itc analysis fm
TRANSCRIPT
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COMPANY OVERVIEW: ITC GROUP
ITC is one of India's foremost private sector companies with a market
capitalization of nearly US $ 15 billion and a turnover of over US $ 4.75 billion.ITC is rated among the World's Best Big Companies, Asia's 'Fab 50' 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 also ranks among India's top 10 `Most
Valuable (Company) Brands', in a study conducted by Brand Finance and
published by the Economic Times.ITC has a diversified presence in Cigarettes,
Hotels, Paperboards & Specialty Papers, Packaging, Agri-Business, Packaged
Foods & Confectionery, Information Technology, Branded Apparel, GreetingCards, 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 and Greeting
Cards. As one of India's most valuable and respected corporations, ITC is widely
perceived to be dedicatedly nation-oriented. Chairman Y C Deveshwar calls this
source of inspiration "a commitment beyond the market". In his own words: "ITC
believes that its aspiration to create enduring value for the nation provides the
motive force to sustain growing shareholder value. ITC practices this philosophy
by not only driving each of its businesses towards international competitiveness
but by also consciously contributing to enhancing the competitiveness of the larger
value chain of which it is a part."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 inIndia. 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 $ 2.8
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 power of the Internet. This transformational strategy, which
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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 Limited, is aggressively
pursuing emerging opportunities in providing end-to-end IT solutions, including e-enabled services and business process out sourcing. 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 21,000 people at more than 60 locations across India. The
Company continuously endeavors to enhance its wealth generating capabilities in aglobalizing environment to consistently reward more than 4,46,000 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.
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COMPANY PROFILE
Name : ITC Limited
Registered Address : Virginia House, 37, Jawaharlal Nehru Road, Kolkata
West Bengal 700071
Chairman / Chair Person : Yogesh Chander Deveshwar
Executive Director(s) : Pradeep Vasant Dhobale
Nakul Anand
Kurush Noshir Grant
Year of Establishment : 1974
Industry Name : FMCG
Factory/plant : Cigarette and Packing & Printing Factory : Basdeopur P.O., District
Munger Munger811202 India
Annual Turnover : $ 3.5 billion
Total Employees : 21,000
Banker: State Bank of India , ICICI
Phone : 033-22889371/ 033-22886426
Fax : 033-22882358
Email :[email protected].
Internet :http://www.itcportal.com
mailto:[email protected]:[email protected]:[email protected]://www.itcportal.com/http://www.itcportal.com/http://www.itcportal.com/http://www.itcportal.com/mailto:[email protected] -
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ACCOUNTING POLICIES
Convention
To prepare financial statements in accordance with applicable Accounting
Standards in India. A summary of important accounting policies, which have beenapplied consistently, is set out below. The financial statements have also been
prepared in accordance with relevant presentational requirements of the Companies
Act, 1956.
Basis of Accounting
To prepare financial statements in accordance with the historical cost convention
modified by revaluation of certain Fixed Assets as and when undertaken as
detailed below.
Fixed Assets
To state Fixed Assets at cost of acquisition inclusive of inward freight, duties and
taxes and incidental expenses related to acquisition. In respect of major projects
involving construction, related pre-operational expenses form part of the value of
assets capitalized. Expenses capitalized also include applicable borrowing costs.
To adjust the original cost of imported Fixed Assets acquired through foreign
currency loans at the end of each financial year by any change in liability arisingout of expressing the outstanding foreign loan at the rate of exchange prevailing at
the date of Balance Sheet. To capitalize software where it is expected to provide
future enduring economic benefits. Capitalization costs include license fees and
costs of implementation / system integration services. The costs are capitalized in
the year in which the relevant software is implemented for use. To charge off as a
revenue expenditure all up gradation /enhancements unless they bring similar
significant additional benefits.
Depreciation
To calculate depreciation on Fixed Assets and Intangible Assets in a manner that
amortizes the cost of the assets after commissioning, over their estimated useful
lives or, where specified, lives based on the rates specified in Schedule XIV to the
Companies Act, 1956, whichever is lower, by equal annual installments. Leasehold
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properties are amortized over the period of the lease. To amortize capitalized
software costs over a period of five years.
