ASSIGNMENT FOR CORPORATE FINANCE

Qualitative and Quantitative Analysis on ITC LTD.

Submitted to : Prof. T. Viswanathan

Submitted By: Mohit Parekh (46) Shreya Srivastava (82) Subhodeep Biswas (86) Sabitavo Das (73) Sonia Maheswari (84) Prasun Chandra (57)

ACKNOWLEDGEMENTS

I take immense pleasure in thanking Prof. T.Viswanathan. , our course facilitator for introducing us to the basic concepts of Corporate Finance and initiating us into undertaking this topic.

CONTENTS

SUBJECT

PAGE No.

1. Company Overview....................................................... 04 2. Quantitative analysis of ITC ................................................ 05 3. QUALITATIVE ANALYSIS......................................................... 10 4. Cost of capital...................... 14 5. Analysis and Conclusions...... 16

1. COMPANY OVERVIEW
The multibusiness portfolio of ITC Limited encompasses Foods, Personal Care, Cigarettes and Cigars, Branded Apparel, Education and Stationery Products, Incense Sticks and Safety Matches, Hotels, Paperboards & Specialty Papers, Packaging, Agri-Business and Information Technology. Incorporated on August 24, 1910, the first six decades of the Company's existence were primarily devoted to the growth and consolidation of the Cigarettes and Leaf Tobacco businesses. The Seventies witnessed the beginnings of a corporate transformation. In 1975, the Company launched its Hotels business with the acquisition of a hotel in Chennai which was rechristened 'ITC-Welcomgroup Hotel Chola' (now renamed My Fortune, Chennai). Since then ITC's Hotels business has grown to occupy a position of leadership, with over 100 owned and managed properties spread across India under four brands namely, ITC Hotels - Luxury Collection, WelcomHotels, Fortune Hotels and WelcomHeritage. In 1979, ITC entered the Paperboards business by promoting ITC Bhadrachalam Paperboards Limited. In 2004,the company acquired the paperboard manufacturing facility of BILT Industrial Packaging Co. Ltd (BIPCO), near Coimbatore, Tamil Nadu. In 1990, ITC acquired Tribeni Tissues Limited, a Specialty paper manufacturing company and a major supplier of tissue paper to the cigarette industry. In 1990, leveraging its agri-sourcing competency, ITC set up the Agri Business Division for export of agricommodities. ITC's Agri-Business is one of India's largest exporters of agricultural products.ITC launched line of premium range of notebooks under brand Paper Kraft in 2002. The Classmate range of notebooks was launched in 2003. ITC also entered the Lifestyle Retailing business with the Wills Sport range of international quality relaxed wear for men and women in 2000. The Wills Lifestyle chain of exclusive stores later expanded its range to include Wills Classic formal wear (2002) and Wills Club life evening wear (2003). ITC also initiated a foray into the popular segment with its men's wear brand, John Players, in 2002.In 2000, ITC spun off its information technology business into a wholly owned subsidiary, ITC InfoTech India Limited, to more aggressively pursue emerging opportunities in this area. Today, ITC is one of India's foremost private sector companies with a market capitalization of nearly US $ 14 billion and a turnover of over $ 5 billion. It is one of the country's biggest foreign exchange earners ( $ 3.2 billion in the last decade) and 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 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.

2. Quantitative analysis of ITC

Ratio Analysis: LIQUIDITY RATIOS: Working Capital: Higher the current assets of a company and lower the currentliabilities, greater are the working capital. A larger chunk of working capital can be used to fund the long term liabilities of the company and therefore, the larger the working capital, the better it is for the company. The working capital of ITC Ltd has been decreased drastically. Working Capital 2009-10 333.07 2010-11 53.44 2011-12 6.60

Working capital ratio is defined as the ratio of the working capital to the current liabilities of the company in any year. For ITC Limited, the working capital shown a proportionate decreasing phenomenon compared to the current liabilities of the company across the three years of consideration. This therefore reflects in poor liquidity of the company. Current Ratio: Current ratio is defined as an indicator of short-term debt paying ability of a company. It is determined by dividing current assets by current liabilities. The higher the ratio, it is believed that, the more liquid the company. Here we observe that the current ratio of ITC is increasing over the three year period under consideration. Current Ratio 2009-10 1.01 2010-11 1.07 2011-12 1.59

