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ORGANIZATION STUDY AND RATIO ANALYSIS
INDUSTRY PROFILE
1.1 SOCIO-ECONOMIC ENVIRONMENT
Following one of the deepest downturns in recent times, the global economy
staged a smart recovery during 2009/10, especially in the latter half, driven by an
extraordinary level of coordinated international action in the form of policy stimulus,
monetary as well as fiscal. As per the International Monetary Fund (IMF), world
output is estimated to grow by 4.2% in 2010 after a decline of 0.6% in 2009 with the
emerging and developing economies – led by China and India – set to grow by 6.3%
in 2010 against a modest 2.4% in 2009 and a sharp rebound by advanced economies
with a growth in output estimated at 2.3% in 2010 against a decline of 3.2% in 2009.
However, the pace and shape of recovery remains uncertain with concerns about the
recovery losing momentum once the stimulus is withdrawn. Recent developments in
Europe, with Greece, Spain and Portugal facing severe challenges in honouring their
external debt obligations, have amplified such concerns. While high levels of
unemployment and fiscal deficit and contraction of credit to productive sectors are the
key concerns for advanced economies, developing economies are faced with the
challenges emanating from high rates of inflation, sharp escalation in asset prices,
exchange rate volatility and increased capital inflows.
The Indian economy entered 2009/10 against the backdrop of a significant
slowdown in growth rate, with the GDP growing at just 6% during the second half of
2008/09. A delayed and severely sub-normal monsoon coupled with continued
recession in the developed world for the better part of 2008/09 served to exacerbate
the macroeconomic context. Yet, the economy staged a remarkable recovery to grow
at 7.2% during the year, facilitated by policy stimulus and increased government
spending. The enhanced allocations for social sector schemes like the National Rural
Employment Guarantee Scheme (NREGS), higher spends on rural infrastructure
creation, the implementation of the Sixth Pay Commission recommendations and the
scheme of debt relief to farmers acted as powerful catalysts to induce a consumption-
led recovery. Much of the growth was fuelled by the Industrial sector, with renewed
momentum in Manufacturing – which grew by 8.9% during the year after eight
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ORGANIZATION STUDY AND RATIO ANALYSIS consecutive quarters of decline in growth rates since 2007/08. While Agricultural
output declined by 0.2%, the Services sector grew, although at a slower pace of 8.7%
against 9.8% in 2008/09. The broad based nature of the recovery, a faster pace of
growth in investments after a marked decline in 2008/09, the sharp pick up in capital
inflows and a resurgent stock market are some of the key positives that augur well for
the economy. The major concern during the year was the rising food inflation –
especially in the second half. While the overall wholesale price index (WPI) based
inflation was 9.9% on a year-on-year basis in March 2010, food inflation was as high
as 16.6%, reflecting the severe adverse impact of a deficient monsoon. With persistent
supply side pressures, inflation became more generalized towards the end of the year,
with inflation in non-food manufactured products rising to 4.7% in March 2010 from
(–) 0.4% in November 2009. While inflation is expected to moderate going forward,
the trend of rising international commodity prices, particularly oil, and the revival of
private consumption pose upside risks. This apprehension is reflected in RBI’s view
that ‘‘the domestic balance of risks shifts from growth slowdown to inflation’’.
Accordingly, a related challenge in the near to medium term would be the
effective management of the burgeoning fiscal deficit. The Indian economy staged a
remarkable recovery to grow at 7.2% during the year, facilitated by policy stimulus
and increased government spending. A faster pace of growth in investments, the sharp
pick up in capital inflows and a resurgent stock market are some of the key positives
that augur well for the economy. Although consensus estimates point to a robust
performance of the Indian economy in 2010/11, with the GDP growth estimated to be
above 8%, it would still be well below the average of nearly 9% per annum achieved
during the 4 years preceding the economic slowdown. As aforementioned, the
combination of the threat of inflationary pressures and the inherent risks to global
economic recovery poses a tough challenge to maintaining and stepping up the growth
momentum to the desired double-digit level. With a fairly young population, skilled
manpower, rising savings and investment rates, a vibrant service sector, a potentially
large source of domestic demand (particularly rural) and the emergence of globally
competitive firms, India has multiple growth drivers which hold out the promise of a
stable and sustained future growth. The economic impact of these strengths will get
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ORGANIZATION STUDY AND RATIO ANALYSIS further augmented by the current and planned investments in infrastructure
development.
High levels of sustained economic growth is a critical necessity for India to
realize its oft quoted ‘demographic dividend’ through the creation of employment
opportunities for the nearly 15 million people expected to enter the working age each
year, the majority of whom would be from rural India. As observed in the Economic
Survey 2009-10, growth is necessary for eradicating poverty but is not a sufficient
condition. In other words, policies for promoting growth need to be complemented
with policies to ensure that more and more people join in the growth process and,
further, that there are mechanisms in place to redistribute some of the gains to those
who are unable to partake in the market process and, hence, get left behind. Equally,
the manner of industrial growth continues to take an immeasurable toll of finite
natural resources. Indeed, the key challenge for India is to sustain high rates of
economic growth even while addressing the problems of inequitable income
distribution and over-exploitation of environmental resources. A comprehensive
growth strategy for rural India, including the agricultural sector which continues to
underperform, is necessary to address the serious issues relating to sustainability and
inclusive growth. The government’s focus on social sector programs such as Bharat
Nirman, NREGS, Sarva Shiksha Abhiyan, food security legislation and strategies to
improve benefit delivery mechanisms have the potential to transform the Indian rural
landscape.
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ORGANIZATION STUDY AND RATIO ANALYSIS 1.2 TOBACCO IN INDIA
Tobacco is a principal cash crop of National importance. It has been playing a
prominent role in the development of Nation's Economy. Although the cultivation of
Tobacco is restricted to 0.3% of the total cultivated area, it provides employment to
large number of people on the one hand. On the other hand, it makes significant
contribution to National Exchequer by way of excise revenue and foreign exchange
earnings. Tobacco being a labor intensive crop provides employment to more than 60
lakhs people who are engaged in the farming curing, re drying, packaging, grading,
manufacturing distribution, export and retailing activities. The bidi industry which
provides employment to around 44.00 lakhs essentially unskilled rural folks mostly
women is also arresting the influx of rural labor to urban centres.
Although there is nationwide anti-Tobacco campaign, the commercial
importance of Tobacco can never be underestimated due to the revenue earning
potentiality and employment generation capacity of the crop. Presently there is a call
for substitution of Tobacco with other crops, but the research findings show that there
is no economically viable alternative crop which is as remunerative as Tobacco to the
farmer.
Botanically, the Tobacco plant belongs to the family Solanacea and genus
Nicotiana. The genus embraces over 60species of which two alone are cultivated.
India grows the cultivated species, viz. Nicotiana tabacum and Nicotiana rustica. The
largest area is under Nicotiana tabacum which is grown all over the country where as
Nicotina rustica is confined to North and North Eastern States i.e., Uttar Pradesh,
Bihar, West Bengal and Assam.
About 5 to 6 per cent of the total area under Tobacco is accounted for Nicotiana
rustica varieties. The cultivation of Nicotiana tabacum has country-wise spread and
this type also accounts for more than 80% of the exchange earnings.
Specific types and varieties of Tobacco have been developed for use in
cigarette, bidi, cigar, cheroot, hookah, chewing, snuff and hookah paste. Rustica types
are used in chewing and snuff whereas tabacum types are used for all purposes.
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ORGANIZATION STUDY AND RATIO ANALYSIS
Even though the cultivation of Tobacco is spread all over the country, the
commercial cultivation of Tobacco is concentrated in States like Andhra Pradesh,
Karnataka, Gujarat, Maharastra, Bihar, Tamilnadu and West Bengal etc. Cigarette
Tobacco is mostly cultivated in Andhra and Karnataka, whereas bidi Tobacco is
grown in Gujarat, Karnataka and Maharastra. Cigar and Cheroot Tobacco are also
grown in Tamilnadu, Andhra Pradesh and West Bengal and Chewing Tobacco is
grown in Tamilnadu, Gujarat, Bihar, West Bengal and U.P. Hookah Tobacco is grown
in UP, and West Bengal.
The total area and production of Tobacco in India for the year 1997-98 were
463.5 thousand ha and 646 million kgs respectively.
India ranks fourth in the total tobacco consumption in the world. But India's
cigarette consumption ranks tenth in the world. Out of the total production, only 19%
of the total consumption of Tobacco is in the form of cigarette whereas 81% is in
other forms like, chewing, bidi, snuff, Gutkas paste, Jarda, hookah paste etc. The per
capita consumption of cigarette in India is one of the lowest in the world in
comparison to major Tobacco consuming countries like Zimbabwe, UK, Brazil,
U.S.A and Pakistan. The annual level for demand of cigarette in India remains the
same at 96 billion sticks as it was 15 years ago, despite the cumulative growth in
population by nearly 35 percent during the same period. However the consumption of
Tobacco has been a matter of national debate in view of the emerging anti Tobacco
drive in the country.
Tobacco is traditional item of India's foreign trade. India is one of the leading
Tobacco exporting countries in the world. India accounts for 5.8% of the international
trade and ranks 5th after Brazil, U.S.A. Turkey and Zimbabwe. The principal market
for India Tobacco is U.S.S.R, U.K, Japan and Middle East countries.
Market and marketing system play a dominant role in ensuring remunerative
price for commercial crop like Tobacco. There has been significant improvement in
the marketing of VFC Tobacco with establishment of Tobacco Board. The production
and marketing of VFC Tobacco have been statutorily regulated by the Tobacco
Board. But the growers of other varieties of Tobacco are at the mercy of unscrupulous
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ORGANIZATION STUDY AND RATIO ANALYSIS traders and middlemen. Excluding VFC Tobacco, the method of marketing of
Tobacco in India differs from type to type and from State to State. In case of VFC
Tobacco the Government of India and the Tobacco Board are announcing Minimum
Support Price (MSP) from year to year with the objective of protecting the interest of
the growers of VFC Tobacco. There is need for establishment of organized marketing
system for all types of Tobacco so that the Indian tobacco can achieve significant
share in the International market.
Research on Tobacco has been playing an important role in the development of
Tobacco varieties in India. India grows different variety of Tobacco under different
agro-climatic conditions. As such the problem of improvement of different varieties
of Tobacco in India are numerous and complicated. The main research work on
Tobacco is being done at Central Tobacco Research Institute at Rajahmundry and its
Research Stations spread throughout India. Apart from conducting research for
development of different varieties of Tobacco for maximizing production, the CTRI,
Rajahmundry has been presently doing research for development of alternative crops
to Tobacco. CTRI, Rajahmundry has also been entrusted with the research for
development of alternative uses of Tobacco in view of anti-smoking campaign.
Earlier the Directorate of Tobacco Development was running two Non-Plan
Schemes on bidi Tobacco viz. (i) Seed and Seedlings Scheme and (ii) Farmers
Training Scheme at Gujarat Agricultural University, Anand, but both these scheme
have been terminated by the end of March 2000.
As a part of all India Comprehensive Scheme to study the cost of cultivation of
the principal crops, this Directorate is running the scheme for Assessing the Cost of
Production of VFC Tobacco in Andhra Pradesh from 1974-75 onwards. Under this
she me the data on cost of production are collected by cost aounting method by Field
staff posted in selected clusters in Tobacco belt of Andhra Pradesh. After collection
and compilation of such field data, this Directorate has been regularly sending such
Information to Directorate of Economics and Statistics. Afterwards, the estimates of
cost generated under this scheme are passed on to the Commission for Agricultural
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ORGANIZATION STUDY AND RATIO ANALYSIS Cost and Prices (CACP) for its use in recommending the Minimum Support Price
(MSP) on VFC Tobacco from year to year basis.
Tobacco Industry in India contributes in a unique manner to several important
facets of the Indian Economy, covering revenue, export, employment, and GDP
growth. The Tobacco industry in India mainly covers manufacturing of cigarette, bidi,
cigar and cheroot, hookah, snuff and other chewing Tobacco like zarda, gutkha and
other pan masala.
Cigarette industry in India is essentially capital intensive in nature. The growth
of cigarette industry both in domestic and international market represents a big
revenue opportunity for the economy. But the burden of Tobacco tax has increasingly
shifted to cigarette with the removal of duty on raw Tobacco since 1979, resulting in
discriminatory rates of duty compared to other Tobacco products.
India's share in world cigarette production has remained at around 1.7%
whereas India's exports of around 2.8 billion sticks of cigarette per year accounts for
less than 1% of the world export of cigarette. There is significant opportunity for
cigarette industry to extent and consolidate its position in intentional market due to
some recent trend like withdrawal/reduction of agricultural subsidy and escalating
cost in the traditional cigarette exporting countries.
Bidi industry is one of the foremost cottage industries in India. Total amount of
bidi Tobacco production was 150million kg and that of bidi was around 700 billion
pieces during1994-95. Around 37% of Tobacco production in India goes to bidi
making as per Indian Market Research Bureau (IMRB) report 1996.The social
significance of bidi industry derives from the fact that it generates more employment
in the economy compared to cigarette industry. During 1993-94 the bidi industry
generated around 1310 million man days of employment. There is scope for
development of bidi industry in view of excessive and biased tax treatment of
cigarette.
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ORGANIZATION STUDY AND RATIO ANALYSIS
Cigar and Cheroot industry is one of the oldest industries in India, and is mainly
concentrated in Tamilnadu and Andhra Pradesh. But presently this industry is in deep
dwindling condition due to unorganized marketing system
From the beginning of 17th century, Tobacco has been playing a important role
in international trade. Recently there has been world-wide anti Tobacco campaign
which resulted in modest fall in area and production of Tobacco. But consumption of
Tobacco in the world has remained more or less stable. Similarly the world cigarette
production grew steadily up to 1997and started declining slowly during 1998 and its
again shows upward trend during 1999.
As per the projection by F.A.O, the global Tobacco industry is poised to
increase at the rate of 1.9% annually which will result in an deficit of 2% projected
global demand. Assets such as experienced farming community confer a significant
competitive advantage for India. With an increase in the world import requirements
translating in to a rise in export potential, Indian Tobacco industry is presented with
significant opportunities to consolidate and extent its position in the global market.
1.3 CONSUMPTION PATTERN OF TOBACCO IN INDIA
Chewing tobacco has been a tradition in India for centuries. Of the total amount
of tobacco produced in the country, around 48% is in the form of chewing tobacco,
38% as bidis, and only 14% as cigarettes. Thus, bidis, snuff and chewing tobacco
(such as gutka, khaini and zarda) form the bulk (86%) of India’s total tobacco
production. In the rest of the world, production of cigarettes is 90% of total
production of tobacco related products.
The per capita consumption of cigarettes in India is merely a tenth of the world
average. This unique tobacco consumption pattern is a combination of tradition and
more importantly the tax imposed on cigarettes over the last 2 decades. Cigarette
smokers pay almost 85% of the total tax revenues generated from tobacco.
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ORGANIZATION STUDY AND RATIO ANALYSIS
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ORGANIZATION STUDY AND RATIO ANALYSIS 1.4 MAJOR PLAYERS IN THE INDIAN TOBACCO MARKET
The major players in the Indian tobacco market are
ITC Ltd
Godfrey Phillips
GTC(Golden Tobacco Limited)
VST Industries Limited
1.4.1 ITC LTD
ITC Limited is an Indian conglomerate with a turnover of US $ 6 billion and a
market capitalization of over US $ 22 Billion. The company has its registered office
in Kolkata.
The company is currently headed by Yogesh Chander Deveshwar. It employs
over 26,000 people at more than 60 locations across India and is listed on Forbes
2000. ITC Limited completes 100 years on 24th August, 2010.
ITC has a diversified presence in Cigarettes, Hotels, Paperboards & Specialty
Papers, Packaging, Agri-Business, Packaged Foods & Confectionery, Information
Technology, Branded Apparel, Personal Care, Stationery, Safety Matches and other
FMCG products. While ITC is an outstanding market leader in its traditional
businesses of Cigarettes, Hotels, Paperboards, Packaging and Agri-Exports, it is
rapidly gaining market share even in its nascent businesses of Packaged Foods &
Confectionery, Branded Apparel, Personal Care and Stationery.
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ORGANIZATION STUDY AND RATIO ANALYSIS
ITC's aspiration to be an exemplar in sustainability practices is manifest in its
status as the only company in the world of its size and diversity to be 'carbon positive',
'water positive' and 'solid waste recycling positive.' In addition, ITC's businesses have
created sustainable livelihoods for more than 5 million people, a majority of whom
represent the poorest in rural India.
List of products
Cigarettes: W. D. & H. O. Wills, Gold Flake, Navy Cut, Insignia, India Kings, Classic
(Verve, Regular, Mild & Ultra Mild), Silk Cut, Scissors, Capstan, Berkeley, Bristol,
Lucky Strike and Flake.
1.4.2 GODFREY PHILLIPS
The success of Godfrey Phillips India is the result of the Company’s
commitment to innovations, enhanced operational efficiencies and adoption of
internationally acclaimed business processes. Driven to excel, innovate and win, we
intend to emerge as one of the most respected Company in the tobacco industry.
As the second largest player in the Indian cigarette industry, our annual turnover
exceeds INR 2200 crores (approx. US $458.05 million). We own some of the most
popular cigarette brands in the country like Four Square,
Red and White, Jaisalmer, Cavanders and Tipper. Over the years we have also
set our own benchmarks in innovation with revolutionary brands like Stellar, the first
slim cigarette and I-gen, the first euro norm cigarette in India.
Products are distributed over an extensive India wide network of more than 500
distributors and 800,000 retail outlets. With the Corporate Office in Delhi, the
Company has offices all across India in over 8 locations.
Godfrey Phillips India has two major stakeholders, one of India's leading
industrial houses - the K. K. Modi Group and one of the world's largest tobacco
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ORGANIZATION STUDY AND RATIO ANALYSIS companies, Philip Morris. The Company also enjoys a strong backing of over 12,000
shareholders.
Range of products
Stellar
Igen
Four Square
Jaisalmer
Red & White Flak
Northpole
Cavanders
1.4.3 GTC (GOLDEN TOBACCO LIMITED)
Golden Tobacco Limited is a professionally managed organization in the field
of tobacco and tobacco related products.
