Financial Statement Analysis of ITC

Ltd
TABLE OF CONTENT
S. No Chapters Page No
1 Title Page 1
2 FMCG Sector Industry Trend 2
3 ITC Ltd About the company: 2
4 ITCs corporate strategies 3
Vision of the company 4
5 Multiple Drivers of Growth for 5
the Economy
6
About the FMCG Industry and
Competition:
Opportunities and threats 7

6 Balance Sheet 7

7 Profit and loss statement 8

8 Funds flow analysis 9

9 Financial Statement Analysis 10

i. Liquidity Ratios 11
a) Current Ratio 12
b) Quick Ratio 12
c) Cash Flow Ratio 12
ii. Profitability Ratios 13
a) PBID margin (%)
b) PBT margin (%)
c) PAT margin (%)
iii. Debt Equity Ratios

iv. Activity Ratios 14

a) Fixed Asset Turnover ratio
 b) Total Assets Turnover Ratio
c) Capital Employed Turnover ratio

v. Return on Investment Ratios 15

vi. Equity Investor Ratios 16

FMCG Sector Industry Trend

The Indian FMCG sector, with a market size of US$ 25 billion (retail sales),
constitutes 2.15 per cent of Indias GDP. The industry is poised to grow between
10 to 12 per cent annually. A well-established distribution network spread across
six million retail outlets.

Food products is the largest consumption category in India,

accounting for nearly 21 per cent of the countrys GDP.

Some of the leading players in this segment include Britannia

Industries Ltd, Dabur India Ltd, GlaxoSmithKline Consumer
Healthcare India Ltd and Gujarat Cooperative Milk Marketing
Federation (GCMMF).

The consumer durables market is expected to reach US$ 12.5 billion in 2015 and
US$ 20.6 billion by 2020. Urban markets account for the major share (65 per cent)
of total revenues in the consumer durables sector in India. There is a lot of scope
for growth from rural markets with consumption expected to grow in these areas
as penetration of brands increases.

The FMCG sector has grown at an annual average of about 11 per cent over the
last decade. The overall FMCG market is expected to increase at (CAGR) of 14.7
per cent to touch US$ 110.4 billion during 2012-2020, with the rural FMCG market
anticipated to increase at a CAGR of 17.7 per cent to reach US$ 100 billion during
2012-2025.Food products is the leading segment, accounting for 43 per cent of
the overall market. Personal care (22 per cent) and fabric care (12 per cent) come
next in terms of market share.

Growing awareness, easier access, and changing lifestyles have been the key
growth drivers for the consumer market. The Government of India's policies and
regulatory frameworks such as relaxation of license rules and approval of 51 per
cent foreign direct investment (FDI) in multi-brand and 100 per cent in single-
brand retail are some of the major growth drivers for the consumer market.

ITC Ltd About the company:

ITC is a public FMCG conglomerate company headquartered in Kolkata. The

company is currently headed by Yogesh chander Deveshwar. It employs more than
26000 employees at more than 60 working locations.

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 belongs to FMCG industry. It is rated by BCG as one of the top 10 consumer
goods companies in the world in terms of the Total shareholder returns (TSR).

One of the foremost in the private sector in terms of

Sustained Value Creation

Operating Profits

Cash Profits

ITC is the only Indian FMCG company to feature in Forbes 2000 list, A
comprehensive ranking of world companies measured by

Composition of sales

Profits

Assets and Market value

ITCs ranking amongst all listed private sector cos.

PBT: No. 6
PAT: No. 5

Market Capitalization: No.

ITCs corporate strategies

Create multiple drivers of growth by developing a portfolio of world class
businesses that best matches organizational capability with opportunities in
domestic and export markets.
Continue to focus on the chosen portfolio of FMCG, Hotels, Paper,
Paperboards & Packaging, Agri Business and Information Technology.

Benchmark the health of each business comprehensively across the criteria of

Market Standing, Profitability and Internal Vitality.

Ensure that each of its businesses is world class and internationally

competitive.
 Enhance the competitive power of the portfolio through synergies derived by
blending the diverse skills and capabilities residing in ITCs various
businesses.
Vision of the company

ITCs aspiration to be a National Champion is driven by its abiding Vision to put

Country before Corporation and the Institution before the Individual. This vision
has inspired a journey to transform ITC into a vibrant engine of growth with
substantial and growing contribution to the Indian economy. It is the Companys
belief that by making societal value creation a core strategic purpose, it has laid
strong foundations for a future-ready corporation an exemplary national
enterprise committed to building enduring value for its stakeholders.

