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Fm analysis itc

  1. 1. Indian Tobacco Company Ltd. PGDM IB Roll No.29Indian Tobacco Company Ltd.Ratio Analysis Submitted by: Prerna Makhijani PGDM IB Roll No. 29
  2. 2. Indian Tobacco Company Ltd. PGDM IB Roll No.29Sector OverviewThe fast moving consumer goods (FMCG) sector would witness over 40 per cent growth in thesemi-urban and urban areas, according to an analysis carried out by the Associated Chambersof Commerce and Industry of India on `Future prospects of FMCG. The size of the sector wouldgo up from the present Rs 38,500 crore to Rs 50,000 crore by 2012, says the analysis. In urbanIndia alone, the sector would witness over 100 per cent growth with its size increasing to Rs35,000 crore by 2010 from the present Rs 16,500 crore, says the analysis adding that the overallsize of the sector, which would include the rural and semi-urban market, would grow to Rs85,000 crore.Over the years the FMCG sector has registering an increase of double digit per cent. Currently,the urban market for FMCG is growing at an annual growth rate of around 20 per cent while thegrowth for semi-urban and rural areas is less than 10 per cent, says the analysis.Though the semi-urban and urban market for FMCG would grow larger, according to theanalysis, it is bound to put a severe pressure on the margins of manufacturers of FMCGproducts due to intense competition. With 12.2% of the world population living in the villagesof India, the Indian rural FMCG market is something no one can overlook. More focus on farmsector will boost the rural income thus providing better growth prospects to the FMCGcompanies. Better infrastructure facilities will improve their supply chain.Also, with rising income and growing consumerism, FMCG sectors are likely to benefit. Growthpotential for all the FMCG companies is huge as the per capita consumption of almost allproducts in the country is amongst the lowest in the world. Further, if these companies canchange consumer’s mindset and offer new generation products, they would be able to generatehigher growth in the future. Other Major market players- THE TOP 10 COMPANIES IN FMCG SECTOR1. Hindustan Unilever Ltd.2. ITC (Indian Tobacco Company)3. Nestle India4. GCMMF (AMUL)5. Dabur India6. Asian Paints (India)7. Cadbury India8. Britannia Industries9. Procter & Gamble Hygiene and Health Care10. Marico Industries
  3. 3. Indian Tobacco Company Ltd. PGDM IB Roll No.29The companies mentioned are the leaders in their respective sectors. The personal carecategory has the largest number of brands, i.e., 21, inclusive of Lux, Lifebuoy, Fair and Lovely,Vicks, and Ponds. There are 11 HLL brands in the 21, aggregating Rs. 3,799 crore or 54% of thepersonal care category. Cigarettes account for 17% of the top 100 FMCG sales, and just belowthe personal care category. ITC alone accounts for 60% volume market share and 70% by valueof all filter cigarettes in India.The foods category in FMCG is gaining popularity with a swing of launches by HLL, ITC, Godrej,and others. This category has 18 major brands, aggregating Rs. 4,637 crore. Nestle and Amulslug it out in the powders segment. The food category has also seen innovations like softies inice creams, chapattis by HLL, ready to eat rice by HLL and pizzas by both GCMMF and GodrejPillsbury. This category seems to have faster development than the stagnating personal carecategory. Amul, Indias largest foods company, has a good presence in the food category withits ice-creams, curd, milk, butter, cheese, and so on. Britannia also ranks in the top 100 FMCGbrands, dominates the biscuits category and has launched a series of products at various prices.In the household care category (like mosquito repellents), Godrej and Reckitt are two players.Goodknight from Godrej, is worth above Rs 217 crore, followed by Reckitts Mortein at Rs 149crore. In the shampoo category, HLLs Clinic and Sunsilk make it to the top 100, although P&GsHead and Shoulders and Pantene are also trying hard to be positioned on top. Clinic is nearlydouble the size of Sunsilk. Dabur is among the top five FMCG companies in India and is a herbalspecialist. With a turnover of Rs. 19 billion (approx. US$ 420 million) in 2005-2006, Dabur hasbrands like Dabur Amla, Dabur Chyawanprash, Vatika, Hajmola and Real. Asian Paints isenjoying a formidable presence in the Indian sub-continent, Southeast Asia, Far East, MiddleEast, South Pacific, Caribbean, Africa and Europe. Asian Paints is Indias largest paint company,with a turnover of Rs.22.6 billion (around USD 513 million). Forbes Global magazine, USA,ranked Asian Paints among the 200 Best Small Companies in the World.Cadbury India is the market leader in the chocolate confectionery market with a 70% marketshare and is ranked number two in the total food drinks market. Its popular brands includeCadburys Dairy Milk, 5 Star, Eclairs, and Gems. The Rs.15.6 billion (USD 380Million) Marico is a leading Indian group in consumer products and services in the GlobalBeauty and Wellness space.There is a huge growth potential for all the FMCG companies as the per capita consumption ofalmost all products in the country is amongst the lowest in the world.Again the demand or prospect could be increased further if these companies can change theconsumers mindset and offer new generation products. Earlier, Indian consumers were usingnon-branded apparel, but today, clothes of different brands are available and the sameconsumers are willing to pay more for branded quality clothes. Its the quality, promotion andinnovation of products, which can drive many sectors.
