITC’s FMCG
business in detail. The company has been able to build the second largest FMCG
business in India by revenues with profitability improving significantly over the past five
years. The FMCG business, which contributed 1% of revenue in 2002, now contributes
20% of overall revenue. Some of the key success stories have been Bingo (the second
largest in the wafers segment), Sunfeast Yippee (the second largest in the instant
noodles segment), and its growing market share in the creams biscuits segment under
the Sunfeast brand. While ITC has also been able to build a successful soaps business,
its success in the home and personal care (HPC) segment is relatively more modest.
Dairy is the next big segment that the company may enter
Press reports (e.g. ITC to take on Nestle, PepsiCo , Amul and HUL with dairy products &
non-carbonated drinks, The Economic Times, 20 February 2014) indicate that dairy is
one of the segments that the company is looking to enter in the next year or so. The
media reports also suggest that categories such as juices, tea and coffee in the non-
carbonated beverage space could also be an attractive option for the company. In this
report, we discuss the potential of the dairy sector in India and how it presents a very
attractive opportunity in the long term. We find that a large part of the sector is
unorganised, which presents a huge opportunity for some of the FMCG companies to
establish a presence in the sector.
India is the largest milk producer in the world
India is the largest producer of milk in the world with annual production of 117mn tonnes,
with the next largest producer (the US) at 87mn tonnes. India accounts for nearly 16.2%
of the global production of milk and has been the largest producer of milk in the world for
the last several years.
Fig. 1: Milk production in mn tonnes (FY13)
Source: National Dairy Development Board
Growth has been steady
Over a longer period of time, growth in production has held steady at 4%. While there
have been years where growth has dipped below that average, we would highlight that
for the majority of the past two decades, growth has held up well.
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Nomura | ITC 22 August 2014
4
Fig. 2: Growth in milk production has held steady over a long period of time
Source: National Dairy Development Board
However production varies significantly by region
While overall production has held steady for India, there is significant variation among
regions and states within the country. The states of Uttar Pradesh, Rajasthan, Andhra
Pradesh and Gujarat are the top 4 producers of milk in the country, while the north-east
region, West Bengal and Odisha are the lowest producers.
Fig. 3: State-wise milk production in FY13
State Production (Million Tonnes)
UP 23.3
Rajasthan 13.9
AP 12.8
Gujarat 10.3
Punjab 9.7
MP 8.8
Maharashtra 8.7
Haryana 7.0
TN 7.0
Bihar 6.8
Karnataka 5.7
Rest 18.2
All India 132.4
Source: National Dairy Development Board
East is the most deficient region by far
This variation in production points to the eastern states as being deficient both as
compared to the national average as well as the top 4-5 producing states. While the
north-east region, Odisha and West Bengal account for 13.2% of the population of the
country, they account for only 5.9% of the milk production in the country.
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Nomura | ITC 22 August 2014
5
Fig. 4: Milk production by region (FY13)
State Production (mn Tonnes) % of total Pop mn % of total
Odisha 1.7 1.3% 41.9 3.5%
West Bengal 4.9 3.7% 91.3 7.5%
North east 1.2 0.9% 14.4 1.2%
Average 9.1
Source: National Dairy Development Board
Cooperatives in East India make the lowest contribution
Looking at the contribution by region in terms of milk procurement, the east region
contributes less than 7% of the overall procurement in the country. West is the largest
contributor and points to the fact that Amul is the largest cooperative in the country. The
state of West Bengal, despite being the largest by population and area in the east region,
is only the third largest in terms of milk production even within the east region. More than
67% of the milk from the east region is procured from Bihar, with 21% coming from the
Odisha; West Bengal contributes only 9% even in the regional context.
Fig. 5: Cooperatives in the east contribute the least in terms of milk procurement
Source: National Dairy Development Board
East is a region which consumes less milk
In terms of per capita availability of milk, the average for India is 290gms per day, while
in the eastern states such as West Bengal and Orissa it is much lower at 140gms and
112gms per day, respectively. In the state of Punjab, the availability is more than
945gms per day. Most other states also have per capita average at more than 300gms
per day. This data again points to lower availability of milk in the eastern states,
consistent with the production data.
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Nomura | ITC 22 August 2014
6
Fig. 6: Per capita availability of milk (FY13)
Source: National Dairy Development Board
Opportunity in the dairy sector is very attractive
The Indian dairy sector is a large opportunity (current size USD10.8bn) which has been
growing over the last decade. In fact, growth has picked up significantly over the past
five years as compared to the early 2000s – after averaging 7% for the 2000-05 period,
growth has picked up to 17% over the past five years.
Fig. 7: Indian dairy sector size (USDbn)
Source: Euromonitor
However, a large part of the industry is unorganised
While the total opportunity size is large, the market is highly fragmented with the
organised cooperatives only accounting for ~10% of overall milk production. Amul
accounts for 4% of the total milk production, while cooperatives in several other states
put together account for another 6% of milk production in terms of volumes. The value-
added segment (packaged and processed milk, cheese, butter, etc.) is a small portion of
the overall milk production in the country. This is where the opportunity for organised
players exists in the longer term, in our view. We estimate that more than 80% of the
milk production market is unorganised.
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Nomura | ITC 22 August 2014
7
What is the opportunity size for ITC?
As per Euromonitor estimates, the dairy sector will continue to grow strongly and be a
USD21.5bn opportunity by 2018F. Although ITC’s entry into the segment is only at the
planning stage at this point, we believe its likely entry into the segment, coupled with the
fact that the market is even more unorganised in the east (where it is planning to start up
its dairy business), indicates that upside potential for the company in this segment is very
large.
ITC has in the past entered several categories – such as soaps, instant noodles, wafers
and biscuits – where it has been able to take a reasonable market share in a relatively
small period of time. We believe similar success can be replicated in the dairy business
as well. Even if we assume that the company is able to take a 2% share of the organised
market in value terms 3-4 years after the launch, that would translate into nearly
USD429mn or INR26bn.
What are the factors that can help ITC to succeed in this
segment?