The reason why ratio increases because of more than a proportionate increases in current assets when compared to the current liability. The ratio is an indication of a company's ability to meet short term debt obligations; the higher the ratio, the more liquid the company is. Quick Ratio: The small Quick ratio, i.e.0.45 times Says that the company's financial strength is not so strong. In general, a quick ratio of or more is accepted by most creditors; however, quick ratios vary greatly from industry to industry and ITC does not have as such any worries in getting creditors.ITC has strong financial positions in many other aspects. The company has also shown an increasing trend in the liquidity ratio over the years. The current assets (fewer inventories) have again increased more than

Quick Ratio

2009-10 0.45

2010-11 0.45

2011-12 0.97

Proportionately reflecting in an increasing liquidity ratio. Also it can be noticed that the ratio has increased from previous where the value was 0.45.Considering the industry average, we see that ITC has been doing really well relatively. As quick ratios vary significantly depending on the industry, comparing the industry average with ITCs ratio makes ITCs financial health look strong and on a growth path. Liquidity Ratios also measures a firms ability to meet its short-term financial obligations on time. This is calculated by taking the ratio of the current assets (less the Inventories held by the company.) LEVERAGE RATIOS: 2009-10 0.01 67.63 2010-11 0.01 83.61 2011-12 0 91.83

Debt Equity Ratio Interest Coverage Ratio

Fixed Charges Coverage Ratio and Debt Service Coverage Ratio: could not been calculated as there are no Preference Dividends. Debt Equity Ratio: The debt-to-equity ratio offers one of the best pictures of companys leverage. The higher the figure, the higher is the leverage the company enjoys. Mathematically, it is defined as the ratio of the total debt to the total equity of the company under consideration at any point of time. Over the last three years, ITC Limited has shown a mix-match of the debt-equity ratio. The ratio of 0.01 times, which means that the company has not been aggressive in financing its growth with debt. Thus its earnings are stable. The company has better support from the shareholders. The ratio has come down from the previous year which was pegged at 0.1 to 0.Over the years, ITC Limited has shown a mix-match of the debt-equity ratio. Interest Coverage Ratio: The interest coverage ratio is a measurement of the number of times a company could make its interest payments with its earnings before interest and taxes. Lower the ratio, higher is the companys debt burden. This is measured as the ratio between the profits before interest and taxes to the interest amount paid that year. The ratio of 91.83 times is magnificently very high and hence the company has very sound financial position. It will have no difficulties of paying interests over its loans. Also it is observed that the ratio has increased since the previous year from 83.61.On an average industry basis it is generally observed that FMCG companies have a higher interest coverage ratios. It is observed that ITC has reported a gradual and continuous increase in profit over the last three years of operation. Also, the companys interest amount has gone down significantly over the last three years.

TURNOVER RATIOS: Turnover Ratios measure the asset management efficiency of the company. 2009-10 Turnover 5.74 2.33 1.87 5.74 33.80 10.80 2010-11 6.28 2.49 2.03 6.28 35.05 10.41 2011-12 6.46 2.63 1.30 6.46 37.68 9.69

Inventory Ratio Fixed Asset Turnover Ratio Total Asset Ratio Inventory Days Debtors Turnover Ratio Average Collection Ratio

Inventory Turnover Ratio: This ratio is used to measure how quickly a company is selling its inventory. A high inventory turnover ratio shows that a company may be losing out on potential sales because it does not keep enough stock.The ratio of 6.46 times signifies that the company is efficient in selling its stocks. Also the ratio has grown more since the last year, making ITC more efficient. Industry Average:5.44 Also it is noticed that ITC has a slightly higher ratio as compared to the industry average, which also supports the fact that they have efficient operations, and they do not suffer from stock outs. Fixed Asset Turnover Ratio: It measures sales per rupee of investment in fixed assets. This ratio measures the efficiency with which fixed assets are employed. A higher ratio indicates a high degree of efficiency in asset utilization and a low ratio reflects inefficient use of assets. The ratio of 2.63 times signifies that the company is very efficiently utilizing its fixed assets for generating sales revenue. Also an increase in the ratio is observed since the last years value of 1.87 which shows higher utilization. Industry average: 0.38. This shows that ITC is doing relatively well, as compared to its counterparts in the industry. Total Asset Ratio: This ratio measures the efficiency of assets employed. The companys asset management is more than the industry standards of 0.78 times compared with 1.87 times in the last year and 1.30times in 201112.Therefore ITC displays efficiency there as well. Debtors Turnover Ratio: This ratio shows how many times sundry debtors turn over during the year. The higher the ratio better is the efficiency of credit management. The ratio of 37.68 times signifies that the company is getting good returns and has no visible risk but benefits out of its debtors. The ratio has increased from previous years 35.05. Industry Average: 5.55 considering the industry average for receivables turnover ratio, ITC is far exceeding the standards and is doing extremely well. Average Collection Period The debt collection

