ITC Cigarette Business

1) ITC is the market leader in cigarettes in India. With its wide range of invaluable brands, it
has a leadership position in every segment of the market.

2) ITC enjoys an 84%share of the cigarette by market value.

3) The last two years though cigarette volumes remain under pressure (down 2-3 per cent
in H1, FY09) thanks to adverse changes in duty rates (excise duty raised, VAT imposed in
FY08, duty on non-filter cigarettes introduced).
Excise and other duties on cigarettes make up 58% of the selling price and thus the pricing of cigarettes
is largely driven by government policies.
Moreover new regulations on cigarette packaging were introduced at the start of the year. Even then,
ITC has managed to grow its sales and profits in this business, led by cost cutting measures, upgrading
customers to filter-cigarettes and price hikes.

4) The pictorialwarnings have been delayed four times and now the government has decided to
make it mandatory from31stMay 2009. But we feel that the effect of pictorialwarningswould
not have desired effect firstly, people buy one or two cigarettes and not the whole pack, so,
they never comes in direct contact with the pictures and secondly, people who smokes are
aware of its negative traits, but it's amatter of habit which does not easily die. Thus, we feel
that the pictorialwarnings will have minimal impact in the consumption of cigarettes.

5) The tobacco industry has received a tax shocks over a couple of times, yet ITC's earnings
remained quite stable. Furthermore, the fixed nature of excise duties (VAT 12.5%) paid to
the state government and excise duties collected by the central government (specified in
Rs. / per stick and on the length of the stick) have the leveraging benefit to the company as
ITCwas able to pass on these hike in excise duty to the customer in the form of increase in
selling price and thus, was able to maintain its EBIT margins.

ITC other FMCG Business

1) ITC entered FMCG space in the year 2001 and was able to grab the market share from its
rivals in a short span of time with the help of strong distribution and brand leveraging.

The company is incurring losses due to the huge advertisement expenditure to position
the brand in the minds of the consumers and ITC had tasted the success by grabbing the
market share from its key competitors in the snacks, biscuit, and soap segment.

The company also entered into the lifestyle business with the name of Wills Lifestyle and
John Players and Personal Care products.

2) The Other FMCG division includes, snacks, ready to eat meals, biscuits, personal care,
lifestyle, etc. we feel that going forward, the Other FMCG business would be able to
start contributing positively into the EBIT margins for the company. We feel that with
the FMCG business getting hold of the nerves of the market, the losses will be reduced
going forward. We have assumed the EBIT margin to be 3% in 2010 and 4% in 2011E
and the company to continue with its advertisement expenditure going forward.

ITC Hotels

1) The ITC Welcomgroup is the second largest hotel chain in India

2) The Hotel industry has taken a hit in October to December quarter which is considered to be
the peak season for the hotel industry due to 26/11 terrorist attack, which resulted into the
lower number of tourists coming into India. We believe that going forward, the Hotel business
will experience a major hit in the margins due to the cancellation of IPL in India and
rescheduling it in South Africa, which further reduces the number of tourists coming in India.
So, for the next two quarters,we don't see major improvement in the hotel business. The
hotel industry is also under pressure due to the setback in the capacity expansion of hotel
industry as a whole. ITC's Hotel business is already feeling the effect, with EBIT growth slowing
to 2% in Q3 FY09. Hence,we have assumed a moderate growth of CAGR5%from2009-2011.

3) The hotel business has registered EBIT margins of 36% in FY07 and 38% in FY08 and 33% in
FY09 and 35% in FY10 due to the economic slow down and Mumbai terrorist attack, which resulted
into the lower number of tourists coming into India. We believe that the hotel business will perform
better going forward, on account of Olympics being organized in 2010 in Delhi and Cricket World Cup in
2011 in India. The capacity expansion will be completed by FY12, but the partly contribution will start
coming from FY11 onwards. Hence we have assumed a moderate Revenue CAGR of 5% and a EBIT CAGR
of 8% from 2009 to 2011.

Current Ratio
The information shows that company’s current liabilities are increasing over its current assets in
the year 2009-10. Before the year 2009-10, company’s current assets gradually increased over
its current liabilities in the last four years , which is a good sign for making investments in the
stock. In the year 2009-10 the current assets didn’t increase in the same proportion as current
liabilities increased.

Debt to Equity Ratio

It can be clearly seen from the financing activities that the company started paying off its debt
from the last year which has again brought down its debt to equity ratio to around 1%. This
shows that the company is less risky to invest in as more funding is done through internal
sources.

EPS
As the profits are increasing the EPS of the company is also increasing despite the fact that the number
of the shares outstanding is also increasing.
Dividend Payout Ratio

As the economies cooled down after a big meltdown company started distributing huge
dividends so as to attract the investors to invest in. As the company created huge reserves in
the previous two years, so they aimed to distribute more and more dividends in the year 2009-
10.

ITC EBIT Overall