We believe there are several factors that can drive success for ITC in this segment.
•Agri division experience: The company has significant experience of running the agri
business, where it has been able to establish a strong supply chain linking directly to
the farmers. In the dairy business as well, the company will need to establish a similar
platform as some of the other companies, such as Nestle and Amul, have done.
ITC has been creating its dairy back-end at Munger and Saharanpur for the past two
years. The milk procurement network at Munger covers more than 2,800 dairy farmers
with average procurement of over 10,000 litres per day. The company has also started
milk-mapping studies in two other locations. We believe the groundwork for a longer-
term sustainable presence in this segment is already being built by the company.
•Lack of a credible brand in east: Although there are several brands in the country, no
popular brand has a strong presence in the east. Amul has a very strong presence in
the west and Nestle has a strong presence in the north, but the east is a relatively
weaker region for both these players. Other players, both international (such as
Danone) and regional (such as Parag Foods), have a much smaller presence in the
country. ITC can create a niche for itself in this region as it already has a strong brand
name in the region.
What are the segments of interest for ITC?
While dairy is a large opportunity, within this we believe company will be interested in the
value-added segments only. Sourcing plain milk and retailing it is the most basic
opportunity in the segment and hence the scope for value addition is limited. Profitability
in that segment is low and we believe ITC will not be interested in entering a segment
where long-term profitability upside is limited.
However, within the dairy segment there are several value-added segments such as
cheese, yogurt, butter, ice cream, etc. The opportunity in these segments is very
attractive, but competition is also very strong. Apart from domestic companies such as
Amul, competition is also very strong from global companies such as Nestle, Danone,
etc.
Growth in the value-added segment has been very strong across players in the market.
For example, Amul, Hatsun Agro, Britannia, Parag Foods and Mother Dairy have grown
at around 20% CAGR in revenue terms in the past five years or so. For many of these
players, the growth rate has been above 20% and, with the share of the unorganised
market still very high, we believe there is enough opportunity for the growth rate to
continue to remain in the high teens range. Another point to highlight here is that, despite
strong competition in the segment, growth has been strong for all the players. This is a
clear indication of the fact that market growth opportunity remains very attractive in the
long term.
Nomura | ITC 22 August 2014
8
Scale of current players
We have looked at the scale of operations of other players in the dairy business. Most of
the players are privately held unlisted companies, so detailed financials are not available,
but as we highlighted above, growth has been strong across the industry. In terms of
revenue size (data available for players) Amul is the largest player with revenues of
above INR181bn, followed by Mother Dairy. Both of them are cooperatives but there is a
sizeable gap between them and the smaller players in terms of revenue size.
We believe this is an attractive category where, apart from the cooperatives, many of the
companies do not have a large established business. Therein lies the opportunity for ITC
to establish a presence. Also, as we highlighted above, even in terms of region, the east
is significantly under-developed in this business and ITC can fill that gap.
In terms of operating margins, industry profitability is in the mid-single-digit range. If, as
we assume in our base case, ITC achieves revenues of INR26bn in the dairy business 3-
4 years after the launch and operates at 5% margins, it can generate INR1.3bn of
operating profits. As focus continues to strengthen on driving profitability in the non-
tobacco businesses, we believe the company will be a lot more focused on driving
profitability in the next five years than in the last decade.
Fig. 8: Competitors in the dairy business
Company Key segments present
Revenue CAGR
FY10-14 (%)
Revenue
EBITDA
margin (%)
Britannia Dairy Cheese, butter, packaged milk and yogurt 12% ~3bn N.A.
Kwality Dairy Cheese, butter, flavoured milk, flavoured yogurt, paneer 44%
~4.5bn
4%
Mother Dairy Cheese, butter, flavoured yogurt, ice creams 14% ~60bn 3%
Hatsun Agro Butter, yogurt, ice cream and milk 22% ~25bn 7%
Amul India Cheese, butter, yogurt, ice cream, paneer, chocolates 23% ~181bn N.A.
Source: Ace Equity, Nomura research
Maintain Buy with TP of INR392
ITC remains our top pick in the sector from a one-year perspective. Given cheap
valuations vs. the sector, stable earnings growth and no uncertainty over tax rate
increases over the next year, we like ITC from a one-year perspective. The company’s
FMCG business should continue to improve its profitability level over the next three
years, which is also a positive. Dairy represents a huge opportunity for the company from
a medium-term perspective, and we believe the company has the platform to
successfully create a niche for itself in this segment in the next five years.
Nomura | ITC 22 August 2014
9
Fig. 9: consumer valuations
Company Ticker Rating Price INR TP INR EPS growth (%) P/E (x) PEG (x)
FY15F FY16F FY15F FY16F FY15F FY16F
Nestle * NEST IN Neutral 5,796 4,680 19% 20% 38.6x 32.1x 2.0x 1.6x
GSK Consumer * SKB IN Reduce 4,897 4,097 19% 17% 32.1x 27.3x 1.7x 1.6x
J ubilant Foodworks J UBI IN Reduce 1,273 710 9% 26% 64.6x 51.2x 7.2x 2.0x
United Spirits UNSP IN Buy 2,456 3,000 46% 53% 39.1x 25.6x 0.8x 0.5x
F&B Average 39.4x 30.9x
Colgate Palmolive CLGT IN Reduce 1,476 1,230 13% 14% 37.3x 32.7x 2.8x 2.3x
Dabur DABUR IN Buy 220 216 21% 24% 34.7x 27.9x 1.7x 1.1x
Godrej Consumer GCPL IN Buy 937 885 23% 25% 33.1x 26.5x 1.4x 1.1x
Hindustan Unilever HUVR IN Reduce 712 540 7% 10% 38.8x 35.1x 5.8x 3.4x
Marico MRCO IN Buy 265 255 22% 21% 27.8x 23.0x 1.3x 1.1x
Emami HMN IN Buy 616 605 12% 16% 30.5x 26.2x 2.5x 1.6x
HPC Average 36.4x 31.8x
ITC ITC IN Buy 345 392 19% 18% 25.4x 21.6x 1.4x 1.2x
Asian Paints APNT IN BUY 613 690 25% 25% 38.4x 30.7x 1.6x 1.2x
Pidilite Industries PIDI IN Buy 367 328 19% 17% 31.5x 27.0x 1.7x 1.6x
Titan Industries TTAN IN Buy 346 350 19% 21% 34.1x 28.2x 1.8x 1.3x
Bata India * BATA IN Buy 1,237 1,320 13% 21% 35.2x 29.1x 2.7x 1.4x
Retail Average 34.4x 28.3x
Source: Bloomberg, Nomura estimates. Note: * denotes calendar year based valuation; pricing as of 20 August 2014 close; our TPs for Dabur, GCPL, Marico, Emami and Pidilite
are under review
Nomura | ITC 22 August 2014
10
Appendix A-1
Analyst Certification
We, Manish J ain and Anup Sudhendranath, hereby certify (1) that the views expressed in this Research report accurately reflect
our personal views about any or all of the subject securities or issuers referred to in this Research report, (2) no part of our
compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this
Research report and (3) no part of our compensation is tied to any specific investment banking transactions performed by
Nomura Securities International, Inc., Nomura International plc or any other Nomura Group company.