Multiple Drivers of Growth for the Economy

ITCs diversified portfolio of businesses, spanning FMCG, Paperboards &

Packaging, Agri Business, Hotels and Information Technology, enables it to have a
significant presence in all 3 sectors of the economy, namely, agriculture,
manufacturing and services, providing the Company with the unique opportunity
to contribute meaningfully to the growth and development of the country.

In services, ITC Hotels is acknowledged worldwide for its fine art of hospitality, for
being an epitome of luxury and the greenest luxury hotel chain in the world.

TC's Branded Packaged Foods Business is one of the fastest growing foods
businesses in India. A spread of delectable offerings in Staples, Snacks & Meals,
Confections and Beverages is available under several popular brands like
Aashirvaad, Sunfeast, Bingo!, Yippee!, Kitchens of India, mint-o, B Natural,
Candyman and GumOn.

Rapid Scale up of FMCG businesses

About the FMCG Industry and Competition:

The Indian FMCG sector, with a market size of US$ 25 billion (200708 retail sales),
constitutes 2.15 per cent of Indias GDP. The industry is poised to grow between 10 to 12 per
cent annually. A well-established distribution network spread across six million retail outlets.

Food products is the largest consumption category in India, accounting for

nearly 21 per cent of the countrys GDP.

Some of the leading players in this segment include Britannia Industries Ltd,
Dabur India Ltd, GlaxoSmithKline Consumer Healthcare India Ltd and
Gujarat Cooperative Milk Marketing Federation (GCMMF).

Competition:

Below are two major competitors of ITC in terms of market share

Hindustan Unilever Limited (HUL) is India's largest fast moving consumer goods
company is one of the major competitions of ITC. HUL is the market leader in Indian
consumer products with presence in over 20 consumer categories such as soaps, tea,
detergents and shampoos amongst others with over 700 million Indian consumers
using its products. It has over 35 brands

Procter & Gamble Co. (P&G) is an American company based in Cincinnati, Ohio
that manufactures a wide range of consumer goods. In India Proctor & Gamble has
two subsidiaries: P&G Hygiene and Health Care Ltd. and P&G Home Products Ltd

Opportunities and Threats: [FMCG SECTOR]

Opportunities in FMCG Sector

Large domestic market over a billion populations.

Untapped rural market.
Changing Lifestyles & Rising income levels, i.e. increasing per capita income
of consumers.
Threats in FMCG sector:
Tax and regulatory structure.
Mimic of brands
Removal of import restrictions resulting in replacing of domestic brands.
Temporary Slowdown in Economy can have an impact on FMCG Industry.

Threat of new entrants:

Economies of Scale Not Easy to Achieve Positive

Product Differentiation Requires huge R&D Positive

Capital Requirements High Positive

2. Threat of substitute products:

Products with improving price/performance tradeoffs relative to present industry

products.
 Calculation Worksheet

Please find the attached calculation worksheet used for all the ratio and
fund flow calculations

FSACalculationWorks
heet.xlsx

Funds Flow Analysis

Funds flow analysis is a study of flow of fund from current asset to fixed asset or
current asset to long term liabilities or vice versa. The study helps in understanding
in many key takeaways on business.
 Total
Sum of Long term 5068. Sum of Short term 2010. 7079.
Inflows 25 inflows 84 09
Sum of Long term 2219. sum of Short term 4859. 7079.
Outflows 54 outflows 55 09
2848. 2848.
Difference 71 Difference 71

Difference or
Mismatch Analysis Mismatch/Total Outflows 0.402411892
Percentage Mismatch 40.24118919
Percentage Mismatch 40.24% is greater than accepted levels of 25%. So the Short
term funds supplied the funds to Long term needs. This will alter the working capital
and hence it has to rely on some other asset or external Influx of funds for short term
needs.

From the above analysis we understand the funds from

Short term Borrowings- Trade Payable- Inventory and Cash Equivalents have
been used towards long term needs. This might result in liquidity issues when the
money needed by short term needs is not meant and working capital needs influx from
other sources.