  4. 4. Indian Tobacco Company Ltd. PGDM IB Roll No.29INDIAN TOBACCO COMPANY LTD. - COMPANY PROFILEITC is one of Indias foremost private sector companies with a market capitalization of nearly US$ 18 billion and a turnover of over US $ 5.1 Billion. ITC is rated among the Worlds Best BigCompanies, Asias Fab 50 and the Worlds Most Reputable Companies by Forbes magazine,among Indias Most Respected Companies by BusinessWorld and among Indias Most ValuableCompanies by Business Today. ITC also ranks among Indias top 10 `Most Valuable (Company)Brands, in a study conducted by Brand Finance and published by the Economic Times. ITC has adiversified presence in Cigarettes, Hotels, Paperboards & Specialty Papers, Packaging, AgriBusiness, Packaged Foods & Confectionery, Information Technology, Branded Apparel, PersonalCare, Stationery, Safety Matches and other FMCG products. While ITC is an outstanding marketleader in its traditional businesses of Cigarettes, Hotels, Paperboards,Packaging and Agri-Exports, it is rapidly gaining market share even in its nascent businesses ofPackaged Foods & Confectionery, Branded Apparel, Personal Care and Stationery.As one of Indias most valuable and respected corporations, ITC is widely perceived to bededicatedly nation-oriented. Chairman Y C Deveshwar calls this source of inspiration "acommitment beyond the market". In his own words: "ITC believes that its aspiration to createenduring 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 internationalcompetitiveness but by also consciously contributing to enhancing the competitiveness of thelarger value chain of which it is a part."ITCs diversified status originates from its corporate strategy aimed at creating multiple driversof growth anchored on its time-tested core competencies: unmatched distribution reach,superior brand-building capabilities, effective supply chain management and acknowledgedservice skills in hoteliering. Over time, the strategic forays into new businesses are expected togarner a significant share of these emerging high-growth markets in India.ITCs Agri-Business is one of Indias largest exporters of agricultural products. ITC is one of thecountrys biggest foreign exchange earners (US $ 3.2 billion in the last decade). The Companyse-Choupal initiative is enabling Indian agriculture significantly enhance its competitiveness byempowering Indian farmers through the power of the Internet. This transformational strategy,which has already become the subject matter of a case study at Harvard Business School, isexpected to progressively create for ITC a huge rural distribution infrastructure, significantlyenhancing the Companys marketing reach.ITCs wholly owned Information Technology subsidiary, ITC Infotech India Limited, isaggressively pursuing emerging opportunities in providing end-to-end IT solutions, including e-enabled services and business process outsourcing.ITCs production facilities and hotels have won numerous national and international awards forquality, productivity, safety and environment management systems. ITC was the first companyin India to voluntarily seek a corporate governance rating.ITC employs over 24,000 people at more than 60 locations across India. The Companycontinuously endeavors to enhance its wealth generating capabilities in a globalizingenvironment to consistently reward more than 3,81,000 shareholders, fulfill the aspirations ofits stakeholders and meet societal expectations. This over-arching vision of the company isexpressively captured in its corporate positioning statement: "Enduring Value. For the nation.For the Shareholder."