Issuer Specific Regulatory Disclosures
The term "Nomura Group" used herein refers to Nomura Holdings, Inc. or any of its affiliates or subsidiaries, and may refer to one or more
Nomura Group companies.
Materially mentioned issuers
Issuer Ticker Price Price date Stock rating Sector rating Disclosures
ITC ITC IN INR 345 20-Aug-2014 Buy N/A
ITC (ITC IN) INR 345 (20-Aug-2014)
Rating and target price chart (three year history)
Buy (Sector rating: N/A)
Date Rating Target price Closing price
22-May-13 392.00 335.55
07-J an-13 337.00 279.05
20-Sep-12 310.00 256.45
23-J an-12 246.00 204.60
For explanation of ratings refer to the stock rating keys located after chart(s)
Valuation Methodology Our target price is INR392. We value the company using a sum-of-the-parts valuation methodology.
We value the core cigarettes business at INR282 per share based on a P/E multiple of 26x on on FY15E earnings. Other SoTP
valuations: Hotels business at 22x, which gives a value of INR5 per share; the Paper Business EV/EBIT of 8x, which gives a
value of INR13 per share; New Ventures at 4x sales, which gives a value of INR71 per share; the Agri Business at 1x sales,
which gives a value of INR8 per share; and the Cash and Liquid assets of INR13 per share. The benchmark index for this stock
is MSCI India.
Risks that may impede the achievement of the target price Policy directives from the union government form the biggest risk
to our investment view. The tobacco sector is highly levered to policy decision from the central and state governments. Any
changes in the tax structure could prove to be a negative for the company. Stricter laws against smoking and potential changes
to include plain packaging could also have a negative impact on ITC’s earnings and thus our target price. ITC has a dominant
70% market share by volume in India’s cigarette sector, with the cigarette business accounting for over 80% of ITC’s profits. Any
potential opening up of the sector to foreign companies would increase competition, which could hurt ITC’s dominant position in
the market.
Important Disclosures
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Nomura | ITC 22 August 2014
11
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A 'Bullish' stance, indicates that the analyst expects the sector to outperform the Benchmark during the next 12 months. A 'Neutral' stance,
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Explanation of Nomura's equity research rating system in Japan and Asia ex-Japan prior to 21 October 2013
STOCKS
Stock recommendations are based on absolute valuation upside (downside), which is defined as (Target Price - Current Price) / Current Price,
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A 'Bullish' rating means most stocks in the sector have (or the weighted average recommendation of the stocks under coverage is) a positive
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Nomura | ITC 22 August 2014
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Nomura | ITC 22 August 2014
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doc_989199763.pdf
In this report we look at the opportunity in the dairy sector in India, which is currently worth USD10.8bn and expected to grow at a 15% CAGR over the next five years (as per Euromonitor estimates). We highlight the regional dynamics of the market and the opportunity for ITC (particularly in eastern India).
Rating
Remains
Buy
Target price
Remains
INR 392
Closing price
20 August 2014
INR 345
Potential upside
+13.6%
Anchor themes
Cigarettes will continue to drive
profits for the company in the
medium term, but profit
contribution from the FMCG
business will likely see a
substantial increase in the next
five years.
Nomura vs consensus
We are ~4% ahead of consensus
on FY16F earnings estimates.
Research analysts
India Consumer Related
Manish Jain - NFASL
[email protected]
+91 22 4037 4186
Anup Sudhendranath - NSFSPL
[email protected]
+91 22 4037 5406
Key company data: See page 2 for company data and detailed price/index chart
ITC ITC.NS ITC IN
EQUITY: GENERAL CONSUMER
Plenty of opportunity to milk
How big can the dairy opportunity be for ITC?
Action: Attractive opportunity in dairy sector
In this report we look at the opportunity in the dairy sector in India, which is
currently worth USD10.8bn and expected to grow at a 15% CAGR over the
next five years (as per Euromonitor estimates). We highlight the regional
dynamics of the market and the opportunity for ITC (particularly in eastern
India). Press reports have indicated that the company has been looking to
enter the segment, and with a large unorganised and under-penetrated market
to tap, we believe the dairy business could be a very attractive opportunity for
the company in the medium term. In our report More than a smoke, dated 12
J une 2014, we have highlighted that the company could generate more than
INR18bn in profits by 2018F from the FMCG business. The dairy business, we
think, can add to that number and presents another lever for the company to
scale up its FMCG business. We maintain our Buy rating on ITC with a TP of
INR392.
Catalysts: Scaling up the FMCG business will drive profit margin higher
and reduce dependence on cigarettes going forward
Valuations: ITC trades at 21.6x FY16F vs. sector average of 27.7x
ITC trades at a significant discount to the sector average at current levels.
With uncertainty on the tobacco tax increases now out of the way for another
year, we believe the stock will see a period of steady returns in the next year.