Financial Statement Analysis

Financial analysis is the process of identifying the financial strengths and weaknesses
of the firm by property establishing relationships between the item of the balance
sheet and the profit and loss account.

Users of Financial Analysis

Trade creditors

Lenders

Investors

Management
Financial Ratio Analysis

A Liquidity Ratio provides information on a company's ability to meet its

shortterm, immediate obligations.
A Profitability Ratio provides information on the amount of income from
each dollar of sales.
An Activity Ratio relates information on a company's ability to manage its
resources (that is, its assets) efficiently.
A Financial Leverage Ratio provides information on the degree of a
company's fixed financing obligations and its ability to satisfy these financing
obligations.
A Market Ratio/Equity Investor Ratio describes the company's financial
condition in terms of amounts per share of stock

Liquidity Ratio
2015 2014
Liquidity Ratios Quick ratio Quick ratio
Quick ratio = Quick 16118.27/116 13569.19/115
assets/Current 81.91= 04.32=
Liabilities 1.379763241 1.179486489
Cash Flow Cash Flow
Ratio Ratio
Cash Flow Ratio=Cash 7588.61/1168 3289.37/1150
assets/Current 1.91= 4.32=
 liabilities 0.649603532 0.285924766
Current Current
Ratio Ratio
23955.03/116 20928.73/115
Current Ratio =Current 81.91= 04.32=
Asset/Current Liabilities 2.050609019 1.819206176

2.5
2
1.5
1
0.5
0 2015

2014

ITC have high liquidity ratios, the higher the margin of safety that the company possesses to
meet its current liabilities. Liquidity ratios greater than 1 indicate that the company is in good
financial health ITC has all the liquidity ratio greater than 1 and it is less likely fall into
financial difficulties.

Current ratio of 2.05 indicates ITC's ability to meet short-term debts. The current ratio
measures whether or not a firm has enough resources to pay its debts over the next 12 month.
The main reason the current ratio increases is due to significant increase in the current assets
as compared to current Liabilities.

The Small or Quick ratio is more than 1 and this number 1.37 is acceptable by most
creditors. Meanwhile it changes from industry to industry. ITC has exhibited financial
liquidity in many other aspects.

The Cash ratio of 0.64 says that the company is not in the position to very quickly liquidate
its assets and cover short-term liabilities. ITC ltd does not have any immediate liquidity
needs so this ratio is quite acceptable as per industry standards.
The cash ratio follows also follows the same trend as the other two liquidity measures. The
increase again is because of a more than significant increase in the cash items of ITC
Limited.
Profitability Ratio
2015 2014
PBID margin PBID margin
Profitability Ratios (%) (%)
14959.26/380 13559.03/343
PBID margin 50.53= 45.74=
(%)=PBID/Total
income*100 39.31419615 39.47805463
PBT margin PBT margin
(%) (%)
13997.52/380 12659.11/343
50.53= 45.74=
PBT margin (%)=PBT/Total
Income*100 36.78666237 36.85787524
PAT margin PAT margin
(%) (%)
9607.73/3805 8785.21/3434
0.53= 5.74=
PAT margin (%)=PAT/Total
Income*100 25.24992425 25.57874718

45
40
35
30
25
20
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0 2015

2014

PBID 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 a measure of the profitability of the company for that
period. The Profit margin of

39.31%

is quiet impressive and the company is making good profits. The sales of the ITC Ltd
have also experienced a similar trend that has led to the expansion of profit. Because
the growth in the two components has nearly been equal, the ratio between them has
not changed significantly.
PBT Margin% is also an impressive 36.78% and is consistent.

Finally PAT Margin % 25.24 is an impressive and consistent as the

trend shows.

The interest component is the sole parameter that can differentiate the trend followed
by the ratio above and this one.

The profit margin compared to the previous period's margin signals there is a
consistent performance in both operational efficiency and profitability means the
company is consistent in its profits and efficiency. A margin higher than those of other
companies or higher than the industry average means ITC business performed better
than those companies during that period.

There is not significant increase in profit margins but there isnt significant
decrease in the profit margin either which suggests the company is consistent
and stable in its profitability and operational efficiency.