Revaluation of Assets
As and when Fixed Assets are revalued, to adjust the provision for depreciation onsuch revalued Fixed Assets, where applicable, in order to make allowance for
consequent additional diminution in value on considerations of age, condition and
unexpired useful life of such Fixed Assets; to transfer to Revaluation Reserve the
difference between the
Written up value of the Fixed Assets revalued and depreciation adjustment and to
charge Revaluation Reserve Account with annual depreciation on that portion ofthe value which is written up.
Investments
To state Current Investments at lower of cost and fair value; and Long Term
Investments, including in Joint Ventures and Associates, at cost. Where applicable,
provision is made where there is a permanent fall in valuation of Long Term
Investments.
Inventories
To state inventories including work-in-progress at cost or below. The cost is
calculated on weighted average method. Cost comprises expenditure incurred in
the normal course of business in bringing such inventories to its location and
includes, where applicable, appropriate overheads based on normal level of
activity. Obsolete, slow moving and defective inventories are identified at the time
of physical verification of inventories and, where necessary, provision is made for
such inventories.
Sales
To state net sales after deducting taxes and duties from invoiced value of goods
and services rendered.
Investment Income
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To account for Income from Investments on an accrual basis, inclusive of related
tax deducted at source.
Proposed Dividend
To provide for Dividends (including income tax thereon) in the books of accountas proposed by the Directors, pending approval at the Annual General Meeting.
Employee Benefits
To make regular monthly contributions to various Provident Funds which are in
the nature of defined contribution scheme and such paid / payable amounts are
charged against revenue. To administer such Funds through duly constituted and
approved independent trusts with the exception of Provident Fund and Family
Pension contributions in respect of Unionized Staff which are statutorily depositedwith the Government. To administer through duly constituted and approved
independent trusts, various Gratuity and Pension Funds which are in the nature of
defined benefit scheme. To determine the liabilities towards such schemes and
towards employee leave encashment by an independent actuarial valuation as per
the requirements of Accounting Standard
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CAPITAL COMPONENTS :
A firms Capital Components are Debt
Borrowed money, either loans or bonds Common equity
Ownership interest Preferred stock
A hybrid security, a cross between debt and equity Capital structure is the mix of the three capital components -
generally expressed in percentages.
The Weighted Average CalculationThe WACC
A firms cost of capital is a weighted average of the costs of the three capitalcomponents where the weights reflect the $ amounts of each component inuse
Referred to in two ways k, the cost of capital WACC, for weighted average cost of capital
Calculating the WACC
Step 1: Develop a market-based capital structure Step 2: Adjust market returns on the underlying securities to reflect the
costs of the three capital component
Step 3: Combine in calculating the WACC
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Capital Structure and CostBook Value Versus Market Value
We can think of the WACC in terms of either book or market values ofcapital components
For both structure and component costs Which is the correct focus?
WACC used to evaluate next years capital projects Must be supported by capital raised next year Book values reflect capital raised and spent years ago Current market values represent our best estimate of next years