Established in the year 1930 by the late Shri. Narsee Monjee, Golden Tobacco
is the first wholly owned indigenous company in the country, taken over by Dalmia
Group in the year 1979. The group is headed by Mr. Sanjay Dalmia as Chairman &
Mr. Anurag Dalmia as Vice Chairman.
Nurtured under the leadership and guidance of Mr. J P Khetan the Managing
Director of Golden Tobacco, the company offers customers an exceptional variety of
the finest tobacco products, which meet world – class standards of quality and
consistency, and is a valid example of contemporary manufacturing techniques,
professional Marketing, good HR practice and quality control systems.
Golden Tobacco has manpower strength of 2000 employees spread across
manufacturing, purchasing, processing, sales and marketing. The Company has two
major production facilities in Mumbai as well as Baroda. To keep the pace with its
strategy of providing quality cigarettes to its national and international customers,
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ORGANIZATION STUDY AND RATIO ANALYSIS Golden Tobacco, Vadodara has recently implemented ISO 9001:2000 and has been
certified by world’s one of the most reputed accreditation agency RWTUV.
The company’s offerings are grouped under the Brand families of Panama,
Chancellor, Golden’s and Steel. Each Brand family has several strong offerings in its
portfiolio, such as Panama Virginia Regular and Panama Filter, Chancellor Browns
and Chancellor Exclusive, and Golden’s Gold Flake.
Product range
Products Variants
Panama
Panama Virginia Regular, Panama Filter, Panama
Premium Filter, Panama Gold, Panama Delight, Panama
Menthol and Panama Mini Kings
Chancellor Chancellor Browns, Chancellor Royale, Chancellor
Exclusive, Chancellor Harvard Luxury, Chancellor Light
Golden Golden’s Gold Flake , Golden’s Major
Style Mini Kings No Variants
Taj Chapp No Variants
Steel No Variants
June No Variants
1.4.4 VST INDUSTRIES LIMITED
VST Industries Limited (VST) is an India-based company. The Company is
engaged in tobacco and related products business. The Company has sales in India
and outside India. Its products include cigarettes, unmanufactured tobacco, cut
tobacco and other articles of paper and paper board. VST Distribution, Storage &
Leasing Company Private Limited is the Company's subsidiary.
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ORGANIZATION STUDY AND RATIO ANALYSIS
Product range:
Shah-I-Deccan, Gold Reserve, Gold Premium, Charminar, Start Up, Moments
Charms, Think, Vijay, Shaan, Xl
1.5 ECONOMIC SIGNIFICANCE OF TOBACCO
India is the world’s second-largest producer of leaf tobacco. It is also a very
large consumer of tobacco products. Tobacco is one of the important cash crops in the
country, and makes a significant contribution to the Indian economy in terms of
employment, income and government revenue. It generates nearly Rs 20 billion of
income per annum. The economic importance of the crop can be considered at three
levels: farm households engaged in tobacco growing and processing; major tobacco
producing States; and central government level.
1.5.1 FARM LEVEL
There are an estimated 850 000 growers of tobacco in the country, characterized
by small family farms, with farmers owning less than 2 ha of land forming about half
of all tobacco growers. However, based on field surveys carried out by Gujarat
Agricultural University, Anand, in selected tobacco growing districts in Gujarat and
Karnataka, the small-scale producers account for about a quarter of the tobacco area.
In total, nearly 6 million farmers and workers depend on this sector for their
livelihood. In addition, the tobacco sector provides direct and indirect employment to
a large number of people in many related industries.
1.5.2 STATE LEVEL
The tobacco sector contributes to the States’ economies through crop production
and to the exchequer through excise duty, as well as from their share in the net central
excise duties. Tobacco cultivation is concentrated in three states: Andhra Pradesh,
Gujarat and Karnataka. The additional excise duties on tobacco, which is distributed
only among tobacco growing states, increased from Rs 3477 million in 1979/80 to Rs
28532 million in 2008/09. During the fiscal years 2003 to 2008, the State
Governments received annually 47.5 percent of the net proceeds of union excise duty
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ORGANIZATION STUDY AND RATIO ANALYSIS levied on a number of commodities, including on tobacco products. It amounted to
around Rs 240000 million annually, of which the share from the tobacco sector is
estimated to have been around 9 percent. These are an important source of revenue for
the States.
1.5.3 CENTRAL GOVERNMENT REVENUE
In India, excise duty is imposed on the entire range of manufactured tobacco
products. In 2008/09, tobacco contributed about Rs 79400 million to the central
government’s revenue or 10.6 percent of total excise collection. Tobacco contributed
Rs 17790 million to export earnings in 2008/09, which was around 5 percent of the
foreign exchange earnings from agricultural products. In addition, the central
government also realized on average around Rs 9000 million per annum from tobacco
enterprises in the form of corporate tax during the last three tax years.
However, raw tobacco was exempted from excise with effect from 1979/80,
primarily because the administration and collection of excise duty on raw tobacco was
expensive as well as cumbersome, and control was ineffective. The consequent
revenue loss from the exemption was more than compensated for by steep increases in
tax rates on manufactured items. Although most manufactured tobacco products
attract excise duties, tobacco products from cottage industries (bidis, etc.) are taxed at
a much lower rate than those from the organized sector (i.e. cigarettes).
Bidi manufacturers producing less than 2 million pieces annually do not have to
pay any excise duty. Bidis (other than paper rolled) produced without the aid of
machines pay Rs 5 per thousand pieces. Other bidi manufacturers currently pay Rs
l5.5 per thousand pieces. Pan masala is taxed 40 percent ad valorem (24 percent basic
duty plus a special duty of l6 percent). Chewing tobacco and snuff with a brand name
attract 50 percent excise duty (ad valorem).
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ORGANIZATION STUDY AND RATIO ANALYSIS
INDIAN TOBACCO COMPANY LIMITED
2.1 COMPANY OVERVIEW
ITC is one of India's foremost private sector companies with a market
capitalization of over US $ 22 billion and a turnover of US $ 6 billion. ITC is rated
among the World's Best Big Companies, Asia's 'Fab50' and the World's Most
Reputable Companies by Forbes magazine, among India's Most Respected
Companies by Business World and among India's Most Valuable Companies by
Business Today. ITC ranks among India's `10 Most Valuable (Company) Brands', in a
study conducted by Brand Finance and published by the Economic Times. ITC also
ranks among Asia's 50 best performing companies compiled by Business Week.
ITC has a diversified presence in Cigarettes, Hotels, Paperboards & Specialty
Papers, Packaging, Agri-Business, Packaged Foods & Confectionery, Information
Technology, Branded Apparel, Personal Care, Stationery, Safety Matches and other
FMCG products. While ITC is an outstanding market leader in its traditional
businesses of Cigarettes, Hotels, Paperboards, Packaging and Agri-Exports, it is
rapidly gaining market share even in its nascent businesses of Packaged Foods &
Confectionery, Branded Apparel, Personal Care and Stationery.
ITC's diversified status originates from its corporate strategy aimed at creating
multiple drivers of growth anchored on its time-tested core competencies: unmatched
distribution reach, superior brand-building capabilities, effective supply chain
management and acknowledged service skills in hoteliering. Over time, the strategic
forays into new businesses are expected to garner a significant share of these
emerging high-growth markets in India.
ITC's Agri-Business is one of India's largest exporters of agricultural products.
ITC is one of the country's biggest foreign exchange earners (US $ 3.2 billion in the
last decade). The Company's 'e-Choupal' initiative is enabling Indian agriculture
significantly enhance its competitiveness by empowering Indian farmers through the
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ORGANIZATION STUDY AND RATIO ANALYSIS power of the Internet. This transformational strategy, which has already become the
subject matter of a case study at Harvard Business School, is expected to
progressively create for ITC a huge rural distribution infrastructure, significantly
enhancing the Company's marketing reach.
ITC's wholly owned Information Technology subsidiary, ITC InfoTech India
Ltd, provides IT services and solutions to leading global customers. ITC InfoTech has
carved a niche for itself by addressing customer challenges through innovative IT
solutions.
ITC's production facilities and hotels have won numerous national and
international awards for quality, productivity, safety and environment management
systems. ITC was the first company in India to voluntarily seek a corporate
governance rating.
ITC employs over 26,000 people at more than 60 locations across India. The
Company continuously endeavors to enhance its wealth generating capabilities in a
globalizing environment to consistently reward more than 3,60,000 shareholders,
fulfill the aspirations of its stakeholders and meet societal expectations. This over-
arching vision of the company is expressively captured in its corporate positioning
statement: "Enduring Value. For the nation. For the Shareholder.
2.2 VISION
Sustain ITC's position as one of India's most valuable corporations through
world class performance, creating growing value for the Indian economy and the
Company’s stakeholders.
2.3 MISSION
To enhance the wealth generating capability of the enterprise in a globalizing
environment, delivering superior and sustainable stakeholder value.
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ORGANIZATION STUDY AND RATIO ANALYSIS
2.4 BUSINESS SEGMENTS
FMCG
o Cigarettes
o Foods
o Lifestyle Retailing
o Personal Care
o Education & Stationery
o Safety Matches
o Agarbattis
HOTELS
PAPERBOARDS & PACKAGING
o Paperboards &Specialty Papers
o Packaging
AGRI-BUSINESSES
o Agri Commodities
o Leaf Tobacco
INFORMATION TECHNOLOGY
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ORGANIZATION STUDY AND RATIO ANALYSIS
ITC BUSINESS PORTFOLIO
2.4.1 FMCG
2.4.1.1 CIGARETTES
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. It's highly popular
portfolio of brands includes Insignia, India Kings, Classic, Gold Flake, Silk Cut, Navy
Cut, Scissors, Capstan, Berkeley, Bristol and Flake.
The Company has been able to build on its leadership position because of its
single minded focus on value creation for the consumer through significant
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ORGANIZATION STUDY AND RATIO ANALYSIS investments in product design, innovation, manufacturing technology, quality,
marketing and distribution.
All initiatives are therefore worked upon with the intent to fortify market
standing in the long term. This in turns aids in designing products which are
contemporary and relevant to the changing attitudes and evolving socio economic
profile of the country. This strategic focus on the consumer has paid ITC handsome
dividends.
ITC's pursuit of international competitiveness is reflected in its initiatives in the
overseas markets. In the extremely competitive US market, ITC offers high-quality,
value-priced cigarettes and Roll-your-own solutions. In West Asia, ITC has become a
key player in the GCC markets through growing volumes of its brands.
ITC's cigarettes are produced in its state-of-the-art factories at Bengaluru,
Munger, Saharanpur, Kolkata and Pune. These factories are known for their high
levels of quality, contemporary technology and work environment.
2.4.1.2 FOODS
ITC made its entry into the branded & packaged Foods business in August 2001
with the launch of the Kitchens of India brand. A more broad-based entry has been
made since June 2002 with brand launches in the Confectionery, Staples and Snack
Foods segments.
The packaged foods business is an ideal avenue to leverage ITC's proven
strengths in the areas of hospitality and branded cuisine, contemporary packaging and
sourcing of agricultural commodities. ITC's world famous restaurants like
the Bukhara and the Dum Pukht, nurtured by the Company's Hotels business,
demonstrate that ITC has a deep understanding of the Indian palate and the expertise
required to translate this knowledge into delightful dining experiences for the
consumer. ITC has stood for quality products for over 98 years to the Indian
consumer and several of its brands are today internationally benchmarked for quality.
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ORGANIZATION STUDY AND RATIO ANALYSIS
The Foods business carries forward this proud tradition to deliver quality food
products to the consumer. All products of ITC's Foods business available in the
market today have been crafted based on consumer insights developed through
extensive market research. Apart from the current portfolio of products, several new
and innovative products are under development in ITC's state-of-the-art Product
Development facility located at Bengaluru.
Leadership in the Foods business requires a keen understanding of the supply
chain for agricultural produce. ITC has over the last 99 years established a very close
business relationship with the farming community in India and is currently in the
process of enhancing the Indian farmer's ability to link to global markets, through
the e-Choupal initiative, and produce the quality demanded by its customers.
The Foods business is today represented in 4 categories in the market. These
are:
Ready to Eat Foods
Staples
Confectionery
Snack Foods
In order to assure consumers of the highest standards of food safety and
hygiene, ITC is engaged in assisting outsourced manufacturers in implementing
world-class hygiene standards through HACCP certification. The unwavering
commitment to internationally benchmarked quality standards enabled ITC to rapidly
gain market standing in all its 6 brands:
Kitchens of India
Aashirvaad
Sunfeast
mint-o
Candyman and Bingo
2.4.1.3 LIFESTYLE RETAILING
21
ORGANIZATION STUDY AND RATIO ANALYSIS
ITC’s Lifestyle Retailing Business Division has established a nationwide
retailing presence through its Wills Lifestyle chain of exclusive specialty stores. Wills
Lifestyle, the fashion destination, offers a tempting choice of Wills Classic work
wear, Wills Sport relaxed wear, Wills Clublife evening wear, fashion accessories and
Essenza Di Wills – an exclusive range of fine fragrances and bath & body care
products and Fiama Di Wills - a range of premium shampoos and shower gels. Wills
Lifestyle has also introduced Wills Signature designer wear, designed by the leading
designers of the country.
With a distinctive presence across segments at the premium end, ITC has also
established John Players as a brand that offers a complete fashion wardrobe to the
male youth of today. With its brands, ITC is committed to build a dominant presence
in the apparel market through a robust portfolio of offerings..
Wills Lifestyle was named Superbrand 2009 by the Superbrands Council of
India recently. Wills Lifestyle has been twice declared 'The Most Admired Exclusive
Brand Retail Chain of the Year' at the Images Fashion Awards in 2001 & 2003. as
well as 'Most Admired Fashion Brand of the year - Fashion Forward' in 2009.
Wills Lifestyle is the title partner of the country’s most premier fashion event -
Wills Lifestyle India Fashion Week. Taking the celebration of the event to its stores.
Wills Lifestyle has partnered with several leading designers whose new edition of
Designer wear is now available at Wills Lifestyle stores.
Wills Lifestyle complements the range of premium apparel with a tempting
choice of fashion accessories. This season a wider choice of accessories will be
offered across ties, cuff links, socks, caps, hand bags, wallets, belts, eyewear and
shoes.
John Players offers a complete and vibrant wardrobe of Casual wear, Party
wear, Work wear, Denims, Outer wear and Suits & Jackets, incorporating the most
contemporary trends, an exciting mix of colors, playful styling, trendy textures and
comfortable fits. The brand is available across the country through a nation-wide
network of over 225 exclusive stores and 1200 multi-brand outlets.
22
ORGANIZATION STUDY AND RATIO ANALYSIS
At the Images Fashion Awards 2005, John Players was declared 'The Most
Admired Shirt Brand of the Year'.At the Images Fashion Awards 2007, John Players
was awarded the 'The Most Admired Fashion Campaign of the Year' award.
2.4.1.4 PERSONAL CARE
In line with ITC's aspiration to be India's premier FMCG Company, recognized
for its world-class quality and enduring consumer trust, ITC forayed into the Personal
Care business in July 2005. In the short period since its entry, ITC has already
launched an array of brands, each of which offers a unique and superior value
proposition to discerning consumers. Anchored on extensive consumer research and
product development, ITC's personal care portfolio brings world-class products with
clearly differentiated benefits to quality-seeking consumers.
ITC's Personal Care portfolio under the 'Essenza Di Wills', 'Fiama Di Wills',
'Vivel Di Wills' 'Vivel UltraPro', 'Vivel' and 'Superia' brands has received encouraging
consumer response and is being progressively extended nationally.
Extensive insights gained by ITC through its numerous consumer engagements
have provided the platform for its R&D and Product Development teams to develop
superior, differentiated products that meet the consumer's stated and innate needs. The
product formulations use internationally recognized safe ingredients, subjected to the
highest standards of safety and performance.
2.4.1.5 EDUCATION & STATIONERY
ITC's Education and Stationery Products are marketed under the brands
"Classmate" and "Paperkraft".
The Paperkraft range of products aims at satisfying the stationery needs &
office consumables need of office executives & working professional. The
continuously expanding product range under Paperkraft includes Premium Business
Paper, Paper Stationery, Markers & Highlighters.
Classmate Notebooks, Classmate Math Instruments, Classmate Scholastic
Products(HB Jet Black writing pencils, erasers & sharpeners), Classmate Writing
23
ORGANIZATION STUDY AND RATIO ANALYSIS Instruments(Ball Pens: Classmate Safari, Classmate Ilet & Classmate Edge and Gel
Pens: Classmate Glider & Classmate Octane)
2.4.1.6 SAFETY MATCHES
ITC’s range of Safety matches include popular brands like i Kno, Mangaldeep,
Aim, Aim Mega and Aim Metro. With differentiated product features and innovative
value additions, these brands effectively address the needs of different consumer
segments. The Aim brand is the largest selling brand of Safety Matches in India. ITC
also exports regular and premium safety matches brands to markets such as Middle
East, Africa and the USA. The successful acquisition of Wimco Ltd. by Russell Credit
Ltd., a wholly owned subsidiary of ITC has consolidated the market standing of the
Company's Matches business through synergy benefits derived through combined
portfolio of offerings, improved servicing of proximal markets and freight
optimization. Through its participation, ITC aims to enhance the competitiveness of
the small and medium scale sectors through its complementary R&D based product
development and marketing strengths, especially the breadth and depth of the
Company's trade marketing and distribution
2.4.1.7 AGARBATTIS
As part of ITC's business strategy of creating multiple drivers of growth in the
FMCG sector, the Company commenced marketing Agarbattis (Incense Sticks)
sourced from small-scale and cottage units in 2003. This Business leverages the core
strengths of ITC in nation-wide distribution and marketing, brand building, supply
chain management, manufacture of high quality paperboards and the creation of
innovative packaging solutions to offer Indian consumers high quality Agarbattis.
Mangaldeep Agarbattis are available in a wide range of fragrances like Rose,
Jasmine, Bouquet, Sandalwood, Madhur, Durbar, Tarangini, Anushri, Ananth and
Mogra.