Leverage Ratios

Debt Equity Ratio

LT debt/ Net worth
Debt/Equity Ratio is a debt ratio used to measure a company's financial
leverage, calculated by dividing a companys total liabilities by its
stockholders' equity. The D/E ratio indicates how much debt a company is
using to finance its assets relative to the amount of value represented in
shareholders equity.

Version 1 with Net Deferred Tax Included

2015 2014
Debt Equity Debt Equity
Ratio Ratio
1778.06/3073
5.69= 1463.05/2626
Debt Equity Ratio = LT 0.05785001 2.02=
debt/ Net worth 1 0.055709728

Version 2 with deferred tax Excluded.

2015 2014
Debt Equity Debt Equity
Ratio Ratio
146.46/30735 151.09/26262
.69= .02=
Debt Equity Ratio = LT 0.004765144 0.005943564
debt/ Net worth
Debt Equity Ratio = LT debt/ Net worth
5.85
5.8
5.75
Debt Equity Ratio =
5.7 LT debt/ Net worth
5.65 1778.06 30735.69
5.6
5.55
5.5
5.45
2015 2014

In both the cases above 0.05 and 0.004 are extremely very low numbers
for this ratio.
ITC has a very low Debt to Equity ratio which means ITC doesnt
run the risk of high debts for the sake of aggressive growth.
It is clearly Equity driven and Not Debt driven. Aggressive
Debt oriented growth practices are often associated with high levels
of risk.
This ensures the shareholders that there is very little risk with
investing with ITC.

2) Total Debt to Total Capital Employed

Total LT + ST Borrowings / Total Capital Employed
Version 1 with Net Deferred Tax and other liabilities components
Included

2015 2014
Debt Equity Debt Equity
Ratio Ratio
Total Debt to Total Capital
Employed = Total LT + ST
Debt/Total Capital
employed 1.359291377 1.414942866

Version 2 with only Short term and long term borrowings

included.

2015 2014
Debt Equity Debt Equity
Ratio Ratio
Total Debt to Total Capital
Employed = Total LT + ST
Debt/Total Capital
employed 0.305217024 0.34888352

Even the total Debt to Total Capital Employed ratio is very less.
It clearly shows ITC ltd is Equity driven and not Debt driven.
Investment Activity Ratios
Activity ratios are calculated to evaluate how efficiently and effectively the
firm utilizes its assets. The fixed (or capital) assets turnover ratio
measures how intensively a firm's fixed assets such as land, buildings, and
equipment are used to generate sales. A low fixed assets turnover implies
that a firm has too much investment in fixed assets relative to sales; it is
basically a measure of productivity

2015 2014
Fixed Asset Fixed Asset
Investment Activity Turnover Turnover
Ratios ratio ratio
Fixed Asset Turnover 49964.82/162 46712.62/143
ratio=Sales Turnover/ 92.63= 08.47=
Net Fixed Assets 3.066712986 3.264683086
Total Assets Total Assets
Turnover Turnover
Ratio Ratio
Total Assets Turnover 49964.82/441 46712.62/392
Ratio =Sales 95.66= 29.39=
Turnover/Total Assets 1.130536799 1.190755706
Capital Capital
Employed Employed
Turnover Turnover
ratio ratio

Capital Employed
Turnover ratio= Sales 49964.82/325 46712.62/277
Turnover/Capital 13.75= 25.07=
Employed 1.536728922 1.684851292

3.5

2.5

2 2015

1.5
2014
1

0.5

0
Investment Activity Ratios

In the above example the fixed assets turnover ratio is 3.0 and 3.2 which
means for every 1 rupee spent on the fixed assets it generates sales worth 0.90
rupees.
 Similarly the Total Assets turnover ratio is more than 1 so it means the
investment on the Total assets, it generates positive sales.

Capital Employed Turnover ratio is also again greater than 1

which suggests investment efficiency of ITC ltd is very healthy and
its key indicator of Investors.

Return on Investment Ratios

Return on investment (ROI) is performance measure used to evaluate

the efficiency of investment. It compares the magnitude and timing of
gains from investment directly to the magnitude and timing of investment
costs. It is one of most commonly used approaches for evaluating the
financial consequences of business investments, decisions, or actions.