capital market conditions
Market values are the appropriate basis for WACC For capital structure For component costs
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COMPUTATION OF COST OF CAPITAL
COST OF EQUITY :
a) Dividend Based :
- Constant
- Growth
- At a Constant Rate
- At a Variable Rate
b) Earning Based
c) Realized Yield Method
d) CAPM (Capital Asset Pricing Model)
Constant Dividend Model :
- For Existing Equity Shares :
Ke = D1
Po
Where as, D1 = Expected Dividend
Po = Current Market Price
- For New Equity Shares:
Ke = D1
Net Proceeds
- Dividend Growth Model :
- At Constant (fixed) rate
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Ke = D1 + g
Po
Cost of Equity
Year Div BV g Ke2009 3.7 20.62 8.75 8.92
2010 10 36.84 8.75 9.022011 4.45 36.39 8.75 8.87
CAPM (Capital Asset Pricing Model)
Ke = Rf + b (Rm - Rf)
Where as, Rf = Risk Free Return
b = systematic risk of an equity share with respect to market
Rm = Market Return
Cost of Equity by CAPM
Year RF B RM Ke
2009 0.4484 0.74 0.0679 0.16
2010 0.4596 0.74 0.0679 0.16
2011 0.4325 0.74 0.0679 0.16
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COST OF DEBT (LOAN) :
Kd = Interest Rate (1-tax)
Calculation of Cost of Debt
Year Interest Debt Int Rate
(%)
Tax Rate Kd
2009 26.58 165.92 16.02 0.3 11.21
2010 20.23 107.71 18.78 0.3 13.15
2011 19.86 97.26 20.42 0.3 14.29
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WEIGHTED AVERAGE COST OF CAPITAL :
WACC = Ke. We + Kp. Wp + Kd . Wd
Calculation of WACC for 2011
Source Amount Weight Cost Weightedcost
Equity Shares 773.81 0.05 8.87 0.42Retained Earnings 15,126.12 0.95 8.87 8.38
Unsecured Loans 97.26 0.01 14.29 0.08Total 15997.19 WACC 8.90
Calculation of WACC for 2010
Source Amount Weight Cost Weightedcost
Equity Shares 381.82 0.03 9.02 0.24Retained Earnings 13628.17 0.97 9.02 8.71
Unsecured Loans 107.71 0.01 13.15 0.10
Total 14117.70 WACC 9.05
Calculation of WACC for 2009
Source Amount Weight Cost Weightedcost
Equity Shares 377.44 0.03 8.93 0.24Retained Earnings 13302.55 0.96 8.93 8.58
Unsecured Loans 165.92 0.01 11.21 0.13
Total 13845.91 WACC 8.96
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ANALYSIS & CONCLUSION
A calculation of a firm's cost of capital in which each category of capital is
proportionately weighted. All capital sources - common stock, preferred stock,
bonds and any other long-term debt - are included in a WACC calculation. All else
equal, the WACC of a firm increases as the beta and rate of return on equity
increases, as an increase in WACC notes a decrease in valuation and a higher risk.
Broadly speaking, a companys assets are financed by either debt or equity.
WACC is the average of the costs of these sources of financing, each of which is
weighted by its respective use in the given situation. By taking a weighted average,
we can see how much interest the company has to pay for every dollar it finances.
A firm's WACC is the overall required return on the firm as a whole and, as such,
it is often used internally by company directors to determine the economic
feasibility of expansionary opportunities and mergers. It is the appropriate discount
rate to use for cash flows with risk that is similar to that of the overall firm.
Following analysis can be concluded for ITC ltd. from the above report :
ITC is very less levered with the debt of 0.02 The cost of Equity is almost same as overall cost of capital The Cash EPS > basic EPS for all the years which reveals generation of cash
profit by ITC throughout the years
Also EPS has been consistently increasing and showing good growth ofcompanys performance
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Advances
Deffered Credit 0.00 0.00 0.00 0.00 0.00
Current Liabilities 5,668.10 4,619.54 4,121.59 3,619.76 3,113.01
Provisions 4,104.84 4,549.94 1,740.49 1,645.33 1,472.84
Total CL & Provisions 9,772.94 9,169.48 5,862.08 5,265.09 4,585.85