We expect the company to deliver another year of solid earnings growth in
FY15 and, with FMCG business profitability showing an improvement (albeit
gradually), we expect the stock to close the gap with sector average
valuations. ITC continues to be our top pick in the large cap space within the
India consumer sector. The opportunity in the dairy sector can be another
medium-term growth driver for the company, which will add to the
attractiveness of the stock, in our view.
Year-end 31 Mar FY13 FY14F FY15F FY16F
Currency (INR) Actual Old New Old New Old New
Revenue (mn) 316,275 380,585 380,585 443,346 443,346 512,979 512,979
Reported net profit (mn) 76,081 90,474 90,474 107,212 107,212 126,339 126,339
Normalised net profit (mn) 76,081 90,474 90,474 107,212 107,212 126,339 126,339
FD normalised EPS 9.63 11.45 11.45 13.57 13.57 15.99 15.99
FD norm. EPS growth (%) 24.0 18.9 18.9 18.5 18.5 17.8 17.8
FD normalised P/E (x) 35.8 N/A 30.1 N/A 25.4 N/A 21.6
EV/EBITDA (x) 24.3 N/A 19.7 N/A 16.7 N/A 14.2
Price/book (x) 11.2 N/A 10.1 N/A 9.1 N/A 8.8
Dividend yield (%) 2.0 N/A 2.4 N/A 2.8 N/A 4.3
ROE (%) 34.0 35.3 35.3 37.7 37.7 41.4 41.4
Net debt/equity (%) net cash net cash net cash net cash net cash net cash net cash
Source: Company data, Nomura estimates
Global Markets Research
22 August 2014
See Appendix A-1 for analyst certification, important disclosures and the status of non-US analysts.
Nomura | ITC 22 August 2014
2
Key data on ITC
Relative performance chart
Source: Thomson Reuters, Nomura research
Notes:
Performance
(%) 1M 3M 12M
Absolute (INR) 0.2 1.2 9.4 M cap (USDmn) 45,313.6
Absolute (USD) -0.3 -2.0 14.8 Free float (%) 67.0
Rel to MSCI India -3.5 -7.7 -30.4 3-mth ADT (USDmn) 44.1
Income statement (INRmn)
Year-end 31 Mar FY12 FY13 FY14F FY15F FY16F
Revenue 265,442 316,275 380,585 443,346 512,979
Cost of goods sold -101,263 -121,182 -145,566 -169,144 -196,655
Gross profit 164,178 195,093 235,020 274,202 316,324
SG&A -59,311 -70,485 -81,216 -92,474 -102,777
Employee share expense -19,443 -21,456 -26,680 -31,568 -37,000
Operating profit 85,425 103,152 127,124 150,160 176,547
EBITDA 92,880 111,743 137,229 160,868 187,797
Depreciation -7,455 -8,591 -10,105 -10,707 -11,250
Amortisation 0 0 0 0
EBIT 85,425 103,152 127,124 150,160 176,547
Net interest expense -696 -872 -800 -900 -86
Associates & J CEs 0 0 0 0 0
Other income 5,711 8,776 9,105 11,105 12,105
Earnings before tax 90,440 111,057 135,429 160,365 188,566
Income tax -28,458 -34,121 -44,014 -52,119 -62,227
Net profit after tax 61,982 76,936 91,414 108,246 126,339
Minority interests -643 -855 -941 -1,035 0
Other items 0 0 0 0
Preferred dividends 0 0 0 0
Normalised NPAT 61,340 76,081 90,474 107,212 126,339
Extraordinary items 1,242 0 0 0
Reported NPAT 62,581 76,081 90,474 107,212 126,339
Dividends -40,885 -54,398 -64,689 -76,656 -116,232
Transfer to reserves 21,697 21,683 25,785 30,555 10,107
Valuations and ratios
Reported P/E (x) 43.6 35.8 30.1 25.4 21.6
Normalised P/E (x) 44.4 35.8 30.1 25.4 21.6
FD normalised P/E (x) 44.4 35.8 30.1 25.4 21.6
Dividend yield (%) 1.5 2.0 2.4 2.8 4.3
Price/cashflow (x) 32.1 38.0 24.5 23.1 18.7
Price/book (x) 13.3 11.2 10.1 9.1 8.8
EV/EBITDA (x) 29.3 24.3 19.7 16.7 14.2
EV/EBIT (x) 31.8 26.3 21.3 17.9 15.1
Gross margin (%) 61.9 61.7 61.8 61.8 61.7
EBITDA margin (%) 35.0 35.3 36.1 36.3 36.6
EBIT margin (%) 32.2 32.6 33.4 33.9 34.4
Net margin (%) 23.6 24.1 23.8 24.2 24.6
Effective tax rate (%) 31.5 30.7 32.5 32.5 33.0
Dividend payout (%) 65.3 71.5 71.5 71.5 92.0
ROE (%) 33.3 34.0 35.3 37.7 41.4
ROA (pretax %) 33.6 35.3 37.6 39.2 42.4
Growth (%)
Revenue 17.8 19.2 20.3 16.5 15.7
EBITDA 21.0 20.3 22.8 17.2 16.7
Normalised EPS 26.5 24.0 18.9 18.5 17.8
Normalised FDEPS 26.5 24.0 18.9 18.5 17.8
Source: Company data, Nomura estimates
Cashflow statement (INRmn)
Year-end 31 Mar FY12 FY13 FY14F FY15F FY16F
EBITDA 92,880 111,743 137,229 160,868 187,797
Change in working capital -1,290 -7,588 5,870 -32 8,397
Other operating cashflow -6,565 -32,474 -31,650 -42,949 -50,208
Cashflow from operations 85,025 71,682 111,449 117,887 145,985
Capital expenditure -23,397 -26,385 -17,500 -12,500 -10,000
Free cashflow 61,628 45,297 93,949 105,387 135,985
Reduction in investments -3,390 -7,745 -15,000 -20,000 0
Net acquisitions
Dec in other LT assets -10,228 23,908 -5,000 0 0
Inc in other LT liabilities 0 0 0 0 0
Adjustments
CF after investing acts 48,010 61,461 73,949 85,387 135,985
Cash dividends -40,885 -54,398 -64,689 -76,656 -116,232
Equity issue 80 83 0 0 0
Debt issue -173 -165 0 0 0
Convertible debt issue 0 0 0 0 0
Others 0 0 0 0 0
CF from financial acts -40,977 -54,479 -64,689 -76,656 -116,232
Net cashflow 7,032 6,982 9,260 8,730 19,754
Beginning cash 24,269 31,301 38,283 47,543 56,273
Ending cash 31,301 38,283 47,543 56,273 76,027
Ending net debt -30,229 -37,375 -46,635 -55,365 -75,119
Balance sheet (INRmn)
As at 31 Mar FY12 FY13 FY14F FY15F FY16F
Cash & equivalents 31,301 38,283 47,543 56,273 76,027
Marketable securities 0 0 0 0 0
Accounts receivable 27,630 31,717 38,166 44,460 51,443
Inventories 64,281 75,221 90,715 105,674 122,272
Other current assets 1,316 6,241 7,510 8,748 10,122
Total current assets 124,528 151,461 183,933 215,155 259,863