2015 2014
ROI Ratios ROA% ROA%
Return on Assets (%) = 21.7390802 22.3944598
PAT/Total Assets 6 7
ROCE% ROCE%
Return On Capital
Employed= PBT + LT
Interest 45.74 48.21
RON% RON%
Return on Networth
(%) =PAT/Net worth 31.25888209 33.51

60

50
ROI Ratios Return on Assets (%)
40 = PAT/Total
Assets
30 Return On Capital
Employed= PBT + LT
20 Interest
Return on Networth
10 (%) =PAT/Net worth

0
2015 2014

ROA%

Also known as Earning power of the company 21.73% is quiet

impressive.
It only makes sense that a higher ratio is more favorable to investors because it
shows that the company is more effectively managing its assets to produce
greater amounts of net income.

Every Rupee invested in assets during the year produced Rupees 0.21 rupees of
net income. This is very good Return rate nevertheless they should try get this
number to a bit higher level.

Profit has increased from the previous year, but the asset utilization
has slightly come down from 22% to 21% and the amount of assets
added also got increased. This is marginal and could be improved.

RON%

The net worth ratio states the return that shareholders could receive on their
investment in a company, if all of the profit earned were to be passed through
directly to them. Thus, the ratio is developed from the perspective of the
shareholder, not the company, and is used to analyze investor returns.

The ratio of net income after taxes to total end of the year net-worth of
the company is called the RONW for that company. This ratio indicates
the return on stockholder's total equity that is invested in the business.
The ratio of
31.25%

is quiet good and the company is utilizing the shareholders funds in an

efficient way

The profit percentage has gone up by 9% with the capital influx of

17%. Still the Return on Networth is relatively lower than previous
financial year because of considerable increase in Expenses through
Employee Benefits and other expenses.

ROCE%

Investors are interested in the ratio to see how efficiently a company uses its
capital employed as well as its long-term financing strategies.

The amount of assets added and Return on Assets reduced has

significantly reduced this ratio by 3%. They should increase Return on
Assets (ROA) or maintain a low asset level.

Equity Investor Ratios

When it comes to informed investing all of the Equity investor ratios are going
to play a major role in determining the investment options amongst the
competitors in the industry. Some of the key Equity investor ratios for ITC ltd
are listed below
 60
50
40
30
20
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2014

2015 2014
Earnings Earnings
Equity Investor Ratio per share per share
Earnings per share (EPS)
= PAT/No of Equity
Shares 11.99 11.05
Dividend
Payout Dividend
ratio Payout ratio
Dividend Payout ratio =
DPS/EPS*100 52.12677231 56.56108597
Earning Earning
Yield Yield
Earning Yield =
EPS/Market price per
share*100 3.735202492 3.453125

P/E ratio P/E ratio

P/E ratio = Market price
per share/EPS 26.77231026 28.95927602
Book Value Book Value
per share per share
Book Value per share =
Net worth/No of Equity
Shares 38.35671101 33.03225774
Book value Book value
to Market to Market
price price
Book value to Market
price =Book value per
share/Market price per
share*100 11.94913116 10.32258054
Interest Interest
Cover Cover
 Interest Cover = PBT +
Interest/Interest 23.90095219 31.66867747

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50
40
30
20
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2014

P/E RATIO
The price-to-earnings, or P/E, ratio shows how much stock investors are paying
for each rupee of earnings. It shows if the market is overvaluing or
undervaluing the company.

The P/E ratio is relatively less for ITC ltd which suggests the
values of the shares are not overpriced.
If you look at the historical data of this ratio it has been
consistent. A stock with a low P/E may have greater potential for
rising.
ITC ltd has also fewer Debts which suggest they dont add Debt to
boost their P/E ratio.

Book Value per share

P/BV ratio values shares of companies with large tangible assets on their
balance sheets.

ITC ltd doesnt have this value less which suggests the stocks are
not undervalued and significant liquid funds in case of Debts or
uncertainty to handle, which increases the investors confidence.

Earning yield is a measure to calculate the percentage of return on an

investment. Earnings yield is another ratio thats similar to dividend yield.
Earnings yield ratio shows how much earnings you received for the money you
spend on your investment.

This is 3% for ITC relatively less comparing the FMCG industry there
are several other companies which has higher Earning Yield, ITC
should try to increase this number to enjoy investor confidence.
Dividend Payout Ratio:

A very low 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: ITC ltd has a lower the ratio; it means the more secure the
dividend because smaller dividends are easier to pay out than larger
dividends. So the value of 52% is quiet good.