In line with ITC's Triple Bottom Line philosophy of every business
contributing to the nation's economic, environmental and social capital, Mangaldeep
agarbattis are manufactured by small scale and cottage units, providing livelihood
24
ORGANIZATION STUDY AND RATIO ANALYSIS opportunities for more than 8500 people. Six out of 11 Mangaldeep Agarbatti
manufacturing units are ISO 9000 certified. Mangaldeep ASHA (Assistance in Social
Habilitation through Agarbattis) is an ITC initiative to improve the quality of raw
agarbatti production and provide better value realization for women rollers. Under the
project, ITC has extended support to NGOs in states and like Bihar, Tripura, Tamil
Nadu, who are setting up agarbatti units, training village women in rolling agarbattis
and employing them in these units. In the latest initiative, ITC signed a MoU with
Orissa Government run Orissa Rural Development and Marketing Society (ORMAS)
for marketing raw incense sticks in the state- a move that is expected to provide
employment opportunities to over 3000 rural women.
2.4.2 HOTELS
ITC Welcomgroup, India’s premier chain of luxury hotels was launched on
October 18, 1975, with the opening of its first hotel - Chola Sheraton in Chennai.
Since then the ITC-Welcomgroup brand has become synonymous with Indian
hospitality. With over 100 hotels in more than 80 destinations.
ITC-Welcomgroup's properties are classified under four distinct brands:
2.4.2.1 ITC Hotels - Luxury Collection
In 2007, ITC-Welcomgroup entered a new phase in its collaboration with
Starwood Hotels & Resorts. ITC-Welcomgroup now has an exclusive tie-up with
Starwood in bringing its premium brand, the 'Luxury Collection', to India. These are
super deluxe and premium hotels located at strategic business and leisure locations.
The seven hotels which are part of this collection are: ITC Maurya in Delhi, ITC
Maratha in Mumbai, ITC Sonar in Kolkata, ITC Grand Central in Mumbai, ITC
Windsor & ITC Royal Gardenia in Bengaluru, ITC Kakatiya in Hyderabad and ITC
Mughal in Agra.
2.4.2.2 WelcomHotels
25
ORGANIZATION STUDY AND RATIO ANALYSIS
WelcomHotels offer five-star hospitality for the discerning business and leisure
traveller. Currently there are three hotels under this brand namely,WelcomHotel
Rama International Aurangabad,WelcomHotel Vadodara and WelcomHotel Grand
Bay Vishakhapatnam. Four other ITC-Welcomgroup Sheraton Hotels – Sheraton
Rajputana Hotel Jaipur, Sheraton Chola Hotel Chennai and Sheraton New Delhi offer
warm, comforting services to the global traveller and a chance to connect.
2.4.2.3 Fortune Hotels
Fortune hotels offer full service properties all over India, including smaller
towns and cities, ideal for the budget traveller. Fortune Hotels have a strong presence
in Ahmedabad, Thiruvananthapuram, Calicut, Darjeeling, Jamshedpur, Vapi,
Hyderabad, Gurgaon, Indore, Ootacamund, Madurai, Jodhpur, Vijaywada, Chennai,
Visakhapatnam, Mahabalipuram, Kolkata, Bengaluru, Navi Mumbai, Tirupati and
Port Blair, while several more hotels are expected to be commissioned soon in other
key locations in India.
2.4.2.4 WelcomHeritage
Welcome heritage brings together a chain of palaces, forts, havelis and resorts
that offer a unique experience. WelcomHeritage endeavours to preserve ancient royal
homes and the historical Indian grandeur and opulence for the future Indian
generations. WelcomHeritage provides a fine range of hotel services inside these
architectural legacies present in Rajasthan, Madhya Pradesh, Uttarakhand, Himachal
Pradesh, Jammu & Kashmir, West Bengal, Karnataka, Tamil Nadu, Punjab, Haryana,
Assam, Sikkim, Meghalaya, Arunachal Pradesh, Uttar Pradesh, Maharastra, Kerala,
Andhra Pradesh and Puducherry.
2.4.3 PAPERBOARDS & PACKAGING
ITC's Paperboards and Specialty Papers Division is India's largest,
technologically advanced and most eco-friendly, paper and paperboards business. The
26
ORGANIZATION STUDY AND RATIO ANALYSIS business caters to a wide spectrum of packaging, graphic, communication, writing,
printing and specialty paper requirements through its four world-class manufacturing
units, 6 sales offices and a network of more than 50 dealers in India, along with an
international trade network of 15 distributors / agents.
The product range includes:
Packaging
Virgin Recycled
Folding Box Boards
Solid Bleached Boards
Coated Duplex White back
Coated Duplex Grey back
White Liner
ITC's Packaging & Printing Business is the largest value added converter of
paperboard packaging in South Asia. It converts over 70,000 tonnes of paper,
paperboard and laminates per annum into a variety of value-added packaging
solutions for the food & beverage, personal products, cigarette, liquor and consumer
goods industries.
The Division supplies value-added packaging to ITC’s various FMCG
businesses. Its client list includes several well-known national and international
companies like Nokia, Colgate Palmolive, Pernod Ricard, Diageo, British American
Tobacco, Philip Morris International, Agio Cigars, UB Group, Tata Tetley, Tata Tea,
Reckitt Benckiser, Radico Khaitan, Akbar Brothers, Surya Nepal, VST Industries, etc.
2.4.3 AGRI-BUSINESSES
ITC's pre-eminent position as one of India's leading corporate in the agricultural
sector is based on strong and enduring farmer partnerships that has revolutionized and
27
ORGANIZATION STUDY AND RATIO ANALYSIS transformed the rural agricultural sector. One of the largest exporters of agri products
from the country, ITC sources the finest of Indian Feed Ingredients, Food Grains,
Edible Nuts, Marine Products, Processed Fruits, Coffee & Spices.
ITC's Agri Business Division is the country's second largest exporter of agri-
products with exports of over Rs. 1000 Crores (Rs. 10 billion). Its domestic sales of
agri-products are in excess of Rs. 1500 Crores (Rs. 15 billion). It currently focuses on
exports and domestic trading of:
• Feed Ingredients - Soya meal
• Food Grains - Rice (Basmati & Non Basmati), Wheat, Pulses
• Edible Nuts - Sesame Seeds, HPS Groundnuts, Castor oil
• Marine Products - Shrimps and Prawns
• Processed Fruits - Fruit Purees/Concentrates, IQF/Frozen Fruits, Organic Fruit
Products, Fresh Fruits
• Coffee & Spices - Coffee, Black Pepper, Chilly, Turmeric, Ginger, Celery and
other Seed Spices
2.4.3.1 Farmer empowerment through e-Choupals
ITC's unique strength in this business is the extensive backward linkages it has
established with the farmers. This networking with the farming community has
enabled ITC to build a highly cost effective procurement system. ITC has made
significant investments in web-enabling the Indian farmer. Christened 'e-Choupal',
ITC's empowerment plan for the farmer centres around providing Internet kiosks in
villages. Farmers use this technology infrastructure to access on-line information from
ITC's farmer-friendly website www.echoupal.com. Data accessed by the farmers
relate to the weather, crop conditions, best practices in farming, ruling international
prices and a host of other relevant information. e-Choupal today is the world's largest
rural digital infrastructure.
28
ORGANIZATION STUDY AND RATIO ANALYSIS
The unique e-Choupal model creates a significant two-way multi-dimensional
channel which 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 6500 installations covering nearly 40,000 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, Maharashtra, Andhra Pradesh,
Kerala and Tamil Nadu. Over the next 5 years it is ITC's Vision to create a network of
20,000 e-Choupals, thereby extending coverage to 100,000 villages representing one
sixth of rural India.
2.4.3.2 Choupal Fresh
Choupal Fresh, ITC's fresh food wholesale and retail initiative, leverages its
extensive backward linkages with farmers and supply chain efficiencies. It focuses on
stocking fresh horticulture produce like fresh fruits and vegetables. Five Choupal
Fresh retail stores are currently operational at Hyderabad. The company has also set
up a complete cold chain for ensuring the availability of fresh products in the market,
besides directly sourcing farm fresh produce from the farmers.
2.4.3.3 Marine Products
ITC has been a significant exporter of seafood from India since 1971. It exports
frozen as well as cooked shrimps and other seafood products to Japan, USA and
Europe. Its well-known brands include Gold Ribbon, Blue Ribbon, Aqua Kings, Aqua
Bay, Aqua Feast and Peninsular.
2.4.4 INFORMATION TECHNOLOGY
29
ORGANIZATION STUDY AND RATIO ANALYSIS
ITC Infotech, a global IT services company, is today one of India’s fastest
growing IT services and solutions providers.
Based out of a picturesque 35 acre campus in the heart of Bangalore city, ITC
Infotech, through wholly-owned subsidiaries in the UK and US, provides outsourced
IT services and solutions to leading global customers.
ITC Infotech offers IT services and solutions across five key industry verticals:
Banking, Financial Services & Insurance (BFSI), Consumer Packaged Goods (CPG)
& Retail, Manufacturing & Engineering Services, Travel, Hospitality &
Transportation and Media & Entertainment.
ITC Infotech enjoys the rare advantage of having a practitioner’s expertise in
some of these industry verticals, which has in part been bequeathed by parent ITC
Limited, which runs market leading businesses in these verticals. While an enterprise
range of technology capabilities and world class quality processes form the
foundation of ITC Infotech’s cutting-edge IT service strength, a sharp domain focus
ensures that IT and ITES delivery always places business needs ahead of technology.
ITC Infotech has carved a niche for itself as a leading global IT solutions
provider by addressing customer pain points through innovative solutions. ITC
Infotech’s leadership capabilities also accrue from business critical engagements with
leading organizations across five continents, and a service delivery footprint spanning
over 140 countries.
ITC Infotech conforms to the highest standards in international process quality,
with ISO 27001, ISO 9001, SEI CMM Level 5 and BS 7799 accreditations. These
reflect the company’s ongoing enterprise-wide focus to ensure that every engagement,
program and project delivers international quality consistently.
2.5 ORGANISATION STRUCTURE OF ITC LTD
2.5.1 THE GOVERNANCE STRUCTURE OF ITC
30
ORGANIZATION STUDY AND RATIO ANALYSIS
The practice of Corporate Governance in ITC is at three interlinked levels:
Strategic supervision by the Board of Directors
Strategic management by the Corporate Management
Committee
Executive management
by the Divisional / Strategic Business
Unit (SBU) Chief Executive assisted by
the respective Divisional / SBU
Management Committee
The three-tier governance structure ensures that:
(a) Strategic supervision (on behalf of the shareholders), being free from
involvement in the task of strategic management of the Company, can be conducted
by the Board with objectivity, thereby sharpening accountability of management;
(b) Strategic management of the Company, uncluttered by the day-to-day tasks
of executive management, remains focused and energized; and
(c) Executive management of a Division or Business, free from collective
strategic responsibilities for ITC as a whole, focuses on enhancing the quality,
efficiency and effectiveness of the business.
The core roles of the key entities flow from this structure. The core roles, in
turn, determine the core responsibilities of each entity. In order to discharge such
responsibilities, each entity is empowered formally with requisite powers. The
structure, processes and practices of governance enable focus on the corporate
purpose while simultaneously facilitating effective management of the wider portfolio
of businesses.
2.5.2 ROLES OF VARIOUS ENTITIES
Board of Directors (Board): The primary role of the Board is that of
trusteeship to protect and enhance shareholder value through strategic supervision of
31
ORGANIZATION STUDY AND RATIO ANALYSIS ITC, its wholly owned subsidiaries and their wholly owned subsidiaries. As trustees,
the Board ensures that the Company has clear goals relating to shareholder value and
its growth. The Board sets strategic goals and seeks accountability for their
fulfillment. The Board also provides direction and exercises appropriate control to
ensure that the Company is managed in a manner that fulfils stakeholders’ aspirations
and societal expectations. The Board, as part and parcel of its functioning, also
periodically reviews its role.
Corporate Management Committee (CMC): The primary role of the CMC is
strategic management of the Company’s businesses within Board approved direction /
framework. The CMC operates under the strategic supervision and control of the
Board.
Chairman: The Chairman of ITC is the Chief Executive of the Company. He is
the Chairman of the Board and the CMC. His primary role is to provide leadership to
the Board and the CMC for realizing Company goals in accordance with the charter
approved by the Board. He is responsible, inter alia, for the working of the Board and
the CMC, for ensuring that all relevant issues are on the agenda and for ensuring that
all Directors and CMC members are enabled and encouraged to play a full part in the
activities of the Board and the CMC, respectively. He keeps the Board informed on all
matters of importance. He is also responsible for the balance of membership of the
Board, subject to Board and Shareholder approvals. He presides over General
Meetings of Shareholders.
Divisional Management Committee (DMC) / SBU Management Committee
(SBU MC): The primary role of the DMC / SBU MC is executive management of the
Divisional / SBU business to realize tactical and strategic objectives in accordance
with Board approved plan.
Executive Director: The Executive Directors, as members of the CMC,
contribute to the strategic management of the Company’s businesses within Board
approved direction / framework. As Directors accountable to the Board for a
business / corporate function, they assume overall responsibility for its strategic
management, including its governance processes and top management effectiveness.
32
ORGANIZATION STUDY AND RATIO ANALYSIS As Directors accountable to the Board for a wholly owned subsidiary or its wholly
owned subsidiary, they act as the custodians of ITC’s interests and are responsible for
their governance in accordance with the charter approved by the Board.
Non-Executive Director: Non-Executive Directors, including Independent
Directors, play a critical role in imparting balance to the Board processes by bringing
an independent judgement on issues of strategy, performance, resources, standards of
Company conduct etc.
Divisional / SBU CEO: The Divisional / SBU CEO is the Chief Operating
Officer for a business with executive responsibility for its day-to-day operations and
provides leadership to the DMC / SBU MC in its task of executive management of the
business.
2.6 ORGANIZATIONAL STRUCTURE OF ITD (INDIAN
TOBACCO DIVISION) BANGALORE
Like any other ITC division even the ITD (Indian tobacco division) is headed
by Chief Executive Officer, Finance Head and Marketing head who monitor the
activities of all the 5 five factories which come under ITD. These officers are
accountable to the Board of directors. They play a key role in the accomplishment of
organizations goals and policies.
Five branches of ITD situated at Bangalore, Munger, Saharanpur, Kolkata and
Pune are headed by Branch managers who control the activities of their respective
factories with the assistance of various other departments functioning in the factory.
The organization structure of Bangalore factory is shown below:
33
ORGANIZATION STUDY AND RATIO ANALYSIS
2.6.1 BRANCH MANAGER
Branch manager is the head if ITD Bangalore, who takes care of all the
activities of the Bangalore branch. All the other department managers report to the
Branch Manager regarding the progress and development of the functions of their
respective departments. The Branch Manager reports which he feels are of importance
to the head office located in Kolkata.
All the five Branch Managers of ITD (Indian tobacco division) meet once in
three months to update each other about the proceedings in their respective branches.
.
2.6.2 PRODUCTION MANAGER
34
BRANCH MANAGER
Prod. ManagerBranch EngineerH R ManagerCommercial Manager
CES Manager M/C Design & Develop.EHS ManagerSecurity Officer MIS Manager
FACTORY ORGANISATION STRUCTURE
Pilot Plant
Flavor Dept.
ORGANIZATION STUDY AND RATIO ANALYSIS
Production Manager is in charge of the two manufacturing departments in ITD
Bangalore, namely,
PMD (Primary Manufacturing Department)
SMD (Secondary Manufacturing Department)
PMD
The primary function of PMD is processing of the various types of tobacco
leaves procured for manufacturing different brands of cigarettes.
PMD production plan depends on:
• SMD Consumption Plan (Bulk)
• SMD Niche Requirement
• OCM Requirements
• Current Stock in CTS
Sequence of Activities in Planning:
Plan Order – Created by HO in SAP. Plan for next month communicated by
month end.
Production Order – Plan Orders in SAP converted into Production Order by
PMD on a daily basis. Operation number generated at this stage. (Continued
till end)
Release Of Production Order – Done by Leaf Godown Clerk on availability of
material.
Bill Of Material – Material issued by Leaf Godown on the basis of BOM.
Start Of Operation – Material fed in operation lines and processing starts.
SMD
35
ORGANIZATION STUDY AND RATIO ANALYSIS
In SMD the processed tobacco leaves processed in PMD department is rolled in
cigarette paper. Then the cigarette paper is glued and later the cigarette rods are cut to
required lengths. And the final product is delivered out as cigarettes.
All the activities that come under PMD and SMD is monitored by the
production manager. If there is any breakdown then, the Production Manager should
visit the spot within a specified time frame and take necessary action so that the
production resumes as early as possible.
2.6.3 CES – CENTRAL ENGINEERING STORES
Central Engineering Stores (CES) in Bangalore procures stores & spares for all
factories including OCMs i.e. 5 factories and OCMs of Indian Tobacco Division. This
is with the objective of having centralized control and to reap the benefit of low prices
procuring all the spares centrally.
2.6.4 EHS (ENVIRONMENT, HEALTH, SAFETY)
36
Reservations From all
Locations enterIn SAP
MRP Run byCES, every
10 days
Generation ofPurchase
Requisition
Non-CodifiedDirect Indent
Codified PD or VB Type
Procurement
Vendor Selection Follow UpPlacing OrdersVendor Evaluation
ORGANIZATION STUDY AND RATIO ANALYSIS
• A commitment from the top management to ensure health and safety of
the organization, its people and the environment as a whole.
• All employees to adhere to Corporate EHS Policy.
EHS SYSTEM AND STANDARDS
Sec. 1: EHS Organization & Management
• EHS organization set-up.
• EHS committees
• Communication of EHS policy
• Training requirements
• Risk management (Safe Work )
• Audits & controls (I. Audit, Law)
• Safe work procedures w.r.t contractors
• Documentation & record keeping
Sec. 2: Occupational Health & Hygiene
• Evaluation of occupational health issues & measures of control (Noise, Dusts, Stress)
• Medical support (Ambulance, First Aid)
• Housekeeping & cleanliness (Hygiene)
• Personal protective equipment (PPE)
Sec.3: Electrical, Mechanical, Buildings, Housekeeping & Safe Work
Practices
• Electrical Safety &safe working practices
• Fencing & Guarding of dangerous machinery & parts
• Safety in buildings & housekeeping
Sec 4: Environment
37
ORGANIZATION STUDY AND RATIO ANALYSIS
• Air pollution, Noise pollution & Water pollution management
• Water conservation & rainwater harvesting
• Wastes management
• Hazardous chemicals
• Energy
• Ozone depleting substances
Sec. 5: Fire Safety
• Fire organization & management:
• Measures of restricting & controlling fire
• Alerting occupants
• Emergency escape arrangement
• Control of Fire
Sec. 6: Accident Reporting, Investigation & Control
• Recording Accident / Injuries / dangerous occurrences
• Investigation of all accidents / injuries / dangerous occurrences
2.6.5 MIS - MANAGEMENT INFORMATION SYSTEM
Entire MIS controls lies at Head Office, Kolkata. In B2 1 NT Server maintained
for login authentication.