  5. 5. Indian Tobacco Company Ltd. PGDM IB Roll No.29Director’s Overview:The Directors’ report to the shareholders basically contains an overview of the Company’sperformance in the fiscal year. It elaborates on the important numbers related to the Profits,Equity, Debts, Assets and Liabilities and gives a brief description of the Company’s financialhealth in its sector.It also provides a description on the internal functioning of the company as in the variousbusinesses run by the company, its impact on the shareholders and it also considers the riskfactor into consideration.Auditors’ Report:The auditing for HM was carried out by Deloitte Haskins & Sells.The Auditors’ Report is directed to the members of ITC Ltd. They attached the Balance Sheet,P&L account and the Cash Flow of the company for the year ended on that date. They make useof accounting Standards as accepted in India for the purpose of auditing and provide areasonable basis for their statements. They conduct the audit in compliance with theAccounting Standards mentioned in the Companies Act, 1956.Reason for selecting Indian Tobacco Company Ltd.ITC Ltd. is one of the top performing companies in its sector. Also it is one of the oldestcompanies that exist in India. ITC Ltd. journey into the current business scenario show itsexemplary performance and success in sustaining and diversifying. ITC is also one of the fewIndian companies who believe in sustainable growth and inclusion. As I would be interning withITC this summer, I took the opportunity to know about the company better in this assignment.
  6. 6. Indian Tobacco Company Ltd. PGDM IB Roll No.29Ratios Calculated:A Liquidity Ratios 1 Current Ratio 2 Quick Ratio 3 Absolute Cash RatioB Leverage Ratios 1 Debt-Equity Ratio 2 Debt- Asset Ratio 3 Interest Coverage RatioC Turnover Ratios 1 Debtors’ Turnover Ratio 2 Fixed Assets Turnover Ratio 3 Total Assets Turnover RatioD Profitability Ratios 1 Gross Profit Margin Ratio 2 Net Profit Margin Ratio 3 EBITDA Margin 4 Operating Expense ratio 5 Return on Capital Employed 6 Return on Total Assets 7 Return on EquityE Valuation Ratios 1 EPS (Basic and Diluted) 2 Price-Earnings Ratio 3 Book Value of Share 4 Dividend per Share 5 Dividend Yield Ratio 6 Dividend Payout Ratio
  7. 7. Indian Tobacco Company Ltd. PGDM IB Roll No.29 ITC Ltd. RATIO ANALYSIS Liquidity Ratios Liquidity R 2011 2010a atios Definition: Current Ratio = Current Assets 1.18 = 10183.97 1.01 = 8127.92 Current Liabilities 8562.78 8049.08 Quick Ratio = Current Assets – Inventory 0.574 = 10183.97 - 5267.53 0.45 = 8127.92 - 4549.07 Current Liabilities 8562.78 8049.08 Cash and Cash Equivalents + Cash Ratio = Short term investments 0.262 = 2243.24 0.14 = 1126.28 Current Liabilities 8562.78 8049.08 Current ratio The current ratio of 1.18 times says that the company is in relatively good short-term financial standings. Also, the ratio has increased over the last year. The ratio is an indication of a companys ability to meet short term debt obligations; the higher the ratio, the more liquid the company is. The reason why the ratio increases mainly is because of a more than proportionate increase of the Current Assets when compared to the Current Liabilities. Industry average: 0.41 Considering the industry average of the FMCG companies, it is evident that ITC is doing an excellent job of maintaining liquidity. Therefore this is a sign of a company in good financial health.
  8. 8. Indian Tobacco Company Ltd. PGDM IB Roll No.29Quick ratioThe small ‘Quick ratio’, i.e. 0.57 times says that the companys financialstrength is not so strong. In general, a quick ratio of 1 or more is accepted bymost creditors; however, quick ratios vary greatly from industry to industryand 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 overthe years. The current assets (less inventories) have again increased morethan 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.Industry average - 0.26Considering the industry average, we see that ITC has been doing really well relatively. As quickratios vary significantly depending on the industry, comparing the industry average with ITC’sratio makes ITC’s financial health look strong and on a growth path.Cash ratioThe cash ratio of 0.26 times says that the company is not in the position to very quicklyliquidate its assets and cover short-term liabilities. But there is no such liquidity need for thecompany and so the small value of the ratio has no such important implications. (The ratio is ofinterest to short-term creditors). The absolute cash ratio follows more or less the same trend asthe other two liquidity measures. The increase again is because of a more than proportionateincrease in the cash items (and near cash items) of ITC Limited.But the ratio has almost doubled from last year’s results i.e. 0.14. This means that even thoughit is on the lower side, ITC will be able to liquidate more easily.