Net Current Assets 819.34 -706.17 2,588.91 2,041.90 1,695.22Miscellaneous Expenses 0.00 0.00 0.00 0.00 0.00
Total Assets 16,052.47 14,172.09 13,912.63 12,272.10 10,637.96
Contingent Liabilities 251.78 258.73 261.36 308.08 129.56
Book Value (Rs) 20.55 36.69 36.24 31.85 27.59
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ANNEXURE 2
Profit & Loss account of ITC ------------------- in Rs. Cr. -------------------
Mar '11Mar '10 Mar '09 Mar '08 Mar '07
12 mths 12 mths 12 mths 12 mths 12 mths
Income
Sales Turnover 30,633.57 26,399.63 23,247.84 21,467.38 19,519.99
Excise Duty 9,512.74 7,832.18 8,262.03 7,435.18 7,206.16
Net Sales 21,120.83 18,567.45 14,985.81 14,032.20 12,313.83
Other Income 775.76 545.05 426.21 516.50 276.22
Stock Adjustments 308.42 -447.54 630.30 32.46 322.96
Total Income 22,205.01 18,664.96 16,042.32 14,581.16 12,913.01
Expenditure
Raw Materials 8,601.13 7,140.69 6,864.96 6,307.79 5,807.48
Power & Fuel Cost 421.68 387.34 394.12 309.90 253.00
Employee Cost 1,178.46 1,014.87 903.37 745.00 630.15
Other Manufacturing
Expenses560.57 413.79 402.88 73.52 65.32
Selling and Admin
Expenses2,408.03 2,093.87 1,684.41 1,609.33 1,299.17
Miscellaneous Expenses 1,120.89 1,008.91 516.90 682.72 601.28
Preoperative Exp
Capitalised-60.54 -71.88 -72.55 -112.75 -42.52
Total Expenses 14,230.22 11,987.59 10,694.09 9,615.51 8,613.88
Mar '11 Mar '10 Mar '09 Mar '08 Mar '07
12 mths 12 mths 12 mths 12 mths 12 mths
Operating Profit 7,199.03 6,132.32 4,922.02 4,449.15 4,022.91
PBDIT 7,974.79 6,677.37 5,348.23 4,965.65 4,299.13
Interest 78.11 90.28 47.65 24.61 16.04
PBDT 7,896.68 6,587.09 5,300.58 4,941.04 4,283.09
Depreciation 655.99 608.71 549.41 438.46 362.92
Other Written Off 0.00 0.00 0.00 0.00 0.00
Profit Before Tax 7,240.69 5,978.38 4,751.17 4,502.58 3,920.17
Extra-ordinary items 35.21 48.65 81.52 117.41 61.94
PBT (Post Extra-ord 7,275.90 6,027.03 4,832.69 4,619.99 3,982.11
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Items)
Tax 2,287.69 1,965.43 1,565.13 1,480.97 1,263.07
Reported Net Profit 4,987.61 4,061.00 3,263.59 3,120.10 2,699.97
Total Value Addition 5,629.09 4,846.90 3,829.13 3,307.72 2,806.40
Preference Dividend 0.00 0.00 0.00 0.00 0.00
Equity Dividend 3,443.47 3,818.18 1,396.53 1,319.01 1,166.29Corporate Dividend Tax 558.62 634.15 237.34 224.17 198.21
Per share data (annualised)
Shares in issue (lakhs) 77,381.44 38,181.77 37,744.00 37,686.10 37,622.23
Earning Per Share (Rs) 6.45 10.64 8.65 8.28 7.18
Equity Dividend (%) 445.00 1,000.00 370.00 350.00 310.00
Book Value (Rs) 20.55 36.69 36.24 31.85 27.59
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ANNEXURE 3
Ratios
Mar ' 11Mar ' 10Mar ' 09Mar ' 08Mar ' 07
Per share ratios
Adjusted EPS (Rs) 6.24 10.38 8.43 7.87 7.08
Adjusted cash EPS (Rs) 7.08 11.98 9.89 9.03 8.04
Reported EPS (Rs) 6.45 10.64 8.65 8.28 7.18
Reported cash EPS (Rs) 7.29 12.23 10.10 9.44 8.14
Dividend per share 4.45 10.00 3.70 3.50 3.10
Operating profit per share (Rs) 9.30 16.06 13.04 11.76 10.64
Book value (excl rev res) per share (Rs)20.55 36.69 36.24 31.85 27.59
Book value (incl rev res) per share (Rs.)20.62 36.84 36.39 32.00 27.74
Net operating income per share (Rs) 27.29 48.63 39.70 37.23 32.73
Free reserves per share (Rs) 19.07 34.73 34.27 29.88 25.62
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BIBLIOGRAPHY
1. http://www.cmie.com/2. http://money.rediff.com3. http://www.moneycontrol.com/4. http://www.itcportal.com/5. Book : Financial Managementby I M Pandey6. Class Notes
Thank you!...
http://www.cmie.com/http://money.rediff.com/companies/itc-ltd/12630003/ratiohttp://money.rediff.com/companies/itc-ltd/12630003/ratiohttp://www.moneycontrol.com/http://www.moneycontrol.com/http://www.itcportal.com/http://www.itcportal.com/http://www.itcportal.com/http://www.moneycontrol.com/http://money.rediff.com/companies/itc-ltd/12630003/ratiohttp://www.cmie.com/http://www.cmie.com/