ITC Logo
Media Centre
Press Report

Paper gains?
The Economic Times - 17 Nov 2003

ITC acquires paperboard unit of BILT- a neutral event: ITC has established a dominant position in the value-added paperboard segment in India with the acquisition of a 65,000-tonne facility for Rs 2.33 bn. The overall market size for value added paperboard in India is about 250,000 tonne. ITC would now account for more than 80% of this market and would thus have some pricing power for its overall business. The current pricing for paperboard is at lower than import parity pricing and to that extent there is a leeway to improve the product price depending on the demand elasticity.

As per the terms of the deal, there are six bullet payments of equal size beginning in year 0 and then at the end of every year until year five. The NPV of the deal using a cost of capital of 13% for ITC works out to Rs 1.8 bn. Operating at a steady state, the acquired unit should be able to generate sales of Rs 1.9 bn-2 bn and earn 15-20% EBIT margins, without factoring in much upside from pricing. As such, in theory the acquisition should be able to generate enough cash flows to pay back the cost of acquisition over the five-year time frame. We believe this acquisition does not mean any increase in outlay for capital expenditure for ITC and will be within the Rs 6 bn guidance for annual capex.

Limited impact on overall corporate profitability:

The impact of the acquisition, as we have assumed in our earnings model, is limited. Our EPS for FY05E and FY06E have increased by 1.2% each. We have not altered our capex projections and believe it will be capped within Rs 6 bn annually. We have assumed that in FY05 ITC can utilise 70% of the acquired capacity and 80% in FY06. There would likely be upside if ITC delivers a higher utilisation rate.

Investment thesis:

We rate ITC Buy/low risk (1L). Our positive call on the stock is premised on a recovery for the core cigarette business as well as cyclical recoveries for its hotels and paperboard businesses. ITC is building a strong portfolio of non-cigarette consumer businesses, which we believe will help valuations over a longer term. We have received positive feedback from trade channels about ITC’s recent initiatives in the food business. With price and volume leadership for the cigarette business, ITC has demonstrated significant ability to expand it operating profits. While the issue of investment in non-consumer businesses has been crapped with limited investments, we believe a rising dividend payout ratio could help valuations. While BAT is committed to developing ITC’s business in India, it will be very difficult for it to get a controlling stake in this company unless facilitated by the government. With a rural recovery in the offing, ITC looks set to be a beneficiary as half of its cigarette volumes are derived from the rural economy.


Our target price for ITC is Rs 950 based on about 13.5x FY04E EPS, a 10% premium to sensex valuations. The company is investing in the non-cigarette consumer businesses and the growth of this segment should help rating multiples. We believe ITC can trade at 8-10xEV/EBITDA, which is at the lower end of its historical trading band. The company has tremendous brand equity for its core cigarette brands and will likely get a premium over the broader market. Our target price of Rs 950 is based on 8.5xEV/FY04E EBITDA.

Near-term market volatility and short-term trading patterns may cause the Expected Total Return to become temporarily misaligned relative to the hurdle for this stock’s fundamental rating, as defined under our current system.


We rate ITC ‘Low Risk’ as the company operates in branded businesses and has witnessed low volatility in its earnings. It has steadily increased its earnings over the years and we believe the dominance in its categories will allow it to continue this trend.

With much of its earnings coming from the tobacco segment, the most important risk for ITC is controls on the business and the taxation policy of the government. Being perceived as a sin (read "unhealthy") industry, the stock attracts negatives such as environmentalist action as well as limited investment opportunities.

Another significant risk to the company is the dilution in capital efficiency from investments being committed to non-tobacco businesses, some of them being global cyclicals and others economy cyclicals. Risks could emerge from any acquisition that the company announces in these capital-intensive businesses.