HO Central Help Desk
- Central functioning cell for all locations.
- LN access SAP access – Applications collected at B2. Processing,
Approval and Creation takes place from HO. BCF MIS team has
no control. “Book a Call”.
- For any MIS issue, B2 has to book a call with the HO team and they
take care of it.
38
ORGANIZATION STUDY AND RATIO ANALYSIS
Hardware
Desktops provided to all managers and office associates. Laptop
given only to Level D managers. Other manager - Need basis, HOD
approval.
Software
Microsoft Windows XP Professional, Version 2002 (SP-3), Domain –
ITC.IN
Connectivity
- LAN – Local Area Network for all computers in the factory.
- WAN – Wide Area Network access for connectivity with HO and B1.
Dedicated leased lines for WAN. (BSNL & Reliance – 2 vendors for
contingency & backup)
Security
- Restricted with individual passwords. Automatic lock if unused for 2
minutes.
- Password to be alphanumeric with special character. Changed every
90 days.
- Employees not to share their password except with their HOD.
- Personal laptops – No LAN connection. No Company software to be
installed.
- No personal software can be installed on factory computers.
2.6.6 PILOT PLANT
39
ORGANIZATION STUDY AND RATIO ANALYSIS
Pilot Plant forms part of Centre for Process Development (CPD) team, Head
Office. Operations controlled by the HO. (Chief blender in HO).Project initiated by
HO. Trial runs in PP & results communicated to HO. Analyzing results, iterations
take place in blends. Continue until satisfied with the result.
- Development of samples for new products (i.e. new brands)
• Based on the recommendation of Marketing Team Survey
- Straight Grade Analysis
• Changes in crop chemical composition analyzed every year.
- Development of grades for existing blends
• Change in crop chemistry to ensure that blend remains the
same
- PMD processing for Niche Operations of SMD
• Minimum Operation Size- 250 Kgs, Maximum Capacity – 540
Kgs.
2.6.7 HR DEPARTMENT
Major Functions
• Maintaining harmonious Industrial Relations in the factory.
• Assisting in preparation of LTA with workers.
• Recruitment of workers for the factory
• Appointment of Contractor Labors in the factory.
• Responsible for functioning of Canteen, Ambulance Room, Transport
• Processing of wages for all workers
• Providing training and development facilities to the workers.
• Maintain various welfare schemes and funds for workers
HR Statistics
40
ORGANIZATION STUDY AND RATIO ANALYSIS
Total number of workers in the factory - 1148
Total number of managers in the factory - 99
Total number of confidential secretaries - 26
Total number of contract workers in the factory - 450-500
Long Term Agreement
• LTA is the Memorandum of Settlement entered into between the
Management on the one hand and the Union on the other hand.
• The need to enter into MOS is as prescribed by Section 12 (3) of the
Industrial Disputes Act.
• Current LTA is with effect from 1st August, 2007 for a period of 42
months.
• It prescribes workers’ entitlement and other T&C of employment in the
factory.
• Signed by BM, HRM, BE, PM from Management Side duly witnessed
by CM.
PROCESS FLOW For Wages Processing
Master Data Base à Time and Leaves Recording à Computation of
Earning Details à Deductions à Release of Net Payment
2.6.8 COMMERCIAL / FINANCE DEPARTMENT
41
ORGANIZATION STUDY AND RATIO ANALYSIS
The commercial department consists of the six divisions as mentioned below:
2.6.8.1 CAPEX (Capital Goods)
Fixed asset is an asset held with the intention of being used for the purpose of
producing or providing goods and services and is not held for sale in the normal
course of business.
Different types of Capex Plan
“Project” - Specific items each for Rs. 5 crores and above in value
“Specified” - Specific items each for Rs. 50 Lacs and above in value
“Clubbed” - For Items less than Rs. 50 Lacs each in value
“Flexible” - Unforeseen and emergent
Procedure for purchase of CAPEX items
42
ORGANIZATION STUDY AND RATIO ANALYSIS
2.6.8.2 Indirect Taxes
A. Central Excise Related Compliances
a. Monthly reconciliation of Excise Duty
Reconciliation of various Excise related GL Accounts, SAP Reports and
record of AR1 submitted for clearance of goods is done on a monthly
b. Reconciliation with Cenvat Records
On a monthly basis a report is generated for ascertaining the status of invoices.
The report is reviewed and ensured that Cenvat Credit is taken on time. Balance
entered in Register is reconciled with respective Cenvat Credit GL Accounts on a
monthly basis. Moreover, a reconciliation of Cenvat-in-Transit and Cenvat Clearing
Account is done at the month-end.
B. Service Tax Related Compliances
43
ORGANIZATION STUDY AND RATIO ANALYSIS
a) Monthly reconciliation of Service Tax credits availed and maintenance
of Service Tax Register
i. Person Liable to pay Service Tax
Generally the service provider. However in the case of GTA the person
who is paying the freight is liable to pay service tax. Moreover, if the
Import service provider has no place of business in India, then the service
receiver is liable to pay Service Tax and he can avail credit of service tax
paid. For Input Service Tax Credit received from ITD Head Office / ILTD
(Input Service Distributors - ISDs), service tax credit is being availed based
on the challan copies received from ISDs.
ii. Monthly Reconciliation
On a monthly basis service tax credit register dump is taken from SAP
using t-code YRF 301 – Service Tax Credit Register. The same is
reconciled with Service tax credit related GL accounts. Post reconciliation,
the entries of service tax credit utilized for payment of excise duty & any
other credit reversal entries are manually updated in the Service Tax credit
register maintained in excel sheet. The closing balance in Service tax credit
register is tallied with the GL accounts & the same is considered for
monthly ER 1 returns.
b) Service Tax Return (Half Yearly ST-3 Return – Due Date: 25th of the
month following the end of the preceding half year)
• Name of Taxable Service
• Details of Provisional Assessment made, if any
• For all services (including GTA)
• Taxable Value, Service Tax Payable, Service Tax paid in advance,
Details of Challan and Challan Date, Cenvat Credit taken and
utilized
• Self Assessment Memorandum
c) Service Tax Payment
44
ORGANIZATION STUDY AND RATIO ANALYSIS The Service Tax liability for the month on the taxable services availed in the
factory shall be paid by 5th day of the following month (6th of the following month
if the duty is paid electronically through internet banking). Service tax payment is
done at the Unit in capacity of recipient of Service as there is no output service
provided. Service tax is paid electronically through internet banking & procedures
followed for E-payment of Service Tax are similar to that of E-payment of Excise
Duty.
C. Vat Related Compliances
Availment of VAT credit & maintenance of VAT register is described as
follows
a) Identify the items which may be considered as input and capital
Consider the Intra-State purchase for the period concerned and identify
the items, which may be considered as input or as capital as per the State VAT
Act & Rules.
The segregation of input and capital is required as, in some States
treatment is different for input items and capital items. In Karnataka, VAT
Credit on Input can be taken immediately on receipt of goods; however VAT
Credit for Capital Goods can only be availed after the Capital Goods has been
put to use.
b) Compute the input tax credit available
Input Tax Credit to be computed in the manner as prescribed in the
State VAT Act.
c) Disallowance of input credit
Input credit is normally disallowed under the following circumstances:
i. Stock Transfer – Intra-State and Inter-State
ii. Sales Return – Within a period as specified in the State VAT
Act & Rules
D. Entry Tax Related Compliances
45
ORGANIZATION STUDY AND RATIO ANALYSIS
a) Sort the Materials based on Entry Tax Rate and Material Number for the
various category of purchases
b) For Entry Tax on CAPEX Items, get the amount from CAPEX In-Charge
c) Entry Tax is payable on LSHS and CES received in the current month but GR
not done. Provision will be created for the same, which will be reversed in
the subsequent month.
d) For Bangalore Factory Purchase Orders starting with 40, 45 and 47 are DI
Items. From the Entry Tax Payable Account, sort Purchase Orders starting
with 40,45 and 47, for which Material Number is Blank and document type is
“WE” and take the sum of Entry Tax Payable.
e) Entry Tax is not payable on materials stock transferred within 6 months of
receipt. As mentioned above, for Stock Transfer Out, subtotal of Purchase
Order will not be Zero, it will show debit balance. Check Purchase Orders,
subtotal of which shows debit balances and ensure that it is stock transfer out
and then calculate the Entry Tax posted for the same
f) Entry Tax is also not payable on Materials exclusively used on Export
Brands. Obtain list of materials exclusively used for export brands from
Production Department on monthly basis and calculate maximum value of
entry tax on the same
g) Reconcile the Entry Tax Payable as per details send by HO with Entry Tax as
per Entry Tax Payable Account.
Rate of Entry Tax for the materials in ITC is as mentioned below:
• Cigarettes/Cut Tobacco - 4%
• Making Materials – Domestic/Imported - 1%
• Flavors – Domestic/Imported - 1%
• Spares – Domestic/Imported - 2%
• Capex Items - 2%
• LSHS - 5%
2.6.8.3 EXPORT – IMPORT
46
ORGANIZATION STUDY AND RATIO ANALYSIS
A. EXPORT
Customers:
a) Cigarettes and Smoking Mixture to King Maker Marketing (KMM),US on
consignment basis
b) Direct Sales - Cigarettes to Middle East (ME)
i. On Letter of credit(LC) basis – Kuwait, UAE, Bahrain, Qatar
ii. On advance basis – Saudi Arabia , Oman
Planning by Marketing (HO) based on orders received
For ME, the Commercial Dept. will prepare the Proforma Invoice and send to
HO which in turn will be sending it to the Customer for release of LC.
Payment Terms-
a) Letter Of Credit
The LC comes to our Banker from the Customer’s Banker. The Original
Documents will be sent to our banker who in turn will send these to Customer’s
Banker. The intimation will be given to the Customer regarding the receipt of
the docs. The original documents will be released by the Bank once the payment
is made by the Customer.
b) Advance
The Original documents are send to the Customer directly and a copy of
the same would be send to bank for closure of FIRC (Foreign Inward
Remittance Certificate) issued at the time of receipt of Advance.
Major Brands that are exported
ME – Scissors, Wills
US – Ace, Gold Crest, Hival, Smokers Friendly, Checkers (LIP / Non-LIP)
B. IMPORT
47
ORGANIZATION STUDY AND RATIO ANALYSIS Mainly Import consists of the following items
(a) CAPEX
(b) WMS
(c) Tobacco
(d) Spares
Material Arrival-
i. Intimation received by CES from Vendor regarding dispatch of material.- Air
Cargo Arrival Notice from Airlines , Air Way Bill, Vendor’s Invoice
ii. CES will forward the pre-alert to CHA(Customs House Agents)
iii. Accordingly, CHA will prepare the checklist and forward to Commercial for
confirmation
iv. Once it is cleared, Commercial ask CHA to file “Bill of Entry” and Entry in
Import Register done
v. Simultaneously, Commercial will send “Duty Instruction Sheet” to Bank to
prepare a bank draft of Duty Amount in favor of Commissioner of Customs.
vi. On-line Filing of Bill of entry and payment of Duty amount by CHA.
vii. Customs Authority to do assessment and verification of material, assessable
value and duty amount
viii. On satisfaction, will release the goods from Customs (Duplicate Copy of BOE
for availing Cenvat, Triplicate Copy of BOE used for payment to Vendor.)
ix. Duty Payment made either through bank draft or by utilizing DEPB license
(Original or by Transfer Release Advice)
Vendor Payment –
a) Direct Payment – Once GR is made, payment made
The submission of documents – “Form A1, FEMA Declaration, Triplicate Copy
of BOE, Invoice and Airway Bill” to Bank for payment.
Exchange rate as intimated by bank based on the forward rate booked. After
payment, Debit Advice given by Bank.
b) DAN Payment – (Document Arrival Notice)
48
ORGANIZATION STUDY AND RATIO ANALYSIS
Vendor’s banker forwards the documents (Invoice, Packing List,) to bank.
Intimation send to the Company vide Document Arrival Notice by bank.
Once GR made, submission of documents – “Form A1, FEMA Declaration,” to
bank for payment .Exchange rate as intimated by HDFC, Kolkata based on the
forward rate booked. After payment , Debit Advice given by Bank.
2.6.8.4 BOOKS OF ACCOUNTS
A. Trial Balance
The Trial Balance shall consist of the transactions of Bangalore Cigarette
Factory, ATC, HDC, Pilot Plant, R & D Centre
B. Balance Sheet
i. Fixed Assets
Schedule V report extracted from YRF80 should match with GL.
The sum of the General Ledger accounts in AUC should be zero at the month-
end.
Review of CWIP in transit balance and ensure that the value represents
payment made towards the assets, which have not reached the factory as on
review date.
Review the balance lying in CWIP account. Any abnormal delay in
capitalization should be taken up with concerned Engineer – Manager and
appropriate action should be taken.
Check the posting made from revaluation reserve account.
ii. Inventories
On the First of every month the PSV of Inventory takes place which is
reconciled with the balance as per Books.
The value of Inventory (Leaf, WMS, Spares, Finished Stock) should match
with the balance in GL.
iii. Deposits
49
ORGANIZATION STUDY AND RATIO ANALYSIS
The General Ledger balances of Dep-Govt & Public Bodies and Security Deposit
is reviewed for recovery/adjustment.
iv. Sundry Debtors
Balance lying in Sundry Debtors and due date of realization is reviewed along
with status.
v. Cash & Bank balances
As at the end of the month, the Cash and Cheques in Hand GL account shows
the balance only pertaining to the receipt as the last day of the month.
The balance of Main Bank Account should be in conformity with the Balance
as per bank Statement
Schedules for Bank Reconciliation statement need to be prepared every month
and review the status of cheque deposited and not encashed and cheque issued
but not presented for payment.
Ensure necessary adjustment entries for Time Barred cheques in accordance
with policy.
vi. Advances
Review of Advances- vendor wise schedules for advance made to Vendors,
Government and employees are prepared as at the end of the month and
reviewed.
Balance lying in PLA and Cenvat Register as per GL should match with the
Excise Records.
Balance lying in Cenvat in Transit account and Service Tax Credit Receivable
Account should be reviewed. Any old balance outstanding for long period
should be examined and appropriate action should be taken.
Balance lying in Cenvat on Hold Account should be reviewed to ensure that
balance represents 50% of the amount of cenvat credit (Basic+ Education Cess
+ Secondary Cess) for asset capital goods received during the year.
vii. Sundry Creditors
50
ORGANIZATION STUDY AND RATIO ANALYSIS
Accounts payable includes balances related to subsidiary and associated
company, payable on account of SSI vendors, payable to employees, payable on
account of overseas transactions and payable on account of Government & Public
bodies and others. GL wise schedules need to be prepared with age analysis within 6
months and beyond 6 months.
Review of Clearing Account Balance – GR/IR Clearing, Cenvat Clearing,
Freight Clearing Account.
C. Profit and Loss Account
i. Sales and Other Income
Balance appearing in Misc. Income – Claim Realized and Misc. Income –
Sundries needs to be verified.
The Product-wise details of Export Sales to tally with the GL Balance
ii. Consumption – Raw Materials
Consumption figure may be derived from “opening stock + purchase-closing
stock = Consumption” The derived consumption value will match with the
consumption value shown in the GL accounts
iii. Manufacturing, Selling etc Expenses
To Ensure that all the expenses accrued till month end have been booked.
Analytical review is done for any variation with reference to earlier periods.
iv. Depreciation
Depreciation rates are reviewed based on note circulated by Head Office.
D. VARIANCE ANALYSIS
51
ORGANIZATION STUDY AND RATIO ANALYSIS
This is done for all Balance Sheet accounts and Revenue accounts vis a
vis the corresponding previous quarter. Schedules are prepared based on
formats provided by HO for each line item in the B/S and P/L identifying the
reasons for variances.
2.6.8.5 PROCUREMENT AND PAYMENT PROCESS
A. RAISING OF PURCHASE ORDER
i. Purchase Order (PO) of Raw Material (RM – Tobacco and WMS) are
raised at Head Office.
ii. Purchase Order (PO) of Stores & Spare Parts is raised at Unit Level.
The comprehensive procedure of the raising of purchasing order or
procurement is mentioned in the following page,
Activities Coded (PD- Demand Based/ VB- Based on Reorder
Level)
Not Coded (Direct Indent)
52
ORGANIZATION STUDY AND RATIO ANALYSIS
Raising of Purchase
Requisition
Reservation Created by User Department. MRP Run
made by CES after every 10 days which convert Reservation into PR.
User Department directly raises Purchase Requisition.
Quotation Comparative Quotation invited by CES
Comparative Quotation invited by User Department.
Raising of PO PO are created/ raised by CES Clerk and approved by
CES Manager.
PO are created/ raised by Commercial (Need to mention GL Code and Cost
Centre).
Release of PO If Amt. < Rs. 10,000 – By CES Manager
If Amt. > Rs. 10,000 – By I/C Procure. and CM
No need to release. However, PO signed by I/C Procurement , CM and BM in
all cases.
Receipt of Goods
GRN done by CES/ Other Factory
GRN done by Concerned User Dept. (However, in this case it would be directly charged off to PL without routing through Stock Account).