  9. 9. Indian Tobacco Company Ltd. PGDM IB Roll No.29 LEVERAGE RATIOS These are Structural Ratios are based on the proportions of debt and equity in the financial structure of the firm. 20112@)22 2010Debt Ratios Definition: 2011 2010 Debt(Shareholder’s fund + Debt asset ratio = Loan funds) 0.63 = 16052.47 0.616 = 14172.09 Assets 25417.1 23006.18 Interest Earnings Before Interest and Coverage Ratio = Taxes 123.6 = 7209.84 81.4 = 5942.31 Interest Expense Schedule 17, Page 107 58.32 73 Debt/Equity Ratio = Debt (Loan Funds) 0.006 = 99.20 0.007 = 107.71 Equity (Shareholder’s Funds) 15953.27 14064.38 Fixed Charge coverage ratio = PBIT + Depreciation NA NA interest + (repayment of loan)/1-tax rate DEBT EQUITY RATIO The debt-to-equity ratio offers one of the best pictures of a companys leverage. The higher the figure, the higher is the leverage the company enjoys. The ratio of 0.006 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 0.007. Over the years, ITC Limited has shown a mix-match of the debt-equity ratio.
  10. 10. Indian Tobacco Company Ltd. PGDM IB Roll No.29DEBT / ASSETS RATIOThe company exhibits high debt/asset ratio which shows that its assets are financed mainly bydebt rather through equity. Also it has been seen that the company has very high debt to equityratio. And the ratio has increased from 2010 to 2011 which indicates that along with the rise inassets the debt has also increased by large numbers.It was 0.61 for FY’10 and 0.63 for FY’11.The industry analysis shows that the debt to assets ratio should be fairly low thereby stressingthe fact that majority firms are financing assets by equity.INTEREST COVERAGE RATIOThe interest coverage ratio is a measurement of the number of times a company could make itsinterest payments with its earnings before interest and taxes. Lower the ratio, higher is thecompany’s debt burden. This is measured as the ratio between the profit before interest andtaxes to the interest amount paid that year. The ratio of 123.6 times is magnificently very highand hence the company has very sound financial position. It will have no hassles of payinginterests over its loans. Also it is observed that the ratio has increased since the previous yearfrom 81.4.On an average industry basis it is generally observed that FMCG companies have a higherinterest coverage ratios.Fixed Charges Coverage Ratio and Debt Service Coverage Ratio could not been calculated asthere are no Preference Dividends.
  11. 11. Indian Tobacco Company Ltd. PGDM IB Roll No.29 TURNOVER RATIOS Turnover Ratios measure the asset management efficiency of the company. Turnover ratios 2011 2010 Inventory = Sales 5.81 = 30604.39 5.77 = 26259.60 Turnover Ratio Inventory 5267.53 4549.07 Fixed Assets = Net Sales 2.2 = 21167.58 1.98 = 18153.19 Turnover Ratio Fixed Assets 9678.47 9151.39 Schedule 6 Pg.86Total Assets Ratio = Net Sales 1.25 = 21167.58 1.21 = 18153.19 Average Total Assets 16854.32 14957.10 Asset to Equity = Total Assets 1.05 = 16854.32 1.06 = 14957.10 Ratio Owners Equity 15,953.27 14064.38 no. of days in inventory = 365 62.82 = 365 63.25 = 365 Inventory turnover 5.81 5.77 debtors turnover ratioSchedule 9 Pg.103 = Net sales 23.33 = 21167.58 21.15 = 18153.19 Average debtors 907.2 858.07 Averagecollection period = 365 15.64 = 365 17.25 = 365 debtors turnover 23.33 21.15
  12. 12. Indian Tobacco Company Ltd. PGDM IB Roll No.29Inventory turnover ratio:This ratio is used to measure how quickly a company is selling its inventory. A high inventoryturnover ratio shows that a company may be losing out on potential sales because it does notkeep enough stock.The ratio of 5.81 times signifies that the company is efficient in selling its stocks. Also the ratiohas grown more since the last year, making ITC more efficient.Industry Average: 5.44Also it is noticed that ITC has a slightly higher ratio as compared to the industry average, whichalso supports the fact that they have efficient operations, and they do not suffer from stockouts.Debtors’ Turnover Ratio: This ratio shows how many times sundry debtors turn over during the year. The higher theratio better is the efficiency of credit management. The ratio of 23.33 times signifies thatthe company is getting good returns and has no visible risk but benefits out of itsdebtors. The ratio has increased from previous year’s 21.15.Industry