period of 9.69 days is quiet good and the company is efficient in getting back its dues. It indicates the number of days; worth of credit sales that is locked in sundry debtors. Also it is noticed that the no. of days since the last year have come down. In 2010 it was 10.41, this remains a good sign for ITC. Profitability Ratio: Profitability Ratio reflects the business operations 2009-10 25.28 29.33 24.33 23.01 2010-11 20.48 33.35 22.82 -39.41 2011-12 22.29 35.58 23.43 22.29

Gross Profit Margin Return On Equity Net Profit Margin Earnings Per Share

Gross Profit Margin: The ratio between the profit before interest and taxes (equal to the operating income, in our case) to that of the sales for the given period during which the profit has been earned is measure of the profitability of the company for that period. The Profit margin of 22.29% is quiet impressive and the company is making good profits. ITC Limited has done well in the last few years and has continuously reported higher and higher profit every subsequent time. The sales of the company have also experienced a similar trend that has led to the expansion of less profit. Because the growth in the two components has been decreasing. Last year the margin was 20.48% therefore there has been a slight improvement in the profit margins. Industry Average: 13.39 considering the industry average margin, it is observed that ITC has a significant higher margin. This also indicates that the company is making higher amounts of profit. Return on Equity: This ratio indicates the operating efficiency of the firm. It has increased from 33.35% in the last year to 35.58% in FY12 due to a increase in Profit Before tax. Therefore we observe that the operating efficiency of ITC has increased over the last one year. Industry Average: 25.36% (for last 5 years) ITC has exceeded the industry average for ROE as well. This indicates that the operations of the company are far more effective than its competitors. Net Profit Margin: Net Profit Margin is the ratio of net profit and net sales. The interest component is the sole parameter that can differentiate the trend followed by the ratio above and this one. The net margin of 23%is quiet impressive, and the company is performing well.Net Profit for ITC Limited, like PBIT, has shown ansignificant constant and upward trend. The financing decisions and also the tax have altered the overall impact on the profitability of the company. The percentage has also improved since last years 22% showing an upward trend. Industry Average: 26.4% we also observe that as per the industry standards, ITC is some steps below. This could mean that ITC needs to take some corrective measure.

Earnings per Share Ratio: Earnings per share, as it is called, are a company's profit after tax (PAT) divided by its number of outstanding (equity) shares. It is therefore measured as the portion of a company's profit allocated to each outstanding share of common stock. EPS serves as an indicator of companys profitability. In comparison to the face value of Re.1/share the EPS of Rs.22.29is very good. Also the company has done better as compared to last years value of loss of Rs.-39.41. The industry average remains at8.61. Therefore ITC offers less EPS as per the industry, but still does a decent job in the ratio. YIELD RATIO: 2009-10 Dividend Per share 10 Ratio Dividend Payout Ratio 94.02 2010-11 4.45 69.04 2011-12 4.5 57.09

Dividend per Share Ratio: Dividends per share (EPS): PAT/Number of ordinary shares Dividend per share (DPS) is a simple and intuitive number. It is the amount of the dividend that shareholders have (or will) receive, over a year, for each share they own. In compared to the face value of the shares, i.e. Re.1.00/share. DPS of Rs.4.50 is quiet good. Dividend Payout Ratio: A verylow payout ratio indicates that a company is primarily focused on retaining its earnings rather than paying out dividends. The payout ratio also indicates how well earnings support the dividend payments: the lower the ratio, the more secure the dividend because smaller dividends are easier to payout than larger dividends. So the value of Rs.57.09 is quiet decent. But last years ratio was on the higher side, which means that ITC was not focusing on retaining its earnings.Industry Average: 53.7%ITC is giving out more dividends as compared to its competitors; this means that they want to keep theirinvestors happier.