LT investments 52,068 59,813 74,813 94,813 94,813
Fixed assets 97,152 138,854 141,249 143,041 141,791
Goodwill 3,141 3,165 3,165 3,165 3,165
Other intangible assets 0 0 0 0 0
Other LT assets 23,908 0 5,000 5,000 5,000
Total assets 300,798 353,293 408,160 461,174 504,633
Short-term debt 19 0 0 0 0
Accounts payable 49,961 53,721 71,946 83,811 105,407
Other current liabilities 44,787 53,391 64,248 74,843 86,598
Total current liabilities 94,767 107,112 136,194 158,653 192,004
Long-term debt 1,054 908 908 908 908
Convertible debt 0 0 0 0 0
Other LT liabilities 0 0 0 0 0
Total liabilities 95,821 108,020 137,102 159,561 192,912
Minority interest 1,571 1,799 1,799 1,799 1,799
Preferred stock 0 0 0 0 0
Common stock 7,818 7,902 7,902 7,902 7,902
Retained earnings 186,767 223,677 249,462 280,018 290,125
Proposed dividends
Other equity and reserves 8,820 11,895 11,895 11,895 11,895
Total shareholders' equity 203,406 243,474 269,259 299,814 309,921
Total equity & liabilities 300,798 353,293 408,160 461,174 504,633
Liquidity (x)
Current ratio 1.31 1.41 1.35 1.36 1.35
Interest cover 122.8 118.3 158.9 166.8 2,046.7
Leverage
Net debt/EBITDA (x) net cash net cash net cash net cash net cash
Net debt/equity (%) net cash net cash net cash net cash net cash
Per share
Reported EPS (INR) 7.92 9.63 11.45 13.57 15.99
Norm EPS (INR) 7.76 9.63 11.45 13.57 15.99
FD norm EPS (INR) 7.76 9.63 11.45 13.57 15.99
BVPS (INR) 26.02 30.81 34.08 37.94 39.22
DPS (INR) 5.23 6.88 8.19 9.70 14.71
Acti vity (days)
Days receivable 35.8 34.2 33.5 34.0 34.2
Days inventory 219.8 210.1 208.0 211.9 212.1
Days payable 174.7 156.1 157.6 168.1 176.1
Cash cycle 81.0 88.2 84.0 77.9 70.3
Source: Company data, Nomura estimates
Nomura | ITC 22 August 2014
3
ITC has had several success stories in the food segment
In our report More than a smoke, dated 12 J une 2014, we discussed ITC’s FMCG
business in detail. The company has been able to build the second largest FMCG
business in India by revenues with profitability improving significantly over the past five
years. The FMCG business, which contributed 1% of revenue in 2002, now contributes
20% of overall revenue. Some of the key success stories have been Bingo (the second
largest in the wafers segment), Sunfeast Yippee (the second largest in the instant
noodles segment), and its growing market share in the creams biscuits segment under
the Sunfeast brand. While ITC has also been able to build a successful soaps business,
its success in the home and personal care (HPC) segment is relatively more modest.
Dairy is the next big segment that the company may enter
Press reports (e.g. ITC to take on Nestle, PepsiCo , Amul and HUL with dairy products &
non-carbonated drinks, The Economic Times, 20 February 2014) indicate that dairy is
one of the segments that the company is looking to enter in the next year or so. The
media reports also suggest that categories such as juices, tea and coffee in the non-
carbonated beverage space could also be an attractive option for the company. In this
report, we discuss the potential of the dairy sector in India and how it presents a very
attractive opportunity in the long term. We find that a large part of the sector is
unorganised, which presents a huge opportunity for some of the FMCG companies to
establish a presence in the sector.
India is the largest milk producer in the world
India is the largest producer of milk in the world with annual production of 117mn tonnes,
with the next largest producer (the US) at 87mn tonnes. India accounts for nearly 16.2%
of the global production of milk and has been the largest producer of milk in the world for
the last several years.
Fig. 1: Milk production in mn tonnes (FY13)
Source: National Dairy Development Board
Growth has been steady
Over a longer period of time, growth in production has held steady at 4%. While there
have been years where growth has dipped below that average, we would highlight that
for the majority of the past two decades, growth has held up well.
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Nomura | ITC 22 August 2014
4
Fig. 2: Growth in milk production has held steady over a long period of time
Source: National Dairy Development Board
However production varies significantly by region
While overall production has held steady for India, there is significant variation among
regions and states within the country. The states of Uttar Pradesh, Rajasthan, Andhra
Pradesh and Gujarat are the top 4 producers of milk in the country, while the north-east
region, West Bengal and Odisha are the lowest producers.
Fig. 3: State-wise milk production in FY13
State Production (Million Tonnes)
UP 23.3
Rajasthan 13.9
AP 12.8
Gujarat 10.3
Punjab 9.7
MP 8.8
Maharashtra 8.7
Haryana 7.0
TN 7.0
Bihar 6.8
Karnataka 5.7
Rest 18.2
All India 132.4
Source: National Dairy Development Board
East is the most deficient region by far
This variation in production points to the eastern states as being deficient both as
compared to the national average as well as the top 4-5 producing states. While the
north-east region, Odisha and West Bengal account for 13.2% of the population of the
country, they account for only 5.9% of the milk production in the country.