Average: 5.55Considering the industry average for receivables turnover ratio, ITC is far exceeding thestandards and is doing extremely well.Average Collection PeriodThe debt collection period of 15.64 days is quiet good and the company is efficient in gettingback its dues.It indicates the number of days; worth of credit sales that is locked in sundrydebtors. Also it is noticed that the no. of days since the last year have come down. In 2010 itwas 17.25, which remains a good sign for ITC.Creditors’ turnover Ratio is not calculated as there are no Credit Purchases.Fixed Assets Turnover ratio:It measures sales per rupee of investment in fixed assets. This ratio measures the efficiencywith which fixed assets are employed. A higher ratio indicates a high degree of efficiency inasset utilization and a low ratio reflects inefficient use of assets.The ratio of 2.2 times signifies that the company is very efficiently utilizing its fixed assets forgenerating sales revenue. Also an increase in the ratio is observed since the last year’s value of1.98 which shows higher utilization.Industry average: 0.38This shows that ITC is doing relatively well, as compared to its counterparts in the industry.Total Assets Turnover ratio:
  13. 13. Indian Tobacco Company Ltd. PGDM IB Roll No.29 This ratio measures the efficiency of assets employed. The company’s asset management is more than the industry standards of 0.78 times compared with 1.21 times in the last year and 1.25 times in FY’11. Therefore ITC displays efficiency there as well. PROFITABILITY RATIOS Profitability Ratios reflect the business operations. 2011 2010 Gross Profit Margin = Gross Profit*100 34.33 = 726816 33.1 = 601531 Net Sales 21167.58 18153.19 ROTA Ratio = Net profit after tax 0.29 = 4987.61 0.27 = 4061.00 Average Total Assets 16854.32 14957.10 Return on PAT - preference Equity Ratio = dividends 0.312 = 4987.61 0.288 = 4061.00 Average Owners Equity 15953.27 14064.38 Earnings Before InterestEarnings Power = and Taxes 1.81 = 30604.39 1.75 = 26259.60 Ratio Average Total Assets 16854.32 14957.10EBITDA ratio = EBITDA 0.374 = 7924.15 0.36 = 6624.02 Net sales 21167.58 18153.19 Net profit margin = Net profit 0.23 = 4987.61 0.22 = 4061.00 Net sales 21167.58 18153.19
  14. 14. Indian Tobacco Company Ltd. PGDM IB Roll No.29Gross Profit MarginThe ratio between the profit before interest and taxes (equal to the operating income, in ourcase) to that of the sales for the given period during which the profit has been earned is ameasure of the profitability of the company for that period. The Profit margin of 34.33% is quietimpressive and the company is making good profits. ITC Limited has done well in the last fewyears and has continuously reported higher and higher profit every subsequent time. The salesof the company 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 hasnot changed significantly. Last year the margin was 33.1%, therefore there has been a slightimprovement in the profit margins.Industry Average: 13.39Considering 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.Net Profit Margin RatioPAT or the profit after tax is directly correlated with the profit before tax. The interestcomponent is the sole parameter that can differentiate the trend followed by the ratio aboveand this one. The net margin of 23% is quiet impressive, and the company is performing well.PAT for ITC Limited, like PBIT, has shown an upward trend. The financing decisions and also thetax have altered the overall impact on the profitability of the company. The percentage has alsoimproved since last year’s 22% showing an upward trend.Industry Average: 26.4%We also observe that as per the industry standards, ITC is some notches below. This could meanthat ITC needs to take some corrective measures.Return on Total Assets:The return on Total Assets is yet another method of calculating the return of the company. Thisis calculated by taking the ratio between the PBIT (Profit before Interest and Taxes) to the TotalAssets of the company.Earning power of the company, i.e. 29% is quiet good and the company is doing well. Even lastyear in 2010, ITC had a ROTA of 27%.Industry Average: 25.7%ITC Ltd. also exceeds the industry standards of 25.7% but quite a margin, therefore suggestingthat the company is getting good returns on the assets that have been invested.