3. QUALITATIVE ANALYSIS
Vision: Sustain ITC s position as one of the Indias most valuable corporations through the world class performance, creating growing value for the Indian economy and the companies stakeholders. Mission: To enhance the wealth generating capability of the enterprise with the globalizing environment, delivering superior and sustainable stakeholder value. Values: ITC is a demand-driven organization responsive to national development objectives and programs. It endeavors to deliver relevant and cost-effective services for sustainable development ends. Its staff is committed to providing information and advice according to criteria implicit in the United Nations Charter: the highest standards of efficiency, competence, integrity and neutrality. FINANCIAL PERFORMANCE The financial performance of the ITC limited is excellent when compared to the market situation. The balance sheet as on 31st march 2009 shows that the total value of source of funds which includes shareholders funs, loan funds and deferred tax is 14779.82 (Rs in crores) where the 31st march 2008th value is 12817.17 (Rs in crores). It is clear that the funds seem to be increasing. On the other hand the net current assets which includes inventories,debtors,cash in hand and bank is 3456.10 (Rs in crores) where the previous year was 2586.97 (Rs in crores) which seems to be increasing too. However, the percentage of profit is reduced from 2006 to 2009;it is notable that the organization is still in profit even in the recession period which is a hope for the survival in the market. It is clearly seen by the annual report of ITC Limited that the profit of the organization is continuously increased overall in the current years. There was a slight decrease in the percentage of the profit occurred but the profit seems to be remain in the increasing state which is very important to all organizations in this competitive market. Internal analysis of the company: Internal analysis of ITC Ltd is the strength and weakness of the organization. The strength of the organization is nothing but its brand and the powerful management. ITC Ltd brands are very popular in India. Their beauty products such as Fiama Di Wills and Vivel are more popular in the market. And the ITC Welcomgroup hotels have a powerful position in the market as well. This is the positive side for the ITC Ltd. On the other hand, the weakness of the organization is their unrelated diversification. They have major hotel sectors and as well as Agri sectors and so on. As there is no connection between the different

sectors, there may arise a problem in the future of handling the business in the smooth way as the fortune of the market is always unpredictable. This is the negative side for the ITC Ltd. External analysis of the company: The external analysis of ITC Ltd is the opportunity and threats for the organization. The opportunities for the organizations such as rural market and E-choupal are a big boon to the organization. Investing in the rural areas helps the development of rural markets and the Government lays a very less tax on the rural markets which helps the ITC to save their save their expenses on tax. This one of the biggest advantage and the positive side for the organization. Another external factor is the Threats to the ITC Ltd is that the increasing level of tax in Cigarettes which lead to loss the huge amount of cash on tax. The other threat is that the health hazard which the public is very well aware off. So the ITC Cigarettes industry which is doing very well in the present market may face some serious problems in the future market. MARKET POSITION CHAIRMAN-I am delighted to present ITC's third Sustainability Report. This Sustainability Report, prepared in accordance with G3, the latest Revision of the Global Reporting Initiative guidelines and assured by PricewaterhouseCoopers Pvt. Ltd., represents a balanced and reasonable presentation of ITC's economic, social and environmental performance. ITC is committed to sustain its position as one of India's most valuable corporations through world-class performance, creating growing value for the Company's stakeholders and the Indian economy. Over the last decade, Total Shareholder Returns, measured in terms of increase in market capitalization and dividends, grew at a compound rate of over 30% per annum, placing ITC among the foremost in the country in terms of efficiency in servicing financial capital. ITC aims to sustain its premier market standing and leadership position in each of the business segments. Stars: ITC Ltd has a very strong market position in the sectors such as Hotels, Paperboard/packaging and agricultural business. They are very famous for Hotels and Agri business.ITC is very strong in these positions as these sectors are considered as stars in BCG matrix which means these sectors generates a huge amount of profit because of the market shares. Question marks: ITC Ltd FMCG sectors such as automotive companies, furniture companies, financial companies, tobacco companies, food companies are in the stage of question mark in the BCG matrix which means these sectors growing rapidly fast and consumes a large sum of cash because of low market shares. But there is a chance that these sectors may become stars Dogs: ITC InfoTech are now the Dogs in the BCG matrix as they have very low market share and doesnt produce lot sum amount of cash which indicates the weakest sector of ITC Ltd.