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Nomura | ITC 22 August 2014
5
Fig. 4: Milk production by region (FY13)
State Production (mn Tonnes) % of total Pop mn % of total
Odisha 1.7 1.3% 41.9 3.5%
West Bengal 4.9 3.7% 91.3 7.5%
North east 1.2 0.9% 14.4 1.2%
Average 9.1
Source: National Dairy Development Board
Cooperatives in East India make the lowest contribution
Looking at the contribution by region in terms of milk procurement, the east region
contributes less than 7% of the overall procurement in the country. West is the largest
contributor and points to the fact that Amul is the largest cooperative in the country. The
state of West Bengal, despite being the largest by population and area in the east region,
is only the third largest in terms of milk production even within the east region. More than
67% of the milk from the east region is procured from Bihar, with 21% coming from the
Odisha; West Bengal contributes only 9% even in the regional context.
Fig. 5: Cooperatives in the east contribute the least in terms of milk procurement
Source: National Dairy Development Board
East is a region which consumes less milk
In terms of per capita availability of milk, the average for India is 290gms per day, while
in the eastern states such as West Bengal and Orissa it is much lower at 140gms and
112gms per day, respectively. In the state of Punjab, the availability is more than
945gms per day. Most other states also have per capita average at more than 300gms
per day. This data again points to lower availability of milk in the eastern states,
consistent with the production data.
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Nomura | ITC 22 August 2014
6
Fig. 6: Per capita availability of milk (FY13)
Source: National Dairy Development Board
Opportunity in the dairy sector is very attractive
The Indian dairy sector is a large opportunity (current size USD10.8bn) which has been
growing over the last decade. In fact, growth has picked up significantly over the past
five years as compared to the early 2000s – after averaging 7% for the 2000-05 period,
growth has picked up to 17% over the past five years.
Fig. 7: Indian dairy sector size (USDbn)
Source: Euromonitor
However, a large part of the industry is unorganised
While the total opportunity size is large, the market is highly fragmented with the
organised cooperatives only accounting for ~10% of overall milk production. Amul
accounts for 4% of the total milk production, while cooperatives in several other states
put together account for another 6% of milk production in terms of volumes. The value-
added segment (packaged and processed milk, cheese, butter, etc.) is a small portion of
the overall milk production in the country. This is where the opportunity for organised
players exists in the longer term, in our view. We estimate that more than 80% of the
milk production market is unorganised.
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Nomura | ITC 22 August 2014
7
What is the opportunity size for ITC?
As per Euromonitor estimates, the dairy sector will continue to grow strongly and be a
USD21.5bn opportunity by 2018F. Although ITC’s entry into the segment is only at the
planning stage at this point, we believe its likely entry into the segment, coupled with the
fact that the market is even more unorganised in the east (where it is planning to start up
its dairy business), indicates that upside potential for the company in this segment is very
large.
ITC has in the past entered several categories – such as soaps, instant noodles, wafers
and biscuits – where it has been able to take a reasonable market share in a relatively
small period of time. We believe similar success can be replicated in the dairy business
as well. Even if we assume that the company is able to take a 2% share of the organised
market in value terms 3-4 years after the launch, that would translate into nearly
USD429mn or INR26bn.
What are the factors that can help ITC to succeed in this
segment?
We believe there are several factors that can drive success for ITC in this segment.
•Agri division experience: The company has significant experience of running the agri
business, where it has been able to establish a strong supply chain linking directly to
the farmers. In the dairy business as well, the company will need to establish a similar
platform as some of the other companies, such as Nestle and Amul, have done.
ITC has been creating its dairy back-end at Munger and Saharanpur for the past two
years. The milk procurement network at Munger covers more than 2,800 dairy farmers
with average procurement of over 10,000 litres per day. The company has also started
milk-mapping studies in two other locations. We believe the groundwork for a longer-
term sustainable presence in this segment is already being built by the company.
•Lack of a credible brand in east: Although there are several brands in the country, no
popular brand has a strong presence in the east. Amul has a very strong presence in
the west and Nestle has a strong presence in the north, but the east is a relatively
weaker region for both these players. Other players, both international (such as
Danone) and regional (such as Parag Foods), have a much smaller presence in the
country. ITC can create a niche for itself in this region as it already has a strong brand
name in the region.
What are the segments of interest for ITC?
While dairy is a large opportunity, within this we believe company will be interested in the
value-added segments only. Sourcing plain milk and retailing it is the most basic
opportunity in the segment and hence the scope for value addition is limited. Profitability
in that segment is low and we believe ITC will not be interested in entering a segment
where long-term profitability upside is limited.
However, within the dairy segment there are several value-added segments such as
cheese, yogurt, butter, ice cream, etc. The opportunity in these segments is very
attractive, but competition is also very strong. Apart from domestic companies such as
Amul, competition is also very strong from global companies such as Nestle, Danone,
etc.
Growth in the value-added segment has been very strong across players in the market.
For example, Amul, Hatsun Agro, Britannia, Parag Foods and Mother Dairy have grown
at around 20% CAGR in revenue terms in the past five years or so. For many of these
players, the growth rate has been above 20% and, with the share of the unorganised
market still very high, we believe there is enough opportunity for the growth rate to
continue to remain in the high teens range. Another point to highlight here is that, despite
strong competition in the segment, growth has been strong for all the players. This is a
clear indication of the fact that market growth opportunity remains very attractive in the
long term.
Nomura | ITC 22 August 2014
8
Scale of current players
We have looked at the scale of operations of other players in the dairy business. Most of
the players are privately held unlisted companies, so detailed financials are not available,
but as we highlighted above, growth has been strong across the industry. In terms of
revenue size (data available for players) Amul is the largest player with revenues of
above INR181bn, followed by Mother Dairy. Both of them are cooperatives but there is a
sizeable gap between them and the smaller players in terms of revenue size.