• Quotations required for Amount less than 5,000 is one and for amount
greater than 5,000 is three
• Justification note in case of single quote to be signed by Indenter,
Respective HOD, Branch Engineer
B. METHOD OF BILL PROCESSING
i. On receipt of bills from vendors, the respective departments (Engineering,
Finance, Human Resource, Logistics, Production, MIS etc. ) will enter in the
Bill Register in SAP selecting the respective category (“Bill with PO” or “Bill
without PO”) via SAP
ii. Bills will be forwarded to Commercial Department with the copy of the Bill
Register Report in order to ensure that all bills sent to Commercial are entered
in the Bill Register in SAP.
iii. On receipt of the bills from respective departments in commercial, it is
received in Finance in the Bill Register vide SAP (Bill Register System)
53
ORGANIZATION STUDY AND RATIO ANALYSIS iv. I/C Bill Passing will, thereafter, distribute the bills to the members of the Bill
Passing team in Commercial for processing.
v. Voucher processing (SAP T Code – YF30) is done using SAP T-Code MIRO
(Bills against Purchase/Service Orders) and F-43 (Direct Bill without PO).
vi. After processing the vouchers the SAP Document number, generated by SAP,
is written on the face of the Invoice and print out of the document number will
be taken by using the SAP T Code YSFF12.
vii. The voucher printouts are attached with the Invoices and other supporting
documents, for e.g., Challan copies, etc and the stamps are affixed on the
voucher “ SERVICE TAX “for all Service Tax related transaction vouchers
and “VAT CREDIT “ for all the transaction vouchers where Vat credit is
availed. This segregation aids in separating the original bills at a later point in
time.
viii. These vouchers are forwarded to the designated manager for
passing/approving the voucher.
ix. Processed vouchers will get approved by the designated manager and
forwarded for further release in SAP system. All supporting are defaced by
affixing voucher passed stamp.
x. The approved vouchers are sorted out vendor wise and forwarded for release
to concerned manager.
xi. The vouchers are released by using SAP T Code YRF13. (Payment Block
Release). The concerned manager also will cross check the same aspects of the
Invoice and voucher while releasing.
xii. The released voucher is sent to the Cashier who will segregate the voucher on
the basis of mode of payment and execute the payment process.
SWOT ANALYSIS OF ITC
ITC is one of India's biggest and best-known private sector companies. In fact it
is one of the World's most high profile consumer operations. Its businesses and brands
are focused almost entirely on the Indian markets, and despite being most well-known
54
ORGANIZATION STUDY AND RATIO ANALYSIS for its tobacco brands such as Gold Flake, the business is now diversifying into new
FMCG (Fast Moving Consumer Goods) brands in a number of market sectors -
including cigarettes, hotels, paper, agriculture, packaged foods and confectionary,
branded apparel, personal care, greetings cards, Information Technology, safety
matches, incense sticks and stationery. Examples of its successful new FMCG
products include:
Aashirvaad - India's most popular atta brand with over 50% market
share. It is also present in spices and instant mixes.
Mint-o - Mint-0 Fresh is the largest cough lozenge brand in India.
Bingo! - a new introduction of finger snacks.
Kitchens of India - pre-prepared foods designed by ITC's master chefs.
Sunfeast - is ITC's biscuit brand (and the sub-brand is also used on some
pasta products.
3.1 STRENGTHS
ITC leveraged it traditional businesses to develop new brands for new
segments. For example, ITC used its experience of transporting and
distributing tobacco products to remote and distant parts of India to the
advantage of its FMCG products. ITC master chefs from its hotel chain are
often asked to develop new food concepts for its FMCG business.
ITC is a diversified company trading in a number of business sectors
including cigarettes, hotels, paper, agriculture, packaged foods and
confectionary, branded apparel, personal care, greetings cards, Information
Technology, safety matches, incense sticks and stationery.
3.2 WEAKNESSES
The company's original business was traded in tobacco. ITC stands for
Imperial Tobacco Company of India Limited. It is interesting that a business
55
ORGANIZATION STUDY AND RATIO ANALYSIS
that is now so involved in branding continues to use its original name, despite
the negative connection of tobacco with poor health and premature death.
To fund its cash guzzling FMCG start-up, the company is still dependent
upon its tobacco revenues. Cigarettes account for 47 per cent of the company's
turnover, and that in itself is responsible for 80% of its profits. So there is an
argument that ITC's move into FMCG (Fast Moving Consumer Goods) is
being subsidized by its tobacco operations. Its Gold Flake tobacco brand is the
largest FMCG brand in India - and this single brand alone holds 70% of the
tobacco market.
3.3 OPPORTUNITIES
Core brands such as Aashirvaad, Mint-o, Bingo! And Sun Feast (and
others) can be developed using strategies of market development, product
development and marketing penetration.
ITC is moving into new and emerging sectors including Information
Technology, supporting business solutions.
e-Choupal is a community of practice that links rural Indian farmers
using the Internet. This is an original and well thought of initiative that could
be used in other sectors in many other parts of the world. It is also an
ambitious project that has a goal of reaching 10 million farmers in 100,000
villages.
ITC leverages e-Choupal in a novel way. The company researched the
tastes of consumers in the North, West and East of India of atta (a popular type
of wheat flour), then used the network to source and create the raw materials
from farmers and then blend them for consumers under purposeful brand
names such as Aashirvaad Select in the Northern market, Aashirvaad MP
Chakki in the Western market and Aashirvaad in the Eastern market. This
concept is tremendously difficult for competitors to emulate.
Chairman Yogi Deveshwar's strategic vision is to turn his Indian
conglomerate into the country's premier FMCG business.
56
ORGANIZATION STUDY AND RATIO ANALYSIS
Per capita consumption of personal care products in India is the lowest in
the world offering an opportunity for ITC's soaps, shampoos and fragrances
under their Wills brand.
3.4 THREATS
The obvious threat is from competition, both domestic and international.
The laws of economics dictate that if competitors see that there is a solid profit
to be made in an emerging consumer society that ultimately new products and
services will be made available. Western companies will see India as an
exciting opportunity for themselves to find new market segments for their own
offerings.
ITC's opportunities are likely to be opportunities for other companies as
well. Therefore the dynamic of competition will alter in the medium-term.
Then ITC will need to decide whether being a diversified conglomerate is the
most competitive strategic formation for a secure future.
RESEARCH METHODOLOGY
57
ORGANIZATION STUDY AND RATIO ANALYSIS
4.1 RESEARCH DESIGN OF THE STUDY:
Research simply means a search for facts, answer to questions and solution to
problems. Research is a systematic and logical study of an issue or problem or
phenomenon through scientific method. It is a systematic and objective analysis and
according of controlled observations that may lead to development generalization
principle resulting in prediction and possibly ultimate control of events. A research
design is arrangements of condition for the collection and analysis of data in a manner
that aims to combine relevance to the research purpose with economy procedure.
There various research design methods but descriptive and analytical research design
is more suitable for the study.
This research is by and large a desk research and involved the following methods.
a) Scanning though standard textbooks to understand the theory behind financial
performance appraisal.
b) Collection of company’s specific literature i.e., companies profile and annual
reports over this study period.
c) Identification of financial ratios likely to reflect financial performance adequately.
d) Calculation of these ratios over the study period and tabulation.
e) Finally, forwarding certain recommendations and conclusions to the company.
4.2 METHODOLOGICAL ASSUMPTIONS:
(a) Definition used for various financial ratios in the project is assumed to be
universal.
(b) It is assumed that financial performance is the ultimate index of performance of
company.
(c) It is also assumed that ratios selected for this study reflects financial performance
well and adequately.
4.3 STATEMENT OF THE PROBLEM:
58
ORGANIZATION STUDY AND RATIO ANALYSIS
Changes in the financial performance of the company could be due to several
reasons, changes in profit, changes in operating efficiency, changes in quality of
debtors and many more other reasons. The financial position of the company cannot
be stationary, but it is dynamic owing to the shift in its financial position with regard
to various financial parameters.
Analysis of the financial performance tries to find out the reasons for shift in
position and tires to establish a trend of the direction in which the business is moving
in. Therefore using general terminology, the statement of the problem could be
generalized as a detection of reasons for variation in the financial position of the
company.
4.4 NEED AND PURPOSE OF THE STUDY:
The ultimate performance indicator of any company could financial indicators
because obviously all costs and efficiencies will get reflected in the financial mirror,
once again reasons for variations in the financial position could be several.
By analyzing systematically the identified financial ratios, which reflect
financial performance well and adequately, the company could understand its own
position over time. Such a broad understanding will be of great relevance to the
managers of the company investors (present potential) as well as to any other
party/parties interested in the company.
In other words financial performance evaluation will serve as an eye opener to
any company and the company in question is no exception has this study.
4.5 OBJECTIVES OF STUDY:
a) Analysis of the financial performance of the company.
b) To detect certain financial ratios which are likely to reflect the variability in
profit?
c) To conduct firm comparison over the study period from 2004-05 to 2009-10.
4.6 SCOPE OF THE STUDY:
59
ORGANIZATION STUDY AND RATIO ANALYSIS
Financial performance evaluation as well as proved area and innumerable
studies have proved the utility and usefulness of this analytical technique by analyzing
financial performance employing certain selected financial ratios the company in
question managers, present and potential investors, outside parties as such as creditors
and sectors of the government employees and many more could get an idea of the
performance of the company over the study period (any other two period). While
doing so the project has dealt upon obtaining an understanding of general competition
in this line of activity also. Therefore scope of the study extends over parties both
insider and outsides of the firms.
4.7 TOOLS OF DATA COLLECTION:
Data was collected through discussion and interview with concerned
Executives in the ITC
4.8 SOURCES OF DATA:
Primary as well as secondary data has been collected for the purpose of the
study. The primary data is collected in the information from the concerned to
officials. The secondary data collected from the records
4.9 LIMITATIONS OF THE STUDY:
a) Ratio analysis is a widely used technique to evaluate the financial position and
performance of a business but these is certain problem in using ratios. The
analyst should be aware of these problems.
b) The major constraint for the study was the timing of the study the vastness of
the financial statement was another factor of limitation. The study is based on
the data given by the officials and reports of the company the confidentiality
of some facts and figures are also limitation.
60
ORGANIZATION STUDY AND RATIO ANALYSIS
c) Financial statement analysis is based on balance sheet, profit and loss account
prepared as per accounting practice. This practice is some cases may lead
window-dressing to cover up bad financial position.
d) Financial Statements analysis is suffers from inherent weakness of accounting
practice such as their historical nature matching principle etc.
e) This study is based on only 6 years.
RATIO ANALYSIS
61
ORGANIZATION STUDY AND RATIO ANALYSIS
5.1 FINANCIAL STATEMENTS:
Financial statements, as used incorporate business houses, refer to a set of
reports and schedules, which an accountant prepares at the end of the period of time
for a business enterprise. The financial statements are the means with the help of
which the accounting system perform its main function affairs of the business. These
statements comprise balance sheet and profit and loss account. In India, every
company has to present its financial statements in the form and contents as prescribed
under section 211 of the Companies Act 1956.
5.2 BALANCE SHEET:
Balance sheet is a statement showing the nature and amount of a company’s
assets on one side and liabilities and capital on the other. It shows the financial
conditions of a company at the end of a given period usually at the end of one-year
period. Balance sheet shows how the money has been made available to the business
of the company and how the money is employed in the business.
5.3 PROFIT AND LOSS ACCOUNT:
Earning profit is the principal objective of all business enterprise and profit
and loss account is the document, which indicates the extent of success achieved by
the business in meeting this objectives. Profits are of primary importance to the Board
of Directors in evaluating the management of a company, to shareholders in making
investment decisions and to bank and other creditors in judging the loan repayment
capacities and ability of the company.
5.3.1 Nature of Financial Statements:
Financial statements are prepared for the purpose of presenting periodical
review or report on the progress by the management and deal with-
(a) Status of the Investments in the Business.
(b) Results achieved during the period under review.
62
ORGANIZATION STUDY AND RATIO ANALYSIS The Data exhibited in these financial statements are the result of the combined effect
of
1. Recorded facts
2. Accounting conventions.
3. Postulates or assumptions made to implement conventional procedures
4. Personal judgments used in the applications of conventions and postulates and
5. Accounting Standards and guidance notes.
5.3.2 Objectives of Financial Statements:
The accounting principles Board of America mentions the objectives of
financial statements as follows:
1) To provide reliable financial information about economic resources and
obligations of a business enterprise.
2) To provide reliable information about the net resources (resources less
obligations) of an enterprise that results from its activities.
3) To provide financial information that assists in estimating the earning
potentials of a business.
4) To provide other needed information about changes in economic resources and
obligations.
5) To disclose to the extent possible, other information related to the financial
statements that is relevant to the needs of the users of these statements.
5.3.3 Importance of Financial Statements:
The most important objective of financial statements is to present information
for the use of different categories of persons as mentioned below:
Management: Financial statements and accounts are of a very great help in
understanding the progress, position and prospects of the business. Financial
statements, by helping the management to be acquainted with the causes of the
business results, enable them to formulate appropriate policies and course of action
for the future. A comparative analysis of financial statements should enable
63
ORGANIZATION STUDY AND RATIO ANALYSIS management to see the trends in the progress and position of and make suitable
modifications in policies to avert unfavorable situation.
Public: Business is a social entity. Various group of the society, though not directly
connected with business, position and prospects of a business enterprise. These
groups are financial analysts, trade associations, labor unions, financial press, students
and teachers, etc. It is only through the published financial statements that the people
can analyze, judge, and comment upon the business enterprise.
Shareholders and Lenders: The financial statements serve as a useful guide for the
shareholders the suppliers and the lenders of a company. It is through critical
examination of the financial statements that these groups can come to know about the
efficiency and effectiveness of the management and position, progress and prospects
of the company. For this purpose, it is necessary that the financial statements should
contain accurate, complete and systematic facts and figures. So that these people can
get full and accurate ideas regarding the present position and the future of the
company.
Labor and Trade Union: In India workers are entitled to Bonus, under the payments
of Bonus act, depending upon the size of the profit as disclosed by audited and a
profit and loss account. Thus Profit and loss account becomes greatly important to the
workers. In wage negotiations also, the size of profits and the profitability achieved
are greatly relevant.
5.3.4 Limitations of Financial Statements:
1) Financial statements are prepared primarily for shareholders; other interested
parties have to generally make many adjustments before they use them
profitably.
2) It is not always possible to discover false figures in financial statements;
unscrupulous managements generally resort to “Window dressing” in the
preparation of such statements.
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ORGANIZATION STUDY AND RATIO ANALYSIS
3) Quite often financial statements do not disclose current worth of the business.
Only historical facts are presented and the true current worthies not reflected.
4) Financial statements take into consideration only the financial factors. They
fail to bring out the significance of non-financial factors.
5.3.5 Analysis of Financial Statements:
Analysis of financial statements refers to the treatment of information
contained in the financial statement in a way so as to afford a full diagnose of the
profitability and financial position of the firm concerned.
The process of analyzing financial statements, involves the rearranging,
comparing and measuring the significance of financial and operating data. Such a step
helps to reveal the relative significance and effect of items of the data in relation to
the time period and/or between two organizations.
According the Myers, “Financial statement analysis is a largely a study of
relationship among the various financial factors in business ad disclosed by a single
set of statements and a study of the trend of these factors as shown in a series of
statements”.
5.3.6 Types of Financial Statement Analysis:
1. Horizontal Analysis: When financial statements for a number of years are
reviewed and analyzed, the analysis is called ‘Horizontal Analysis’. As it is
based on date from year to year rather than on one date or period of time as a
whole, this is also known as ‘Dynamic Analysis’. This is very useful for Long-
term trend analysis and planning.
2. Vertical Analysis: It is frequently used for referring to ratios developed for
one date or for one accounting period. Vertical analysis is also called ‘Static
Analysis’. This is not very conductive to proper analysis of the firm’s financial
position and its interpretation as it does not enable to study data in perspective.
This can only be provided by study conducted over a number of years so that
comparisons can be affected. Therefore, vertical analysis is not very useful.
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ORGANIZATION STUDY AND RATIO ANALYSIS 5.3.7 Methods of Analyzing Financial Statements:
Analytical methods and devices used in analyzing financial statements are as
follows:
1) Comparative Statements.
2) Common-size statements
3) Trend ratio
4) Fund flow Statements
5) Ratio Analysis
1. Comparative Statements: The comparative Balance Sheet analysis in the
study of the trend of the same items group of the items and computed items in
two or more balance sheet of the same business enterprise on different dates.
The changes in the period balance sheet items at the end of a period can be
observed, which reflects the conduct of a business.
2. Common-size Statement: Common-size statements facilities both type of
analysis horizontal as well as vertical analysis. It not only compares across
years but each individual item of group of assets and liabilities is related to the
total of the group in respect of each year. It means individual current asset is
shown as a percentage of total current assets. Main advantage of common-size
statements is that a comparison of performance and financial condition in
respect of different units of the same industry can also be done.
3. Trend Analysis: The easiest way to evaluate the performance of a bank is to
compare its percent ratio with the past ratio when financial ratios over a period
of time are compared it is known as time series or trend analysis. It gives an
indication of change and reflects whether financial performance has improved
or has deteriorated or has remained constant over time.
4. Fund flow Statements: The Fund flow statements is a method by which we
study changes in the financial position of a business enterprises between
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ORGANIZATION STUDY AND RATIO ANALYSIS
beginning and ending financial statements dates. It is a statement showing
sources and application of funds for a period of time. It is a complimentary
statement to the income statement. Fund flow statements considers both
capital and revenue items.
5.3.8 Objectives of Financial Statements Analysis:
1) The analysis would enable the present and the future earning capacity and the
profitability of the concern.
2) The operational efficiency of the concern as a whole as well as department
wise can be assessed. Hence, the management can easily locate the areas of
efficiency and inefficiency.
3) The solvency of the firm, both short-term and long-term, can be determined
with the help of the financial statement analysis which is beneficial to trade
creditors and denture holders
4) The comparative studying regard tone firm with another firm or one
department with another department is possible by the analysis of financial
statements.
5) Analysis of past results in respects of earning and financial position of the
enterprise is of great helping forecasting the future results. Hence, it helps in
preparing Budget.
5.3.9 Limitations of Financial Statements Analysis:
1) Analysis of financial statements is a tool, which can be used profitably by an
expert analyst but may lead to faulty conclusions if used by unskilled analyst.
So the result cannot be taken as judgments or conclusions.
2) Financial statements are interim reports and therefore cannot be final because
the final gain or loss can be computed only at the termination of the business.
Financial statement reflects the progress of the position of the business so
analyses of these statements will not conclusive evidence of the performance
of the business.