  15. 15. Indian Tobacco Company Ltd. PGDM IB Roll No.29EBITDA Margin:This ratio indicates the operating efficiency of the firm. It has increased from 36% in the lastyear to 37.4% in FY’11 due to a increase in Profit Before tax. Therefore we observe that theoperating 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 EBITDA margin as well. This indicates that theoperations of the company are far more effective than it’s competitors.
  16. 16. Indian Tobacco Company Ltd. PGDM IB Roll No.29 VALUATION RATIOMarket Ratios 2011 2010Definition: Earnings per Share = Net Income 6.49 = 4987.61 5.33 = 4061 Average Number of Common (EPS) Ratio Shares 7680673807 7611844333 Price-Earnings Ratio = Market Price per Share 34.8 = 226 30.01 = 160 Earnings per Share 6.49 5.33 Market Value to = Market Price per Share 10.71 = 226 8.46 = 160 Book Value Ratio Book value per share 21.1 18.9 Book value of Total assets - Misc 16854.32- 14957.10- share = expenditure 21.1 = 647.98 18.9 = 549.33 Schedule 17 Pg. 107 Total no. of shares 7680673807 7611844333
  17. 17. Indian Tobacco Company Ltd. PGDM IB Roll No.29Earnings Per Share:Earnings per share, as it is called, are a companys profit after tax (PAT) divided by its number ofoutstanding (equity) shares. It is therefore measured as the portion of a companys profitallocated to each outstanding share of common stock. EPS serves as an indicator of acompanys profitability. In comparison to the face value of Re.1/share the EPS of Rs.6.49 is verygood. Also the company has done better as compared to last year’s value of Rs.5.51.The industry average remains at 8.61. Therefore ITC offers less EPS as per the industry, but stilldoes a decent job the ratio.Price-Earnings Ratio:Price-Earnings ratio is a measure of the price paid for a share relative to the income or profitearned by the firm per share. A higher P/E ratio means that investors are paying more for eachunit of income. ITC has a PE ratio of 34.8, which means that the shares of ITC might not be veryattractive.Industry Average: 8.87As already mentioned, ITC’s shares might not be very attractive to investors. As seen by theindustry standards also, ITC’s PE ratio is extremely high. Book Value per Share:BV is considered to be the accounting value of each share, drastically different thanwhat the market is valuing the stock at. The book value, i.e. Rs.21.1 is far higher thanthe face value of each share, i.e. Re.1.00. Here “diluted” value in considering numbersof shares is not considered.Market to Book Value ratioThe book-to-market ratio attempts to identify undervalued or overvalued securities by takingthe book value and dividing it by market value. In basic terms, if the ratio is above 1 then thestock is undervalued; if it is less than 1, the stock is overvalued.For ITC the value is 10.71 which makes the shares really undervalued. Also as compared to lastyear the undervaluing has increased.
  18. 18. Indian Tobacco Company Ltd. PGDM IB Roll No.29Yield Ratio 2011 2010Definition: Dividend Yield Ratio = Dividend per share*100 1.96 = 4.45*100 6.25 = 10.00*100 Market Price per share Pg. 28 226 160 Dividend payout Ratio = Dividend Per Share*100 68.56 = 4.45*100 187.6 = 10.00*100 Earnings per Share 6.49 5.33 DIVIDEND YIELD RATIO Dividend yield is a way to measure how much cash flow you are getting for each rupee invested in an equity position. So higher the ratio, better the cash flow. We notice that for FY’10, the ratio was very high as compared to FY’11. It has gone down from 6.25 to 1.96. Therefore the cash flow has decreased for ITC. Industry Average: 1.53 Considering the industry average, ITC is still quite ahead of its competitors in providing a steady cash flow to its investors. DIVIDENT 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: the lower the ratio, the more secure the dividend because smaller dividends are easier to pay out than larger dividends. So the value of 0.68 times is quiet decent. But last year’s 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 their investors happier.