We believe this is an attractive category where, apart from the cooperatives, many of the
companies do not have a large established business. Therein lies the opportunity for ITC
to establish a presence. Also, as we highlighted above, even in terms of region, the east
is significantly under-developed in this business and ITC can fill that gap.
In terms of operating margins, industry profitability is in the mid-single-digit range. If, as
we assume in our base case, ITC achieves revenues of INR26bn in the dairy business 3-
4 years after the launch and operates at 5% margins, it can generate INR1.3bn of
operating profits. As focus continues to strengthen on driving profitability in the non-
tobacco businesses, we believe the company will be a lot more focused on driving
profitability in the next five years than in the last decade.
Fig. 8: Competitors in the dairy business
Company Key segments present
Revenue CAGR
FY10-14 (%)
Revenue
EBITDA
margin (%)
Britannia Dairy Cheese, butter, packaged milk and yogurt 12% ~3bn N.A.
Kwality Dairy Cheese, butter, flavoured milk, flavoured yogurt, paneer 44%
~4.5bn
4%
Mother Dairy Cheese, butter, flavoured yogurt, ice creams 14% ~60bn 3%
Hatsun Agro Butter, yogurt, ice cream and milk 22% ~25bn 7%
Amul India Cheese, butter, yogurt, ice cream, paneer, chocolates 23% ~181bn N.A.
Source: Ace Equity, Nomura research
Maintain Buy with TP of INR392
ITC remains our top pick in the sector from a one-year perspective. Given cheap
valuations vs. the sector, stable earnings growth and no uncertainty over tax rate
increases over the next year, we like ITC from a one-year perspective. The company’s
FMCG business should continue to improve its profitability level over the next three
years, which is also a positive. Dairy represents a huge opportunity for the company from
a medium-term perspective, and we believe the company has the platform to
successfully create a niche for itself in this segment in the next five years.
Nomura | ITC 22 August 2014
9
Fig. 9: consumer valuations
Company Ticker Rating Price INR TP INR EPS growth (%) P/E (x) PEG (x)
FY15F FY16F FY15F FY16F FY15F FY16F
Nestle * NEST IN Neutral 5,796 4,680 19% 20% 38.6x 32.1x 2.0x 1.6x
GSK Consumer * SKB IN Reduce 4,897 4,097 19% 17% 32.1x 27.3x 1.7x 1.6x
J ubilant Foodworks J UBI IN Reduce 1,273 710 9% 26% 64.6x 51.2x 7.2x 2.0x
United Spirits UNSP IN Buy 2,456 3,000 46% 53% 39.1x 25.6x 0.8x 0.5x
F&B Average 39.4x 30.9x
Colgate Palmolive CLGT IN Reduce 1,476 1,230 13% 14% 37.3x 32.7x 2.8x 2.3x
Dabur DABUR IN Buy 220 216 21% 24% 34.7x 27.9x 1.7x 1.1x
Godrej Consumer GCPL IN Buy 937 885 23% 25% 33.1x 26.5x 1.4x 1.1x
Hindustan Unilever HUVR IN Reduce 712 540 7% 10% 38.8x 35.1x 5.8x 3.4x
Marico MRCO IN Buy 265 255 22% 21% 27.8x 23.0x 1.3x 1.1x
Emami HMN IN Buy 616 605 12% 16% 30.5x 26.2x 2.5x 1.6x
HPC Average 36.4x 31.8x
ITC ITC IN Buy 345 392 19% 18% 25.4x 21.6x 1.4x 1.2x
Asian Paints APNT IN BUY 613 690 25% 25% 38.4x 30.7x 1.6x 1.2x
Pidilite Industries PIDI IN Buy 367 328 19% 17% 31.5x 27.0x 1.7x 1.6x
Titan Industries TTAN IN Buy 346 350 19% 21% 34.1x 28.2x 1.8x 1.3x
Bata India * BATA IN Buy 1,237 1,320 13% 21% 35.2x 29.1x 2.7x 1.4x
Retail Average 34.4x 28.3x
Source: Bloomberg, Nomura estimates. Note: * denotes calendar year based valuation; pricing as of 20 August 2014 close; our TPs for Dabur, GCPL, Marico, Emami and Pidilite
are under review
Nomura | ITC 22 August 2014
10
Appendix A-1
Analyst Certification
We, Manish J ain and Anup Sudhendranath, hereby certify (1) that the views expressed in this Research report accurately reflect
our personal views about any or all of the subject securities or issuers referred to in this Research report, (2) no part of our
compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this
Research report and (3) no part of our compensation is tied to any specific investment banking transactions performed by
Nomura Securities International, Inc., Nomura International plc or any other Nomura Group company.
Issuer Specific Regulatory Disclosures
The term "Nomura Group" used herein refers to Nomura Holdings, Inc. or any of its affiliates or subsidiaries, and may refer to one or more
Nomura Group companies.
Materially mentioned issuers
Issuer Ticker Price Price date Stock rating Sector rating Disclosures
ITC ITC IN INR 345 20-Aug-2014 Buy N/A
ITC (ITC IN) INR 345 (20-Aug-2014)
Rating and target price chart (three year history)
Buy (Sector rating: N/A)
Date Rating Target price Closing price
22-May-13 392.00 335.55
07-J an-13 337.00 279.05
20-Sep-12 310.00 256.45
23-J an-12 246.00 204.60
For explanation of ratings refer to the stock rating keys located after chart(s)
Valuation Methodology Our target price is INR392. We value the company using a sum-of-the-parts valuation methodology.
We value the core cigarettes business at INR282 per share based on a P/E multiple of 26x on on FY15E earnings. Other SoTP
valuations: Hotels business at 22x, which gives a value of INR5 per share; the Paper Business EV/EBIT of 8x, which gives a
value of INR13 per share; New Ventures at 4x sales, which gives a value of INR71 per share; the Agri Business at 1x sales,
which gives a value of INR8 per share; and the Cash and Liquid assets of INR13 per share. The benchmark index for this stock
is MSCI India.