Cash cows: ITC Ltds FMCG-Cigarettes are now in the position of Cash Cows in the market as they produce a stable cash flow which makes a good growth rate in the market shares. As there is a good profit, it is a hope that this sector may move to the position of Stars or Question marks in the near future.

Business areas:
Beyond hotel industry, it involves in some other business too. The following are some of the business of ITC LIMITED, Cigarettes Foods Lifestyle retailing Personal care Education and stationary Safety matches Agricultural business Information technology.

SWOT ANALYSIS STRENGTHS Managing Diverse Business. ITC has 105 subsidiaries connected with its various operations. Wealth of local knowledge and international expertise helps it to be globally competitive. High quality standard products and services. Excellent Export earnings. Highly professional management. Excellent Distribution network Excellent brand making capability helping it to diversify it into retailing. IT and Hotels segments. Agri-export segment showing excellent growth of 28% and earning Rs 4 billion foreign exchange. Lasting Impression by catchy Ads. ITC LTD is one of the most liquid scripts in the capital market with domestic institutions having a considerable stake. Good returns by way of DPS every year. The dividend declared is 13.5 Rs per share. The Lifestyle retailing segment has won acclaim and moving towards higher sales. The expression greeting card is widening its base all over India and it is available at most retail shops. Steady increase in the return on capital employed. Sophisticated Research and development facilities. WEAKNESS Diversification into various lines in which it does not have much knowledge would be very risky proposition. High competition from established brands which has resulted in reduction in profit margins. Step increase in cigarette taxes has adversely affected the revenue earned. Due to high price of cigarette, consumers are switching to other cheaper forms of tobacco.

ITC Hotel industry has still not created a big share in the market size.

OPPORTUNITIES Big untapped market available. For cigarettes, Hotels, IT, Retail Garment, Packaging and agricultural products. High growth potential could be achieved. Good source of revenue and foreign exchange available by way of exports of agricultural products, Hotels and cigarettes. ITC competitors dont have the financial banking like IT so it cant take advantage of this. Proper publicity of the hotels would increase its brand image and revenue. THREATS Negative publicity for smoking could affect its cigarette segment. Government is under huge pressure from public organizations for banning tobacco products which could affect it adversely. High competition from established brands. Competition from unbranded products. Due to terrorist attacks the tourism industry has taken a back seat which would affect the hotel segment. Poor monsoon leads to poor agricultural growth which would affect the Agri- exports. The obvious threat is from competition, both domestic and international. PESTLE ANALYSIS PESTLE stands for Political, Economic, Social, Technological, legal, and Environmental. The global economy grows at the rate of 5.3% in 2010 but in 2011, it manages to grow at 3.9% against the forecast of 4.4% in the beginning of the year. Growth in Advanced Economies slowed down to 1.6% in 2011 against 3.2% in 2010 primarily due to the sovereign debt crisis in the euro zone, contraction of the Japanese economy and a sluggish recovery in the US. Growth in Emerging & Developing economies also decelerated from 7.5% in 2010 to 6.2% in 2011 with China, India and Brazil recording significant decline in growth rates. The world economy is passing through a very difficult phase and is expected to grow by 3.5% in 2012. In the context to Indian economy also it decelerated considerably during the year, 2011/12 at 6.5% as compared to 8.4% in 2010/11. The latest data of of 1st quarter of 2012-13 is 5.4% and in second quarter, it was 5.2% clearly showing the sign of economic slowdown. a tight monetary policy stance adopted by the Reserve Bank in a bid to balance the growth-inflation dynamic, lower global demand and hardening international prices of crude oil combined to lower the growth rate to below 6%. The position on the twin deficits also worsened with the fiscal deficit touching 5.9% of GDP and the current account deficit estimated at around 4% of GDP. As far as the political scenario of India is concerned, every time there is headline of politicians involving in Scam, Irregularities in distributing license and favoring their associates. All these things left an impression of bad governance in the eyes of International community which ultimately hampers the image of country as a result MNC companies shows their resistance in coming to India for Business. Also the decision-making process is also very slow in India in comparison to other Developing nations by the virtue of which decisions do get materialize very late and benefits to ex-chequers came very late. For the products of ITC limited, basically related to agri business and Tobacco with Government guidance is easily available for the company at cheaper rate.