  19. 19. Indian Tobacco Company Ltd. PGDM IB Roll No.29 TREND ANALYSIS Price to Earnings Raio 35 30 25 PE VALUE 20 15 10 5 0 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 PE 14.5 11.4 16.2 18.2 32.1 20.9 24.9 21.4 24.7 28.2 Earnings Per Share 7 6 5 EPS in Rs 4 3 2 1 0 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 EPS 1.6 1.8 2.1 2.5 3 3.6 4.1 4.3 5.3 6.4Source for Historical Values:
  20. 20. Indian Tobacco Company Ltd. PGDM IB Roll No.29 Cash flow statement analysisCash flow from operating activities:ITC Ltd. has given us the cash from operations. The initial information talks about the profit and lossadjustment. The profits for 2010 were 6015.31 and for the yr 2011, it has increased to 7268.16. Theincrease in profits is mostly because of an increase in interest income from both on long term andcurrent investments. The profits are also made from the sale of current investments and long terminvestments. Doubtful and bad advances have also been reduced.The company has adopted similar credit policy as compared to last year and that is why the sundrydebtors have just slightly increased from 858 to 907. The inventory has also not increased much, i.e. inFY’10, it was 4549 which is now 5267. The trade payables have increased from 530 to 918. Overall, thecompany has given similar credit and even enjoyed sufficient credit from its suppliers and so the netcash from operating activities has been balanced because in yr 2010, it was 4641 which has marginallyincreased to 5264.Cash flow from investing activities:The company has invested in ‘purchase of fixed assets’. This amount has been financed partly by sale offixed assets and from the same proceeds of investments. The company again has purchased investmentsmaybe at the end of the yr because the interest received has reduced by half compared to 2010. It hasalso purchased long term investments.The company has made investments in joint ventures and reduced investments in its subsidiaries ascompared to the previous year. Cash has also been generated by selling long term investments from66.47 in 2010 to 103.58. Also the income received from current and long term investments has alsoincreased slightly. Also ITC has reduced the loans that it gave last year from 811 to 239.Overall, the amount used in investing activities has reduced substantially from 3542 to 616.Cash flow from financing activities:It gives us the information about the amount of money either raised or used which could be equity ordebt.For ITC, it can be observed that the company has chosen to finance itself through share capital.Therefore we notice an increase since last year, from 720 to 903. The company has tried to reduce itslong term borrowing from 1.85 to 1.40. There also has been a decrease in repayment of long termborrowings. We notice that ITC has extended credit facilities to quite an extent.Overall, we can conclude that the company has invested largely in the purchase of fixed assets. Thisamount has been raised by funds from operating activities, from financing activities as well asavailability of cash in hand, with scheduled banks and FDs. This indicates that the company is planning
  21. 21. Indian Tobacco Company Ltd. PGDM IB Roll No.29for expansion and so, the positives or negative impact of this expansion should be evaluated in thefuture cash flow statements. Impact of Budget on FMCG Sector in 2012The rise in excise duty will have a negative impact on FMCG companies, which FMCG companies willpass on to consumer.Budget imposed an additional ad-valorem excise on cigarettes, while keeping the fixed rate structureconstant. The additional levy is at the rate of 10 per cent on 50 per cent of retail selling price (MRP),which effectively works out to 5 per cent of MRP. This additional levy is on cigarettes above 65mm oflength, which covers almost the entire cigarette portfolio of ITC. ITC may go for medication of length ofsome of its lower-end brands (reduce the length to sub-65mm) to avoid the additional levy on some partof its portfolio.The increase in excise duty on bidis and cigarettes would narrow the price gap for cigarette products,which is positive for ITC. However, ad valorem imposition is a negative development for the cigaretteindustry.The budget was neutral for the FMCG sector. Even, increase in tax slab will not yield much, as it will justgive Rs 2000 more in the hands of consumer. Bad news is the rise in excise duty by 200 bps to 12 percent will bring future margin pressure on FMCG sector, which is already under pressure due to inputprice inflation. But the sector will go for necessitate price hike.
  22. 22. Indian Tobacco Company Ltd. PGDM IB Roll No.29References