Risks that may impede the achievement of the target price Policy directives from the union government form the biggest risk
to our investment view. The tobacco sector is highly levered to policy decision from the central and state governments. Any
changes in the tax structure could prove to be a negative for the company. Stricter laws against smoking and potential changes
to include plain packaging could also have a negative impact on ITC’s earnings and thus our target price. ITC has a dominant
70% market share by volume in India’s cigarette sector, with the cigarette business accounting for over 80% of ITC’s profits. Any
potential opening up of the sector to foreign companies would increase competition, which could hurt ITC’s dominant position in
the market.
Important Disclosures
Online availability of research and conflict-of-interest disclosures
Nomura research is available on www.nomuranow.com/research, Bloomberg, Capital IQ, Factset, MarkitHub, Reuters and ThomsonOne.
Nomura | ITC 22 August 2014
11
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email [email protected] for help.
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Distribution of ratings (Global)
The distribution of all ratings published by Nomura Global Equity Research is as follows:
47% have been assigned a Buy rating which, for purposes of mandatory disclosures, are classified as a Buy rating; 41% of companies with this
rating are investment banking clients of the Nomura Group*.
43% have been assigned a Neutral rating which, for purposes of mandatory disclosures, is classified as a Hold rating; 54% of companies with
this rating are investment banking clients of the Nomura Group*.
10% have been assigned a Reduce rating which, for purposes of mandatory disclosures, are classified as a Sell rating; 24% of companies with
this rating are investment banking clients of the Nomura Group*.
As at 30 J une 2014. *The Nomura Group as defined in the Disclaimer section at the end of this report.
Explanation of Nomura's equity research rating system in Europe, Middle East and Africa, US and Latin America, and
Japan and Asia ex-Japan from 21 October 2013
The rating system is a relative system, indicating expected performance against a specific benchmark identified for each individual stock,
subject to limited management discretion. An analyst’s target price is an assessment of the current intrinsic fair value of the stock based on an
appropriate valuation methodology determined by the analyst. Valuation methodologies include, but are not limited to, discounted cash flow
analysis, expected return on equity and multiple analysis. Analysts may also indicate expected absolute upside/downside relative to the stated
target price, defined as (target price - current price)/current price.
STOCKS
A rating of 'Buy', indicates that the analyst expects the stock to outperform the Benchmark over the next 12 months. A rating of 'Neutral',
indicates that the analyst expects the stock to perform in line with the Benchmark over the next 12 months. A rating of 'Reduce', indicates that
the analyst expects the stock to underperform the Benchmark over the next 12 months. A rating of 'Suspended', indicates that the rating, target
price and estimates have been suspended temporarily to comply with applicable regulations and/or firm policies. Securities and/or companies
that are labelled as 'Not rated' or shown as 'No rating' are not in regular research coverage. Investors should not expect continuing or
additional information from Nomura relating to such securities and/or companies. Benchmarks are as follows: United States/Europe/Asia ex-
Japan: please see valuation methodologies for explanations of relevant benchmarks for stocks, which can be accessed
at:http://go.nomuranow.com/research/globalresearchportal/pages/disclosures/disclosures.aspx; Global Emerging Markets (ex-Asia): MSCI
Emerging Markets ex-Asia, unless otherwise stated in the valuation methodology; Japan: Russell/Nomura Large Cap.
SECTORS
A 'Bullish' stance, indicates that the analyst expects the sector to outperform the Benchmark during the next 12 months. A 'Neutral' stance,
indicates that the analyst expects the sector to perform in line with the Benchmark during the next 12 months. A 'Bearish' stance, indicates that
the analyst expects the sector to underperform the Benchmark during the next 12 months. Sectors that are labelled as 'Not rated' or shown as
'N/A' are not assigned ratings. Benchmarks are as follows: United States: S&P 500; Europe: Dow J ones STOXX 600; Global Emerging
Markets (ex-Asia): MSCI Emerging Markets ex-Asia. Japan/Asia ex-Japan: Sector ratings are not assigned.
Explanation of Nomura's equity research rating system in Japan and Asia ex-Japan prior to 21 October 2013
STOCKS
Stock recommendations are based on absolute valuation upside (downside), which is defined as (Target Price - Current Price) / Current Price,
subject to limited management discretion. In most cases, the Target Price will equal the analyst's 12-month intrinsic valuation of the stock,
based on an appropriate valuation methodology such as discounted cash flow, multiple analysis, etc. A 'Buy' recommendation indicates that
potential upside is 15% or more. A 'Neutral' recommendation indicates that potential upside is less than 15% or downside is less than 5%. A
'Reduce' recommendation indicates that potential downside is 5% or more. A rating of 'Suspended' indicates that the rating and target price
have been suspended temporarily to comply with applicable regulations and/or firm policies in certain circumstances including when Nomura is
acting in an advisory capacity in a merger or strategic transaction involving the subject company. Securities and/or companies that are labelled
as 'Not rated' or shown as 'No rating' are not in regular research coverage of the Nomura entity identified in the top banner. Investors should
not expect continuing or additional information from Nomura relating to such securities and/or companies.
SECTORS
A 'Bullish' rating means most stocks in the sector have (or the weighted average recommendation of the stocks under coverage is) a positive
absolute recommendation. A 'Neutral' rating means most stocks in the sector have (or the weighted average recommendation of the stocks
under coverage is) a neutral absolute recommendation. A 'Bearish' rating means most stocks in the sector have (or the weighted average
recommendation of the stocks under coverage is) a negative absolute recommendation.
Nomura | ITC 22 August 2014
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Target Price
A Target Price, if discussed, reflects in part the analyst's estimates for the company's earnings. The achievement of any target price may be
impeded by general market and macroeconomic trends, and by other risks related to the company or the market, and may not occur if the
company's earnings differ from estimates.
Disclaimers
This document contains material that has been prepared by the Nomura entity identified at the top or bottom of page 1 herein, if any, and/or,
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services to NSL under a Research Assistance Agreement.
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Nomura | ITC 22 August 2014
13
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