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Anand Rathi Share and Stock Brokers Limited does and seeks to do business with companies covered in its research reports. Thus, investors should be aware that the firmmay have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.Disclosures and analyst certifications are present in Appendix

Anand Rathi Research India Equities

Shirish Pardeshi+9122 6626 6730

shirishpardeshi@rathi.com

Aniruddha Joshi+9122 6626 6732

aniruddhajoshi1@rathi.com

India I EquitiesConsumer

Flash

India Consumer Cigarette companies valuation matrixFY14e FY14e EPS CAGR

Company Price ( ) M. Cap ($m) RoE (%) RoCE (%) FY12-14e (%) PE (FY14e)

ITC 264 37,528 33.9 43.6 15.1 24.9

VST 1,678 470 52.5 66.3 14.7 13.8

Source: Anand Rathi Research

`

BSE FMCG: 5365

Sensex: 17853

Nifty: 5390

11 September 2012

India Consumer

Gutkha demise resurrects cigarettes

With Gujarat and Delhi recently banning gutkha, the number of suchstates has reached 11. We see this is a positive for cigarette companies,considering the hike in excise and VAT rates in recent central and statebudgets on bidi and gutkha. Cigarette consumes only 15% of thetobacco in India which indicates long term growth opportunity.

Ban on gutkha in Gujarat and Delhi. The Gujarat and Delhi stategovernments have bannedgutkhafrom 11 Sep12, following a notificationfrom the Food Safety Standards Authority of India. The notification bansall food products with tobacco or nicotine. Other states that have doneso in the past are Madhya Pradesh, Kerala, Bihar, Maharashtra, Rajasthan,Haryana, Jharkhand, Punjab and Chandigarh. However, there is norestriction on sale of loose tobacco or smoking tobacco products.

Better growth prospects for cigarettes. We believe that the above-mentioned states account for ~45% of the cigarette sector in India.

Though loose tobacco and cigarettes are consumed by different types ofpeople, we believe the news will be a positive for cigarette companies. Weexpect low-end brands such as Bristol, Flake and Scissors of ITC and

Charminar of VST to benefit. Also, we estimate the new cigarette of64mm to command higher volumes, finding favour with former gutkhaconsumers.

Restrictions on smokeless tobacco good for cigarettes. Recently, bothCentre and states hiked excise and VAT rates on products such as gutkhaand khaini. We believe incidences such as the ban on gutkhain some states

would be a long-term positive for the cigarette sector as smokeless tobaccomakes up ~50% of tobacco consumption in India. Bidisaccount for 35%and cigarettes, the rest of the consumption.

Stock calls. We expect a positive impact of these announcements on allcigarette stocksITC, Godfrey Philips and VST Industries. ITC is our toppick among cigarette companies and we expect it to report FY13 volumegrowth of 1-2% against market expectations of a decline in cigarette

volumes.

Relative price performance

BSEFMCG

Sensex

3,500

4,000

4,500

5,000

5,500

Sep-11

Nov-11

Jan-12

Mar-12

May-12

Jul-12

Sep-12

Source: Bloomberg

Tobacco consumption in India

ChewTobacco

50%

Bidi35%

Cigarette15%

Source: Companies

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Appendix

Analyst CertificationThe views expressed in this research report accurately reflect the personal views of the analyst(s) about the subject securities or issuers and no part of thecompensation of the research analyst(s) was, is, or will be directly or indirectly related to the specific recommendations or views expressed by the researchanalyst(s) in this report.

The research analysts, strategists, or research associates principally responsible for the preparation of Anand Rathi Research have received compensation based

upon various factors, including quality of research, investor client feedback, stock picking, competitive factors, firm revenues and overall investment bankingrevenues.

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