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ORGANIZATION STUDY AND RATIO ANALYSIS
3) The reliability of analysis depends on the accuracy of the figures used in the
financial statements. The analysis will be vitiated by manipulations in the
income statements or balance sheet and accounting procedure adopted by the
accountant for recording.
4) The results for indications derived from analysis of financial statements may
be differently interpreted by different users.
5) There are different tool of analysis available for the analyst. However, which
to be used in a particular situation depends on the skill, training and expertise
of the analyst and the result will vary accordingly.
5.4 RATIO ANALYSIS:
Ratio analysis is one of the tool or technique of management accounting. It is
most widely used for the analysis of financial statements. Such as the profit and loss
account or the Income statements, balance sheet. These financial statements are the
financial position. These financial statements are really useful to the executives,
owners, creditors, investors etc. Based upon the financial statements, users can form
judgment about the operating performance of the firm and financial position of the
firm. A creditor can ascertain the liquidity position of the firm that is the ability of the
firm to repay its current liabilities. The management of the firm analyzes the financial
statement to judge the operating efficiency of the firm. The shareholders (owners)
analyze the financial statement of the firm to find out the profitability. The investors
analyze the financial statement of the firm to know the ability of the firm to pay
interest regularly. The future plans of the firm should be laid down in the view of the
firm’s financial strength and weakness. The financial statement contains the items
relating to profit and loss of a firm. But these figures are not enough to be much use,
if they are consider individually. They will be very useful only when one item is
compared with another item Individual items comparison in financial statements
efficiently is possible only by ratio analysis technique. Simply we can say Ratio is the
relationship between two accounting figures, expressed mathematically.
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ORGANIZATION STUDY AND RATIO ANALYSIS
According to Prof. Springfield, Prof. Mass & Prof. C. Merrium, a ratio is
defined as “The indicated Quotient of two mathematical expressions” and as “The
relationship between two or more things”.
5.4.1 Nature and scope of Ratio Analysis:
Ratio analysis is effective tool of financial analysis available to a financial
analyst. Ratio analysis is a one of the tool or technique of financial analysis. The other
tools of financial analysis are:
(1) Comparative financial statement analysis.
(2) Common-size statement analysis.
(3) Trend analysis or Trend percentage.
(4) Fund flow Analysis.
(5) Cash flow Analysis.
Ratio Analysis is a process of determining and interpreting numerical
relationship of different figures in the financial statements. It is statistical yardstick
that provides a measure of relationship between two accounting figures; this
relationship can be expressed in the terms of percentage or as a quotient. (One of them
as a certain number of times the other item).
There are several ratios, which an analyst can adopt, but the type of ratios he
would precisely use depends upon the purpose for which the analysis is made. Ratio
analysis simplifies the understanding of financial statements. It facilitates inter-firm
comparison and as well as intra-firm comparison. Ratio analysis is useful not only to
the insiders. But also to outsiders like creditors, investors etc.
5.4.2 Objectives of Ratio Analysis:
1) To analyze the financial position of the firm by using the various accounting
ratios.
2) To know the liquidity position of the firm that is the firm’s relative strengths
and weakness of the firm.
3) To know the various source utilized by the firm.
4) To know the amount of debt in the firm.
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ORGANIZATION STUDY AND RATIO ANALYSIS
5) To provide information to the investors in Investment Decision.
6) To compare financial position of the firm in the current year with the previous
years’ financial position.
7) To know the season effects in the firm, that is cost position of the firm
between the profit making and loss-making period.
8) To help the management in planning, controlling and decision making.
9) To finds out the solution to the unfavorable financial conditions and financial
performance.
10) To take the suitable corrective measures when the firm’s financial conditions
and performance are unfavorable to the firm when compared to other firms in
the same industry.
5.4.3 Statement of the Study:
A financial Statement contains income statement showing sales, purchase,
revenue, tax, expenses etc.; on the other side, the balance sheets show the liabilities
and sets position during the year.
A study of financial performance is compared of the following:
a) Analysis of the liquidity and profitability of current assets and current liabilities.
b) Analysis of the long-term financial position of current assets and current
liabilities.
c) Analysis of various components of working capital (cash, receivables, inventories,
etc.).
5.4.4 Limitations of Ratio Analysis:
1) Usefulness of ratios depends upon the abilities and intentions of the persons
who handle them. It will be affected considerably by the bias of such persons.
2) Ratios are worked out on the basis of money values only. They do not take
into account the real valves of various items involved. Thus, the technique is
not realistic in its approach.
3) Historical values (especially in balance sheet) are considered in working out
the various ratios. Effects of charges in the price level of various items are
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ORGANIZATION STUDY AND RATIO ANALYSIS
ignored and to that extent the comparisons and evaluations of performance
through ratios become unrealistic and unreliable.
4) One particular ratio, in isolation is not sufficient to review the whole business.
A group of ratios are to be considered simultaneously to arrive at any
meaningful and worthwhile opinion about the affairs of the business.
5) Since management and financial policies and practices different from concern
to concern, similar ratios may not reflect similar state of affairs of different
concerns. Thus, comparisons of performance on the basis of ratios may be
confusing.
6) Since ratios are calculated on the basis of financial statements, which are
themselves affected greatly by the firm accounting policies, and changes these
in, the ratios may not be able to bring out the real situations.
5.5 CLASSIFICATION OF RATIOS:
1. Short-term solvency Ratios:
(a) Current Ratio
(b) Quick Ratio
(c) Absolute Liquid Ratio
(d) Inventory to working capital ratio
2. Long-term solvency Ratios:
(a) Debt-Equity Ratio
(b) Proprietary Ratio
(c) Solvency Ratio
(d) Fixed Assets to net worth Ratio
(e) Current assets to net worth ratio
(f) Current Liabilities to net worth ratio
(g) Fixed Assets ratio
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ORGANIZATION STUDY AND RATIO ANALYSIS
3. Turnover or Activity Ratios:
(a)Stork turnover Ratio
(b)Debtors turnover Ratio
(c)Creditor turnover Ratio
(d)Cash turnover Ratio
(e)Working capital turnover Ratio
(f)Fixed Assets turnover Ratio
(g)Current Assets turnover Ratio
(h)Total Assets Turnover Ratio
(i)Sales to net worth Ratio
4. Profitability Ratios:
(a)Gross profit Ratio
(b)Net profit Ratio
(c)Operating Cost Ratio
(d)Operating Profit Ratio
(e)Total Assets Ratio
(f)Return on Equity Ratio.
5.5.1 Short Term Solvency or Liquidity Ratios:
There are the ratios, which measures the short-term solvency or financial
position of the firm. These ratios are calculated to comment upon the short-term
paying capacity of a concern or the firm’s ability to meet its current obligations.
1) Current Ratio: The current ratio is calculated by dividing current assets by current
liabilities. Current assets include cash and other assets which can be converted into
cash within the normal course of the business (that is normal 12 months) such as bills
receivable, securities, advances, outstanding accrued income and prepaid expenses.
All obligations maturing within a year are included in current liabilities. Thus, current
liabilities include bills payable, sundry creditors, provision for income tax, unclaimed
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ORGANIZATION STUDY AND RATIO ANALYSIS dividend, proposed dividend and long-term debt maturing in the current year. Current
ratio measures the firm’s short-term solvency position. It indicates the availability of
current assets in rupees for everyone rupee current liability. If the ratio is more than
two means that the firm has more current assets, shows high liquidity position of the
firm. When current liabilities are more than current assets means the liquidity position
of the firm is poor. Standard or ideal current ratio is 2:1. The current assets fixed at
two times the current liabilities. The idea behind this fixation is to leave a margin of
safety to cover any fall in the value of current assets and also leave sufficient working
capital after the payment of current liabilities. Current assets twice of current
liabilities or more considered to be satisfactory.
Current Assets
Current Ratio = ----------------------
Current Liabilities
2) Quick Ratio: The quick or acid test ratio is a more defined measure of the firm’s
liquidity. This ratio establishes a relationship between quick or liquid assets and
current liabilities. An asset is liquid, if it can convert into cash immediately or
reasonably soon without loss of value. Cash is the most liquid asset. The other assets,
which are considered relatively liquid and included in the quick assets, are book debts
and marketable securities. Stock or inventory and prepaid expenses are considered to
be less liquid. Inventories normally require sometime for realizing into cash. The
quick ratio is found out by dividing the total of the quick assets by the total current
liabilities. The quick or acid test ratio is sometimes called “Liquidity Ratio”.
Quick/Liquid Assets
Quick/ Acid Test Ratio = -------------------------
Current Liabilities
Quick assets include cash and book debts (debtors and bills receivable) only.
Inventories are excluded because it takes time to sell finished goods and convert raw
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ORGANIZATION STUDY AND RATIO ANALYSIS materials and work in progress into finished goods. There is also uncertainty as to
whether or not the inventories can be sold. Since the prepaid expenses cannot be
converted into cash the prepaid expenses are excluded. By conversion a quick ratio of
1:1 considered satisfactory. It is considered that, if quick assets are equal to current
liabilities, then the concern can meet its obligations.
3) Absolute Liquid Ratio: It is calculated by dividing absolute liquid assets by liquid
liabilities. It is a measure of firm’s present liquidity position to pay its immediate
payments.
Absolute Liquid Assets
Absolute Liquid Ratio = -------------------------
Liquid Liabilities
Absolute liquid assets include cash in hands and cash at bank only. Ideal absolute
liquid Ratio is 0.5:1.
4) Inventory to Working Capital Ratio: It is the ratio of inventory to working
capital. Inventory to working capital ratio is usually expressed as a percentage. It is
expressed as
Inventory
Inventory to Working Capital Ratio = --------------------- x 100
Working capital
This ratio indicates the proportion of working capital tied up in inventories or stocks.
It also indicates whether there is overstocking or under stocking. As per the standard
inventory to working capital ratio the inventories should not absorb more than 75% of
working capital. As such a low inventory to working capital ratio (that is a ratio of
less than 75%) indicates under stocking, and so high liquid position, while a high
inventory to working capital ratio (i.e., a ratio over 75%) indicates overstocking
capital and so, a low liquid position
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ORGANIZATION STUDY AND RATIO ANALYSIS 5.5.2 Long-Term Solvency Ratios / Leverage Ratios:
Long-term solvency ratio conveys a firm’s ability to meet the interest/costs
and repayment schedule of its long-term obligations. These ratios are helpful to
management in proper administration of capital. It also helps the creditors to know the
capacity of a business concern to pay debt in future.
a) Debt-Equity Ratio: The term debt signifies total indebtedness of the company as
shown by its short and long-term obligations. Equity refers to the aggregate
ownership interest measured by the total share capital plus any reserves, which may
rightly and legitimately be appropriate to the shareholders.
The ratio can be calculated in two ways:
(1) Total Debt/Net worth
(2) Net worth/Total Debt
Both these methods are in practice but the interpretation of each requires a
great deal of caution. The fundamental objective of it is to measure the relative
interest of owners and creditors in the enterprise. It also measures the extent of trading
on equity. From the creditors point of view it signifies the extent to which their
interests are covered by net worth of the enterprise. The creditors, however, prefer a
lower debt to equity ratio as it gives them greater cushion against possible loss in the
event of the liquidation of the enterprise. The owners, on the other hand, prefer a high
debt to equity ratio as this will give them better returns with a smaller capital
contribution.
If the debt is less than two times the equity, the logical conclusion is that the
financial structure of the concern is sound. On the other hand, if the debt is more than
two times the equity, the conclusion is the financial structure of the undertaking is
weak.
Debt
Debt Equity Ratio = ---------
Equity
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ORGANIZATION STUDY AND RATIO ANALYSIS b) Proprietary Ratio: It is a variant of the debt equity ratio. It is the ratio, which
expresses the relationship between the net worth or equity and total assets.
Net worth
Proprietary Ratio = ----------------
Total Assets
i. It is an index of the amount of the proprietors funds invested on the total
assets of a concern
ii. It is also indicates the proportion between owned capital (i.e., proprietors
fund) and loaned capital (i.e., borrowed funds or liabilities).
iii. It indicates the relative risks of the owners and the creditors of an enterprise.
The higher the proprietary ratio the stronger is the financial position of the concern
and lower the proprietary ratio, the weaker is the financial position of the enterprise.
c) Solvency Ratio: This ratio measures the long term solvency of the business. It
reveals the relationship between total assets and total external liabilities. External
liabilities mean all long term and short liabilities. It is the difference of 100 and
proprietary ratio. It is calculated as follows:
Total liabilities
Solvency Ratio = ---------------------------
Total Assets
The ratio measures the proportion of total assets provided by creditors (long-term as
well as short-term) of the firm. That is what part of assets is being financed from
loans. If total assets are more than external liabilities, the firm is treated as solvent.
So, the higher the ratio, greater is the amount of creditors that is being used to
generate profits for the owners the firm.
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ORGANIZATION STUDY AND RATIO ANALYSIS d) Fixed Assets Ratio: This ratio is also called the capital employed to fixed assets.
As per sound financial policy acquisition of fixed assets should be financed form
long-term funds only. To test whether this policy is properly followed or not, this ratio
is calculated. It expresses the relationship between long-term funds or capital
employed and fixed assets of the firm. Expressed as a formula, the ratio is
Long-term Funds Capital Employed
Fixed Assets Ratio = ---------------------- or ----------------------
Fixed Assets Fixed Assets
Long-term funds include equity share capital, preference share capital, all reserves
and surplus and long-term loans. Fixed Assets mean net fixed assets. That is fixed
assets after deducting depreciation and long-term investments including shares of
subsidiary companies.
This ratio indicates whether proper adjustment between long-term sources and long-
term uses of capital exists or not Fixed Assets Ratio of more than one reveals that
long-term funds have been employed to finance current assets on the contrary a ratio
of less than one indicates that a part of fixed assets is financed by short-term funds.
e) Fixed Assets to Net worth Ratio: It is the ratio between fixed assets to net worth.
Net Fixed Assets
Fixed Assets to Net worth Ratio = -------------------------
Net worth
This ratio indicates the proportion of fixed assets financed by the owner. In other
words it indicates as to what extent the owners have invested funds on the fixed
assets, which constitute the main structure of the business.
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ORGANIZATION STUDY AND RATIO ANALYSIS f) Current Assets to Net worth Ratio: It is the ratio between current assets and net
worth.
Current Assets
Current Assets to Net worth = -------------------
Net worth
This ratio indicates the proportion of current assets financed by the owners. There is
no standard for this ratio but one can say that if this ratio is high the financial strength
is good and if it is low the financial position of the concern is weak.
g) Current Liabilities to Net worth Ratio: Current Liabilities to net worth ratio is
the ratio between Current liabilities to Net worth.
Current Liabilities
Current Liabilities to Net worth Ratio = ----------------------
Net worth
This ratio indicates the relative contributions of the short-term creditors and the
owners in the capital of an enterprise. If the ratio is very high, it would mean that the
liability base of the concern will not provide an adequate cover for long-term
creditors. That means it would be difficult for the concern to obtain long-term funds.
5.5.3 Activity Ratios / Performance Ratios / Turnover Ratios:
Activity ratios refer to ratios, which measure the level of activities,
performance or the operating efficiency of enterprise.
a) Stock Turnover Ratio: It is the ratio, which indicates the no. Of times the stock is
turned (i.e., sold) during a year. It is the ratio between stock and the cost of goods
sold.
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ORGANIZATION STUDY AND RATIO ANALYSIS
Cost of Goods Sold
Stock Turnover Ratio = ------------------------
Average Stock
It can also be expressed in terms of so many months, weeks or days.
Average stock X Months X Weeks or days in a year
------------------------------------------------------------
Cost of goods sold
This ratio indicates the velocity with which goods move out of the business, i.e., it
indicates the member of times the average stock of finished goods is turned over or
sold during a year. It also indicates whether this is over stocking or lender stocking of
finished goods. It helps the management to know whether the stock of finished goods
held sales are reasonable or unreasonable as compared with predetermined standard.
Again it helps to determine even the liquidity of a concern as it indicates the rate at
which the inventory or stock is converted into sales and then into cash. A stock
turnover of 8 times a year is considered ideal.
b) Receivable Turnover, Debtors Turnover or Debtors velocity: It is the ratio,
which indicates the relationship between debtors, and sales, it indicates the number of
times the debt is collected in a year.
Net Annual Credit Sales
Debtors Turnover Ratio = --------------------------------
Average Debtors
This ratio indicates the rate at which the amounts are collected from the debtors. This
also indicates the liquidity of the concern as the rate at which debts are collected
influences the liquidity of the concern.
Debt collection period: This is the ratio, which indicates the extent to which Debt has
been collected in time. In other words this is the ratio, which indicates the average
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ORGANIZATION STUDY AND RATIO ANALYSIS time taken by the firm to collect debts. It is the ratio, which indicates the average
collection period or the average period of credit allowed to debtors. If the actual
period of credit allowed is more than the normal period of credit or the ideal period of
credit like 30days the indication is that the credit period is not efficient.
c) Creditors Turnover Ratio or Creditors Velocity: Creditors Turnover Ratio is the
ratio between creditors and purchases. It is the ratio, which indicates the number of
times the creditors are paid in a year.
Net Annual Credit Purchases
Creditors Turnover Ratio = ---------------------------------------
Average Creditors
This indicates the rate at which payments are made to creditors or the number of times
payments are made to creditors.
Debt Payment Period: This is the ratio, which is used to indicate the time within
which payments are made to the creditors.
No. Of Days in a year
Debt Payment period = -----------------------------------
Creditors Turnover
This ratio indicates the average period of credit received from creditors further a
comparison of this ratio with debt collection period ratio will indicate the time lag
between the two period of credit and the time lag between tow credit periods will
indicate the duration for which working capital is required to be arranged. The Debt
payment as calculated is compared with the standard or ideal payment viz., 30 days
And conclusions are drawn.
d) Cash Turnover Ratio: It is the ratio between Cash and Turnover or Sales.
Net Annual Sales
Cash Turnover Ratio = ------------------------
Cash
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ORGANIZATION STUDY AND RATIO ANALYSIS
This ratio indicates the extent to which cash resources are efficiently utilized by the
enterprise. It is also helpful in determining the liquidity of a concern.
e) Working Capital Turnover Ratio: It is the Ratio between working capital and
turnover.