4. COST OF CAPITAL
Source: Ace Analyzer and Annual Report of ITC Limited From the following capital structure of ITC limited, determine appropriate overall cost of capital. Types of Capital Prices (in crores) Equity Shares 781.84 crores 12% Preference Shares 500 crores Retained Earnings 41.476 crores 12% debentures 199.96 crores Term Loans 1193.61 crores Total 2716.886 The current price of dividend per share is Rs 4.50. The dividend per share is expected to grow at the rate of 10 %. There are no floatation costs. Interest on bank loan is 11.25%.The market price per share is Rs 297.05. Debentures, redeemable after 6 years, are selling for Rs 250.00 per debenture. The tax rate for the company is 30 %.
Solution: Cost of Debt (Kd): 1) Before tax cost of debt (Ki) =Interest Sales proceeds = 23.99 199.96 = 11.997% After tax cost of Debt (Kd) = Interest (1- tax rate) +RV-SV ____________________n_____ RV+SV 2 = 16.79+8.34 224.98 = 11.16% 2) Cost of Preference Shares (Kp): Kp= Dividend Price = 60 500 = 12% 3) Interest on Loan after tax: Interest = 11.25(1-0.3) = 11.25*0.7 = 7.875% 4) Cost of Equity: By Dividend Approach: Ke= D1+ g P D1=D0 (1+g) = 4.5 (1+0.1) = 4.95

Ke= 4.95 + 0.1 297.05 = 11.67% Capital Employed in Business segment of ITC Limited Business Segment Capital employed (in Rs. crores) Cigarette 3278.95 Others (FMCG) 2211.8 Hotels 2263.95 Agri Business 1052.93 Paperboards 3764.5

Share Price (Rs) 0.51 0.574 0.544 0.522 0.358

Proportion/weight 0.26 0.176 0.18 0.084 0.30

Beta of ITC (itc)= (0.51*0.26)+ (0.574*0.176)+ (0.544*0.18)+ (0.522*0.084)+ (0.358*0.3)= 0.49 Cost of Equity by CAPM model: Risk free rate of return Rf 7.4% Market Rate of return Rm 21.25% Cost of Equity= Rf + (Rm- Rf )*L = 7.4+ (21.25- 7.4)*0.49 = 14.09%

Types of Capital

Prices( in crores)

Equity Shares 12% Preference Shares Retained Earnings 12% debentures Term Loans Total

781.84 crores 500 crores 41.476 crores 199.96 crores 1193.61 crores 2716.886

Weights(Wi) 0.287 0.184 0.015 0.073 0.439 1

Specific Costs(Ci) 0.1167 0.12 0.1167 0.1116 0.07875

Wi*Ci 0.0334 0.0220 0.0017 0.0081 0.0345 0.0997

Overall Cost Of Capital= 9.97%

5. Analysis and Conclusions:

1. 2. 3. 4. 5. ITC is very less levered with debt equity of 0.01 The cost of equity is near to overall Cost of Capital The EPS of the company is also showing positive growth. The Cost of Capital tends to be lower i e.9.97% implies that the companies have a very low cut off point for any new and existing project Low cost also adds value to the firm

It is a clear fact that so far ITC Ltd holds a good reputation in the market and a well slandered position. Even though there is an un-related diversification of ITC, the powerful and the good management help the smooth flow of business which is a successful key factor to survive in the market. Though ITC Ltd has some weak industrial sector, it keeps an overall slandered position in the market even in the recession period where lots of organizations are thrown out of the market. With the level of present status, there is a bright fortune for ITC Ltd after this dark recession which is very near and crystal clear.

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