Net Sales
Working Capital Turnover Ratio = -------------------
Working Capital
This ratio indicates the efficient or inefficient utilization of the working capital of an
enterprise. There is no standard or ideal working capital turnover ratio. But one can
say that the higher the working capital turnover ratio the greater is efficiency. It
should be noted that a very high working capital turnover ratio means over trading,
and a very low working capital turnover ratio means under trading. None-of which is
good for a concern.
f) Fixed Assets Turnover Ratio: Fixed Assets turnover ratio is the ratio between
fixed assets and turnover. Fixed assets, here, means net fixed assets, i.e., fixed assets
less depreciation. This ratio indicates as to what extent the fixed assets of a concern
have contributed to sales.
Net Sales
Fixed Assets Turnover Ratio = ---------------
Fixed Assets
A fixed assets turnover ratio of 5 times or more indicates better utilization of fixed
assets. It may be noted that a very high fixed assets turnover ratio means under
trading, which is not good for the business.
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ORGANIZATION STUDY AND RATIO ANALYSIS g) Current Assets Turnover Ratio: Current assets turnover ratio is the ratio between
current assets and sales (Net sales).
Net Sales
Current Assets Turnover Ratio = -----------------
Current Assets
This ratio indicates the contribution of current assets to net sales. There is no standard
or ideal current assets turnover ratio. Yet, the inference is that a high current assets
turnover ratio is an indication of a better utilization of current assets on the other
hand; a low current assets turnover ratio suggests that the current assets have not been
utilized effectively.
h) Total Assets Turnover Ratio: This is the ratio between total assets and Net sales.
Net Sales
Total Assets turnover Ratio = ------------------
Total Assets
This ratio indicates the efficiency or inefficiency in the use of total resources
or assets of a concern. The standard ratio is that the sales should be at least two times
the value of the assets. A total assets turnover ratio of 2 times or more indicates that
the assets of a concern have been utilized effectively.
i) Sales to Net worth ratio: It is also called as owned capital turnover ratio. It is the
ratio between net annual sales and net worth that is owners’ fund.
Net Annual Sales
Sales to Net worth Ratio = ------------------------
Net worth
This ratio is a good index of the utilization of the owner’s funds. It is also indicates,
whether there is over trading or under trading. Again it indicates whether there is over
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ORGANIZATION STUDY AND RATIO ANALYSIS capitalization or under capitalization. If the volume of sales in relation to net worth is
reasonable, the indication is the owner’s funds have been effectively utilized.
5.5.4 Profitability Ratios:
They are the ratios, which measure the profitability of a concern in other
words they are ratios, which reveal the total effect of the business transaction on the
profit position of an enterprise and indicated how far the enterprise has been
successful in its aim.
(1) Gross Profit Ratio or Turnover Ratio: It is the ratio, which expresses the
relationship between gross profit and sales.
Gross Profit
Gross Profit Ratio = ----------------------- x 100
Net Sales
This ratio indicates the gross results of trading or the overall margin within
which a business undertaking most limit its operation expenses to earn sufficient
profit. It also indicates whether the average markup on the goods has been maintained
or not. The actual gross profit ratio is compared with the gross profit ratio of the
previous year and those are concern carrying on similar business, If it is high then it is
an indication good results and vice versa.
(2) Net Profit Ratio: Net Profit means final balance of operating and Non-operating
incomes after meeting all expenses, that is both operating and non-operating. Sales
mean total sales, but net sales, i.e., total sales minus sales returns.
Net Profit
Net Profit = ------------ x 100
Net Sales
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ORGANIZATION STUDY AND RATIO ANALYSIS This ratio indicates the quantum of profit earned by a concern. A high net profit ratio
indicates that the profitability of the concern is good. A low net profit ratio indicates
that the profitability of the enterprise is poor.
(3) Operating Cost Ratio: Operating Cost refers to all expenses incurred for
operating or running a business. It comprises cost of goods sold plus operating
expenses, such as office and administration expenses and selling and distribution
expenses.
Operating Cost
Operating Cost Ratio = ------------------ x 100
Net Sales
The operating ratio indicates the efficiency of the management in the conduct of the
business. A low operating ratio is indication of the operating efficiency of the
business; on the other hand, a high operating ratio is an indication of the operating
inefficiency of the business.
(4) Operating Profit Ratio: Operating profit is the net profit earned forms the
business for which the concern is started. In other words, it is the excess of net sales
over the operating cost. The operating profit ratio is, generally expressed as a
percentage.
Operating Profit
Operating Profit Ratio = --------------------- x 100
Net Sales
The operating profit ratio also indicates the operating efficiency or inefficiency of a
business. An operating profit ratio of 10% or more is an indication of the operating
efficiency of the business, while an operating profit ratio of less than 10% is an
indication of the operating inefficiency of the business.
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ORGANIZATION STUDY AND RATIO ANALYSIS (5) Return on Total Resources Ratio: Return on Total Resources is also called as
Total Assets Ratio. Return on total resource ratio is the ratio of net profit after taxes,
i.e., final net profit. Return here, means net profit after taxes, i.e., final net profit.
Total resources or total assets means all realizable assets, including Intangible assets,
it they are realizable. This ratio is usually, expressed as a percentage.
Net profit
Return on Total Resources Ratio = ----------------- x 100
Total Assets
This ratio measures the productivity of the total assets or total resources of a
concern. If the actual ratio is 10% or more, it is an indication of higher productivity.
(6) Return on Equity or Net worth or Shareholders Fund Ratio: It is the ratio,
which expresses the relationship between Net profit and shareholders fund.
Net profit
Return on Equity = ------------ x 100
Net worth
i. This Ratio indicates the productivity of shareholder’s fund.
ii. It also gives the shareholders and idea of the return of their funds.
iii. It is also useful for inter-firm and inters industry comparisons.
85
ORGANIZATION STUDY AND RATIO ANALYSIS
ANALYSIS AND INTERPRETATION OF DATA
6.1 SHORT-TERM SOLVENCY RATIOS:
6.1.1 Current Ratio: Current Assets / Current Liabilities
Year 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10
Current
Assets3539.29 5161.90 6289.72 7019.27 8161.11 8127.08
Current
Liabilities3033.82 3579.07 3857.59 4432.30 4705.01 8048.24
Current
Ratio1.1617 1.4422 1.6305 1.5837 1.7346 1.0098
2004-05 2005-06 2006-07 2007-08 2008-09 2009-100
0.2
0.4
0.6
0.8
1
1.2
1.4
1.6
1.8
2
1.1617
1.44219999999999
1.6305 1.58369999999999
1.7346
1.00979999999999
Current Ratio
Interpretation: The ideal or standard ratio is 2:1. The above trend shows that the
current ratio is fluctuating in nature. There is a moderate decrease in the financial year
2009-10. This shows that the company is not following steady working capital policy.
ITC can be said to be insufficiently liquid and there is a shortage of working capital.
86
ORGANIZATION STUDY AND RATIO ANALYSIS 6.1.2 Quick Ratio: Quick Assets / Quick Liabilities
Year 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10
Quick
Assets1536.3 2525.61 2935.69 2968.75 3561.39 3578.01
Quick
Liabilities3033.82 3579.07 3857.59 4432.30 4705.01 8048.24
Quick
Ratio0.5064 0.7057 0.7610 0.6698 0.7569 0.4446
2004-05 2005-06 2006-07 2007-08 2008-09 2009-100
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.5064
0.705700000000004
0.76100.66980000000000
6
0.756900000000004
0.4446
Quick Ratio
Interpretation: The ideal or standard ratio is 1:1. The above trend shows that the
Quick Ratio is fluctuating in nature. The company’s Quick Ratio for the past six years
has been below ideal ratio and in the current year it has deteriorated further. Since the
quick ratio is less than the standard, there is concern required regarding liquidity
position and it is difficult to pay off its short-term liabilities out of Quick realizable
assets.
87
ORGANIZATION STUDY AND RATIO ANALYSIS 6.1.3 Absolute Liquid Ratio: Absolute Liquid Assets / Liquid Liabilities
Year 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10
Absolute
Liquid
Assets
55.66 855.82 900.16 570.25 1032.39 1126.28
Liquid
Liabilitie
s
3033.82 3579.07 3857.59 4432.30 4705.01 8048.24
Absolute
Liquid
Ratio
0.0183 0.2391 0.2333 0.1286 0.2194 0.1399
2004-05 2005-06 2006-07 2007-08 2008-09 2009-100
0.05
0.1
0.15
0.2
0.25
0.3
0.0183
0.2391 0.2333
0.1286
0.219400000000001
0.1399
Absolute Liquid Ratio
Interpretation: The ideal or standard ratio is 0.5:1. The ratio has never been ideal in
the past five years. It is also showing a fluctuating trend. Current year’s absolute
liquid ratio has further decreased. So concern is considered as not liquid.
88
ORGANIZATION STUDY AND RATIO ANALYSIS
6.1.4 Inventory to Working Capital Ratio: (Inventory / Working Capital) * 100
Year 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10
Inventory 2002.99 2636.29 3354.03 4050.52 4599.72 4549.07
Working
Capital505.47 1583.83 2432.13 2586.97 3456.10 78.84
Ratio 396.26% 166.45% 137.90%156.57
%133.09% 5770.00%
2004-05 2005-06 2006-07 2007-08 2008-09 2009-100.00%
1000.00%
2000.00%
3000.00%
4000.00%
5000.00%
6000.00%
7000.00%
396.26%166.45% 137.90% 156.57% 133.09%
5770.00%
Inventory to Working Capital Ratio
Interpretation: As per the standard or ideal inventory to working capital ratio, the
inventories should not absorb more than 75% of working capital. As such, a high
inventory to working capital ratio indicates over stocking, and so, a low liquid
position. The company has never maintained an ideal ratio of 75% and the current
year’s position has become even worse as compared to previous years (i.e., 5770%)
89
ORGANIZATION STUDY AND RATIO ANALYSIS
6.2 LONG-TERM SOLVENCY RATIOS:
6.2.1 Debt-Equity Ratio: Debt / Equity
Year 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10
Debt 245.36 119.73 200.88 214.43 177.55 107.71
Equity 7895.61 9061.48 10437.08 12057.67 13735.08 14064.38
Debt-Equity
Ratio0.0311 0.0132 0.0192 0.0178 0.0129 0.0076
2004-05 2005-06 2006-07 2007-08 2008-09 2009-100
0.005
0.01
0.015
0.02
0.025
0.03
0.035
0.0311
0.0132000000000001
0.01920.0178
0.0129
0.00760000000000001
Debt-Equity Ratio
Interpretation: The standard or ideal Debt-Equity ratio is 2:1. The debt is more than
two times of the equity, which means the Long-term creditors are relatively more. By
observing above trend it may be said that the concerned financial position of the
90
ORGANIZATION STUDY AND RATIO ANALYSIS current year is more sound when compare to previous years. The ratio was always
below ideal. It is a good sign for the company.
6.2.2 Proprietary Ratio: Net worth/ Total Assets
Year2004-05 2005-06 2006-07 2007-08 2008-09 2009-10
Net worth7895.61 9061.48 10437.08 12057.67 13735.08 14064.38
Total
Assets
11550.88 12784.04 14968.4 17249.47 19484.83 23005.34
Proprietar
y Ratio
0.6835 0.7088 0.6973 0.6990 0.7049 0.6113
2004-05 2005-06 2006-07 2007-08 2008-09 2009-100.56
0.58
0.6
0.62
0.64
0.66
0.68
0.7
0.72
0.6835
0.708800000000001
0.6973 0.6990
0.704900000000001
0.6113
Proprietary Ratio
Interpretation: The ideal Standard is 0.5:1. Lower the ratio higher the risk and vice-
versa. The above trend shows that the proprietary ratio is more or less uniform in
91
ORGANIZATION STUDY AND RATIO ANALYSIS nature except for current year. Though the current years ratio has decreased it is above
the ideal level.
6.2.3 Solvency Ratio: Total Assets / Total Liabilities
Year2004-05 2005-06 2006-07 2007-08 2008-09 2009-10
Total
Assets
11550.88 12784.04 14968.4 17249.47 19484.83 23005.34
Total
Liabilities
3279.18 3697.8 4058.47 4646.73 4882.56 8155.95
Solvency
Ratio
3.5225 3.4572 3.6882 3.7122 3.907 2.8207
2004-05 2005-06 2006-07 2007-08 2008-09 2009-100
0.5
1
1.5
2
2.5
3
3.5
4
4.5
3.5225 3.45723.6882 3.7122
3.907
2.8207
Solvency Ratio
Interpretation: Though no standard or ideal solvency ratio has been established, the
higher the solvency ratio of a concern, the stronger is it financial position The above
92
ORGANIZATION STUDY AND RATIO ANALYSIS trend shows that the Solvency Ratio was increasing till 2008-09 but in 2009-10 it
decreased which is not a good sign for the company.
6.2.4 Fixed Assets to Net worth Ratio: Fixed Assets / Net wroth
Year 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10
Fixed
Assets3950.76 4161.73 4744.77 6168.83 7271.91 8142.40
Net
worth7895.61 9061.48 10437.08 12057.67 13735.08 14064.38
Ratio 0.5004 0.4593 0.4546 0.5116 0.5294 0.5789
2004-05 2005-06 2006-07 2007-08 2008-09 2009-100
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.50040.4593 0.4546
0.5116 0.5294
0.578900000000001
Ratio
93
ORGANIZATION STUDY AND RATIO ANALYSIS Interpretation: Ideal ratio is 67%. Fixed Assets should not constitute more than 67%
of the proprietary funds. The above trend of ratios has always remained below ideal
ratio of 67% which is good but the trend for the past 4 years is gradually increasing
which indicates that the financial strongness of the concern is gradually decreasing
and risk to the creditors is increasing.
6.2.5 Current Assets to Net worth Ratio: Current Assets / Net worth
Year 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10
Current
Assets3539.29 5161.90 6289.72 7019.27 8161.11 8127.08
Net
worth7895.61 9061.48 10437.08 12057.67 13735.08 14064.38
Ratio 0.4483 0.5696 0.6026 0.5821 0.5942 0.5778
2004-05 2005-06 2006-07 2007-08 2008-09 2009-100
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.4483
0.569600000000004
0.602600000000005 0.5821 0.5942 0.57780000000000
1
Ratio
94
ORGANIZATION STUDY AND RATIO ANALYSIS Interpretation: There is no standard or ideal current asset to net worth ratio. Higher
the current asset to net worth ratio of a concern, stronger is its financial position. The
current year’s ratio has fallen as compared to the previous year. It shows the strength
of the financial position of the concern is getting weaker. The company should follow
a increasing trend in the coming years i.e., it should increase its current assets.
6.2.6 Current Liabilities To Net Worth Ratio: Current Liabilities / Net worth
Year 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10
Current
Liabilities3033.82 3579.07 3857.59 4432.30 4705.01 8048.24
Net
worth7895.61 9061.48 10437.08 12057.67 13735.08 14064.38
Ratio 0.3842 0.3950 0.3696 0.3676 0.3425 0.5722
2004-05 2005-06 2006-07 2007-08 2008-09 2009-100
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.38420.39500000000000
20.3696 0.3676
0.3425
0.5722
Ratio
95
ORGANIZATION STUDY AND RATIO ANALYSIS Interpretation: The ideal ratio is 0.33. But, the above trend shows that the ratio is
more than the desirable level, which indicates that the firm is not providing adequate
cover for long-term creditors. This means it would be difficult for the firm to obtain
long-term funds. For the current year there is a steep rise (0.5722) in the ratio which is
not a good sign. Hence, the firm should take necessary measures to obtain long-term
funds there by reducing this ratio.
6.2.7 Fixed Assets Ratio: Fixed Assets/Capital Employed
Year 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10
Fixed
Assets3950.76 4161.73 4744.77 6168.83 7271.91 8142.40
Capital
Employe
d
8140.97 9181.21 10637.96 12272.1 13912.63 14172.09
Fixed
Assets
Ratio
0.4853 0.4533 0.4460 0.5027 0.5227 0.5745
96
ORGANIZATION STUDY AND RATIO ANALYSIS
2004-05 2005-06 2006-07 2007-08 2008-09 2009-100
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.485300000000002
0.4533 0.446
0.5027 0.5227
0.5745
Fixed Assets Ratio
Interpretation: The standard or ideal fixed ratio is 0.67. Though the company has
maintained a ratio which is below the ideal level it is showing an increasing trend for
the past 3 years which indicates the control of company over its fixed assets is
decreasing.
6.3 TURNOVER OR ACTIVITY RATIOS:
6.3.1 Stork Turnover Ratio: Cost of Goods Sold / Average stock
Stock Conversion Period = No. Of days in a year / Stock Turnover Ratio
Year 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10
COGS 4966.38 6521.34 8442.6 9375.76 10562.37 12137.88
Average
Stock2002.99 2636.29 3354.03 4050.52 4599.72 4549.07
Stork
Turnover
Ratio
2.4795 2.4737 2.5171 2.3147 2.2963 2.6682
Stock 147.21 147.55 145.01 157.68 158.95 136.80
97
ORGANIZATION STUDY AND RATIO ANALYSIS Conversio
n Period
2004-05 2005-06 2006-07 2007-08 2008-09 2009-102.1
2.2
2.3
2.4
2.5
2.6
2.7
2.4795 2.47372.5171
2.314699999999992.2963
2.6682
Stork Turnover Ratio
Interpretation: A stock turnover of 8 times a year is considered ideal. The above
trend shows that the ratio is less than 8 times which means the concern has
accumulated unsaleable goods which shows the business is not prosperous.
6.3.2 Debtors’ Turnover Ratio: Net Credit Sales / Average Debtors
Debtors Collection Period = No. of Days in a year / Debtors Turnover Ratio
Year 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10
Net
Credit
Sales
7639.45 9790.53 12369.30 13947.53 15388.11 18153.19
Average
Debtors527.76 547.96 636.67 736.93 668.67 858.80
98
ORGANIZATION STUDY AND RATIO ANALYSIS Debtors’
Turnover
Ratio
14.4752 17.8672 19.4373 18.9265 23.0130 21.1378
Debtors
Collection
Period
25.21 20.43 18.78 19.28 15.86 17.27
2004-05 2005-06 2006-07 2007-08 2008-09 2009-100
5
10
15
20
25
14.4752
17.867219.4373 18.9264999999998
23.013
21.1378
Debtors’ Turnover Ratio
Interpretation: Debtor’s Turnover ratio of ITC is fluctuating. For the current year it
has decreased from 23.0130 to 21.1378, hence collection period has increased from
15.86 days in 2008-09 to 17.27 days in 2009-10 which is not a good sign.
6.3.3 Creditor Turnover Ratio: Net annual Credit Purchase / Average Creditors
Debt Payment Period = No. of days in a year / Creditors Turnover Ratio
Year 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10
Net 2769.55 3983.23 5384.86 6016.70 6446.78 6971.40
99
ORGANIZATION STUDY AND RATIO ANALYSIS
Credit
Purchase
s
Average
Creditors1925.64 2189.03 2384.75 2786.97 2964.52 3498.30
Creditors
'
Turnover
Ratio
1.4382 1.8196 2.2580 2.1589 2.1746 1.9928
Debt
Payment
Period
253.79 200.59 161.65 169.07 167.85 183.16
100
ORGANIZATION STUDY AND RATIO ANALYSIS
2004-05 2005-06 2006-07 2007-08 2008-09 2009-100
50
100
150
200
250
300
253.79
200.59
161.65 169.07167.8500000000
01183.16
Debt Payment Period
2004-05 2005-06 2006-07 2007-08 2008-09 2009-100
0.5
1
1.5
2
2.5
1.43819999999999
1.81959999999999
2.2582.1589 2.1746
1.9928
Creditors' Turnover Ratio
Interpretation: The graph shows that, there is high fluctuation in the trend. The Debt
payment period is about 180-250 days which is very long period. Though the
company was showing positive sign from 2006-07 to 2008-09, in the current year it
has shown a negative trend. So the company should see that payments are made
within or exactly on the due dates, which will enhance the company’s credit
worthiness.
6.3.4 Cash Turnover Ratio: Net annual Sales / Cash
Year 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10
101
ORGANIZATION STUDY AND RATIO ANALYSIS
Net Sales 7639.45 9790.53 12369.30 13947.53 15388.11 18153.19
Cash 55.66 855.92 900.16 570.25 1032.39 1126.28
Cash
Turnove
r Ratio
137.2520 11.4386 13.7412 24.4586 14.9053 16.1178
2004-05 2005-06 2006-07 2007-08 2008-09 2009-100
20
40
60
80
100
120
140
160
137.252
11.4386 13.741224.4585999999998
14.9053 16.1178
Cash Turnover Ratio
Interpretation: The ideal cash turnover ratio is 10:1. It may be seen that there is
fluctuation in the ratio. In 2004-05, the ratio is very high which means that the funds
were used very effectively. The cash turnover ratio for all the years is well above the
ideal standard, which indicates that cash resources of the enterprise are efficiently
utilized and hence, the company is in better position.
6.3.5 Working Capital Turnover Ratio: Net annul Sales / Working Capital
102
ORGANIZATION STUDY AND RATIO ANALYSIS
Year 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10
Net Sales 7639.45 9790.53 12369.30 13947.53 15388.11 18153.19
Working
Capital505.47 1583.83 2432.13 2586.97 3456.10 78.84
Working
Capital
Turnove
r Ratio
15.1136 6.1815 5.0858 5.3914 4.4524 230.2535
2004-05 2005-06 2006-07 2007-08 2008-09 2009-100
50
100
150
200
250
15.11366.1815 5.0858 5.3914 4.4524
230.2535
Working Capital Turnover Ratio
Interpretation: The above trend shows that working capital turnover ratio is highly
fluctuating in nature. Company should note that a very high working capital turnover
ratio means over trading, and a very low working capital turnover ratio means under
trading, none of which is good concern. Likewise for the current the ratio is very high
which not a good sign for the company. Hence proper measures should be taken to
tackle this problem.
6.3.6 Fixed Assets Turnover Ratio: Net annual Sales / Fixed Assets
103
ORGANIZATION STUDY AND RATIO ANALYSIS
Year 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10
Net Sales 7639.45 9790.53 12369.30 13947.53 15388.11 18153.19
Fixed
Assets3950.76 4161.73 4744.77 6168.83 7271.91 8142.40
Fixed
Assets
Turnover
Ratio
1.9337 2.3525 2.6069 2.2610 2.1161 2.2295
2004-05 2005-06 2006-07 2007-08 2008-09 2009-100
0.5
1
1.5
2
2.5
3
1.9337
2.35249999999998
2.6069
2.2612.1161
2.2295
Fixed Assets Turnover Ratio
Interpretation: This ratio indicates to what extent the fixed assets of the firm have
contributed to sales. The standard or ideal fixed turnover is 5 times or more, which
indicates better utilization of fixed assets. Above trend shows that the fixed assets are
underutilized as the ratio is below 5. ITC’s Fixed Assets Turnover ratio is not ideal.
104
ORGANIZATION STUDY AND RATIO ANALYSIS 6.3.7 Current Assets Turnover Ratio: Net annual sales / Current Assets
Year 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10
Net Sales 7639.45 9790.53 12369.30 13947.53 15388.11 18153.19
Current
Assets3539.29 5161.90 6289.72 7019.27 8161.11 8127.08
Current
Assets
Turnove
r Ratio
2.1585 1.8967 1.9666 1.9870 1.8855 2.2337
2004-05 2005-06 2006-07 2007-08 2008-09 2009-101.7
1.8
1.9
2
2.1
2.2
2.3
2.1585
1.8967
1.96661.987
1.8855
2.2337
Current Assets Turnover Ratio
Interpretation: The above trend shows that the current turnover ratio is highly
fluctuating in nature. As the higher ratio indicates better utilization of current assets,
the increase in the current year’s ratio is a good sign for the company.
105
ORGANIZATION STUDY AND RATIO ANALYSIS
6.3.8 Total Assets Turnover Ratio: Net annual sales / Total Assets
Year 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10
Net Sales 7639.45 9790.53 12369.30 13947.53 15388.11 18153.19
Total
Assets
11550.88 12784.04 14968.4 17249.47 19484.83 23005.34
Total
Assets
Turnove
r Ratio
0.6614 0.7658 0.8264 0.8086 0.7897 0.7891
2004-05 2005-06 2006-07 2007-08 2008-09 2009-100
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
0.661400000000001
0.765800000000005
0.8264 0.8086 0.789700000000001 0.7891
Total Assets Turnover Ratio
Interpretation: The ideal total assets turnover ratio is 2:1. The above trend shows
that the total assets turnover ratio is fluctuating and below the ideal standard. It
indicates that the assets of the concern are not utilized in a better manner.
106
ORGANIZATION STUDY AND RATIO ANALYSIS
6.3.9 Sales to Net worth Ratio: Net Annual Sales / Net worth
Year 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10
Net
Sales7639.45 9790.53 12369.30 13947.53 15388.11 18153.19
Net
worth7895.61 9061.48 10437.08 12057.67 13735.08 14064.38
Sales
to
Net
worth
Ratio
1.9676 1.0805 1.1851 1.1567 1.1203 1.2907
2004-05 2005-06 2006-07 2007-08 2008-09 2009-100
0.5
1
1.5
2
2.5
1.9676
1.08051.1851 1.1567 1.1203
1.2907
Sales to Net worth Ratio
Interpretation: If the volume of sales in relation to net worth is reasonable, the
indication is that the owner’s have been effectively utilized, from the above graph it
can be noted that even though the ratio is fluctuating, the sales is in relation to the net
worth except for the year 2004-05.
107
ORGANIZATION STUDY AND RATIO ANALYSIS
6.4 PROFITABILITY RATIOS:
6.4.1 Gross Profit Ratio: (Gross Profit / Net Annual Sales) * 100
Year 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10
Gross
Profit2673.07 3269.19 3926.70 4571.77 4825.74 6015.31
Net
Sales7639.45 9790.53 12369.30 13947.53 15388.11 18153.19
Gross
Profit
Ratio
34.99% 33.39% 31.74% 32.78% 31.36% 33.14%
2004-05 2005-06 2006-07 2007-08 2008-09 2009-1029.00%
30.00%
31.00%
32.00%
33.00%
34.00%
35.00%
36.00%
34.99%
33.39%
31.74%
32.78%
31.36%
33.14%
Gross Profit Ratio
Interpretation: The above trend shows that there is fluctuation in gross profit which
is steadily decreasing from the year 2004-05 till 2006-07 and started to decrease from
2007-08 and again in the current year it increased. The organization is not following
fixed policy as for as gross profit is concerned.
108
ORGANIZATION STUDY AND RATIO ANALYSIS
6.4.2 Net Profit Ratio: (Net profit / Net sales) * 100
Year 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10
Net
Profi
t
2191.40 2235.35 2699.97 3120.10 3263.59 4061.00
Net
Sales7639.45 9790.53
12369.3
013947.53
15388.1
118153.19
Net
Profi
t
Ratio
28.68% 22.83% 21.83% 22.37% 21.21% 22.37%
2004-05 2005-06 2006-07 2007-08 2008-09 2009-100.00%
5.00%
10.00%
15.00%
20.00%
25.00%
30.00%
35.00%
28.68%
22.83% 21.83% 22.37%21.21%
22.37%
Net Profit Ratio
109
ORGANIZATION STUDY AND RATIO ANALYSIS Interpretation: The above trend shows that there is steep decrease in the ratio from
year 2004-05 and has remained in the range of 21%-23% which is not a good sign for
the company because higher the net profit ratio higher is the profitability of the firm.
Hence the company has to adopt better policies to increase the net profit ratio.
6.4.3 Operating Cost Ratio: (Operating Cost / Net Sales) * 100
Year 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10
Operatin
g Cost5202.19 6807.42 8779.09 9986.66 11097.30 12741.26
Net Sales 7639.45 9790.53 12369.30 13947.53 15388.11 18153.19
Operatin
g Cost
Ratio
68.09% 69.53% 70.97% 71.60% 72.12% 70.19%
2004-05 2005-06 2006-07 2007-08 2008-09 2009-1066.00%
67.00%
68.00%
69.00%
70.00%
71.00%
72.00%
73.00%
68.09%
69.53%
70.97%
71.60%
72.12%
70.19%
Operating Cost Ratio
110
ORGANIZATION STUDY AND RATIO ANALYSIS Interpretation: A low operating ratio is an indication of operating efficiency of the
firm. The trend shows that the operating expenses continuously increased from 2004-
05 to 2008-09 which is not a good sign but in the current year it has decreased which
is a very good sign. The company must try to maintain its current year trend in the
future.
6.4.4 Operating Profit Ratio: (Operating Profit / Net Sales) * 100
Year 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10
Operatin
g Profit2437.26 2983.11 3590.21 3960.87 4290.81 5815.31
Net Sales 7639.45 9790.5312369.3
0
13947.5
3
15388.1
1
18153.1
9
Operatin
g Profit
Ratio
31.90% 30.47% 29.02% 28.40% 27.88% 32.03%
2004-05 2005-06 2006-07 2007-08 2008-09 2009-1025.00%
26.00%
27.00%
28.00%
29.00%
30.00%
31.00%
32.00%
33.00%
31.90%
30.47%
29.02%
28.40%27.88%
32.03%
Operating Profit Ratio
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ORGANIZATION STUDY AND RATIO ANALYSIS Interpretation: The ideal operating profit ratio is 10%. For the graph it can be seen
that the company has always maintained a ratio of above 10% which indicates the
operating efficiency of the firm but this has continuously declined from 2004-05 to
2008-09. But in the present year it has recovered which is a very good sign. The
company should maintain the same trend in future.
6.4.5 Total Assets Ratio: (Net Profit / Total Assets) * 100
Year 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10
Net
Profit
2191.40 2235.35 2699.97 3120.10 3263.59 4061.00
Total
Asset
s
11550.88 12784.04 14968.4 17249.4
7
19484.83 23005.34
Total
Asset
s
Ratio
18.98% 17.48% 18.04% 18.09% 16.75% 17.65%
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ORGANIZATION STUDY AND RATIO ANALYSIS
2004-05 2005-06 2006-07 2007-08 2008-09 2009-1015.50%
16.00%
16.50%
17.00%
17.50%
18.00%
18.50%
19.00%
19.50%
18.98%
17.48%
18.04% 18.09%
16.75%
17.65%
Total Assets Ratio
Interpretation: The above table shows that the Total Assets Ratio is fluctuating in
nature. The ideal Total Assets Ratio is 10 %. Here, the Total Assets Ratio is more
than the standard which is a very good sign for the company. It is an indication of the
higher productivity of the total resources of the firm.
6.4.6 Return on Equity Ratio: (Net Profit / Net worth) * 100
Year 2004-
05
2005-
062006-07 2007-08 2008-09 2009-10
Net Profit 2191.4
0
2235.3
5
2699.97 3120.10 3263.59 4061.00
Net worth 7895.6
1
9061.4
8
10437.0
8
12057.6
7
13735.0
8
14064.3
8
Return on
Equity
27.75% 24.67% 25.87% 25.88% 23.76% 28.87%
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ORGANIZATION STUDY AND RATIO ANALYSIS
Ratio
2004-05 2005-06 2006-07 2007-08 2008-09 2009-100.00%
5.00%
10.00%
15.00%
20.00%
25.00%
30.00%
35.00%
27.75%
24.67%25.87% 25.88%
23.76%
28.87%
Return On Equity Ratio
Interpretation: The ideal return on equity ratio is 13 %. The above trend shows that
the ratio is fluctuating. Also, the ratio is well above the ideal. This shows company is
having the adequate profit to distribute to the shareholders. The company’s return on
equity is above the standard, which is adequate.
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ORGANIZATION STUDY AND RATIO ANALYSIS
FINDINGS, SUGGESTIONS AND CONCLUSIONS
7.1 Findings:
The liquidity position of the firm is not satisfactory which is evident from
short term and long term liquidity ratios.
The inventory to working capital ratio indicates that the firm’s inventories are
absorbing more than 75% of working capital i.e., 5770% which shows the
liquidity position of the firm is not good.
Fixed assets to net worth ratio indicate the financial weakness of the firm since
the proprietors funds are not effectively invested in fixed assets and thus
increase the risk of the creditors
Stock turnover ratio and stock conversion period shows the rate at which
inventories are being converted into sales is very inefficient which shows bad
inventory management.
Debtors turnover ratio and average collection period ratio indicates that the
quality of debtors is suitable for credit management and it also indicates a very
strict credit and collection performance.
Creditors’ turnover ratio and average collection period indicates that the
payment made to the creditors is inefficient which reduces the credit
worthiness of the company.
Working capital turnover ratio of the company is not ideal which shows the
Company is facing the shortage of working capital.
The firm’s profitability position is getting stronger which is evident from the
profitability ratio.
Return on shareholders’ investment is adequate.
The operating cost ratio indicates the operating expenses of the current year
have come down as compared to previous years.
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ORGANIZATION STUDY AND RATIO ANALYSIS 7.2 SUGGESTIONS:
From analysis and interpretation of data, following suggestions were made to
improve the company’s financial position:
• The ITC Ltd should reduce its current liabilities and thereby improve its short
term financial strength.
• ITC Ltd should increase its working capital which can improve the operational
efficiency of the firm.
• The owners’ funds should be invested into fixed assets which increases the
credit worthiness of the company.
• The firm should reduce its stock of finished goods.
• The operating expenses of the company should be reduced further.
• The organizations investment pattern should be catered in a manner where the
returns are high.
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ORGANIZATION STUDY AND RATIO ANALYSIS
7.3 CONLUSIONS:
From the organisation study and financial ratio analysis conducted on ITC Ltd it can
be conclude that:
• ITC has pursued World class competitiveness in all businesses and across the
entire value chain.
• It is Best-in-class in terms of:
Internal Vitality
Market Standing
Profitability
This has helped ITC to diversify the business. Today more than half of its
revenue comes from non tobacco products i.e. cigarettes.
• Strategy of Organization and Governance processes is geared to manage
multiple businesses.
• ITC has blended core competencies and leverage ITC umbrella strengths to
create new avenues of growth.
• From the ratio analysis conducted it can be noted that the company has been
able to provide adequate returns to its shareholders consistently.
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ORGANIZATION STUDY AND RATIO ANALYSIS
MY LEARNING
The six weeks training I had undergone at ITC Ltd, Indian Tobacco Division,
Bangalore has given me a corporate exposure to the functioning of finance department
of a company. My specific learning during this stint at ITC Ltd, Bangalore is as
follows:
Knowledge of the various departments & divisions of ITC Ltd, Indian Tobacco
division, Bangalore.
The role of ITC Ltd in the various business sectors in India and its contribution
to the Indian economy.
Working in a large scale company like ITC Ltd helped me to know the position
of organized FMCG sector in India and will certainly help me in my future
decision making process.
Interacting with all the levels of management and workers has certainly helped
me to understand the entire functioning of the organization.
By doing research in the field of finance, I could know the practical applications
of various financial concepts.
It has also enlightened me about how to analyze the financial aspects of the
organization such as, how the ratios are calculated and how they are useful in
useful in analyzing the firm’s liquidity and financial positions
I also learnt that not all the activities of the organization are based on the
classroom theories
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ORGANIZATION STUDY AND RATIO ANALYSIS
BIBLOGRAPHY
BOOKS:
C.R. Kothari, “Research Methodology”, published by New Age International
(p) Ltd in the year 2002
M.Y. Khan & P.K. Jain, “Financial Management”, Fifth edition, published by
Tata McGraw hill in the year 2008
Stephen Copestake, “Excel 2007”, First edition, published by Dreamtech press
in the year 2008
JOURNALS:
ITC LTD, Annual report 2009-10
CTRI (Central Tobacco Research Institute). 1999. Status Report on Research
Programme on Alternative Crops to Tobacco.
ERC Statistics International Plc. (1998). India. pp. 1-38, in World Cigarette
Report, 1998.
Panchamukhi, P.R. 2000. Economics of shifting from tobacco: an action-cum-
basic research study. In: CMDR, 2000, q.v.
WHO (World Health Organization). 1997. Tobacco or health: a global status
report. Geneva: WHO.
WEBSITE:
www.itcportal.com
http://www.wikipedia.com
http://www.companiesandmarkets.com
http://www.capitaline.com
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