EXECUTIVE SUMMARY

The project assigned to me is to study the financial statements of ITC. Through this report, I
made an effort to analyze the environment in which ITC Limited is operating, its financial health
and the value its enduring.

Through an environment, industry and company analysis, my aim to understand the external
factors influencing the company and its decision making. Later, I evaluated the various ratios to
appreciate their impact on company’s performance over the last five years.

A DuPont analysis is also done to check the credibility of company as per shareholders, financial
analysts and other mutual funds. The financial statements of last five years are analyzed, studied
and interpreted in light of company’s performance. A secondary research has been done on
activities being done by the company such as critical decisions of distributing dividends, Issue of
bonus shares and other current news are analyzed and their impact on the bottom line of the
company is assessed.

As a benchmark, I have also analyzed various components of the company vis-à-vis other
competitors in the same segment. Finally, I have also studied the valuation of Fixed Assets,
Inventory, Investments and Employee related liabilities to end with the amount of Economic
Value Added by the players in that segment for the FY 2013.
After analyzing the financial statements I have also done valuation for the company by using
estimates available and have written this report. The DCF valuation has been given more
importance in my project as it is more conservative and also more technical to establish value.
The free cash flows are calculated for the past five years and also the terminal value of these cash
flows has been calculated.

1
A discounting rate has been calculated by using CAPM model and the free cash flows have been
discounted by the discount rate. Also a terminal growth rate is assumed and the future cash flows
have been calculated. With these future cash flows the Free Cash Flow for the Firm (FCFF) and
Free cash flow to Equity (FCFE) are calculated. Also a comparable company multiples approach
has been calculated to compare ITC to its competitors.

2
 THESIS

ITC, India’s largest cigarette manufacturer by revenue, has garnered leading market share
through its popular brands. It's not without its share of challenges, which include competitive
pressures from cheaper substitutes such as chewing tobacco and leaf-rolled tobacco, and the
potential for further government intervention (like the passage of higher taxes). Even so, ITC has
defended its turf for several years by investing in product innovation, and in marketing its core
brands. In addition, ITC has also recently expanded its product set to include lower-priced
products (which are subject to a lower tax rate) to expand its customer reach. This has allowed it
to post solid sales growth and expand operating margins in its cigarette business, despite rising
taxes. We believe ITC will continue to hold a dominant position in the Indian cigarette market
for over a decade, and we think Indian smokers will trade up to more premium brands as the
prevalence of smoking increases (unlike in developed economies, where smoking is declining).

We believe ITC Limited enjoys a narrow economic moat, owing to its brand strength, pricing
power, and the addictive nature of its core product. Large competitors, including Godfrey Philips
and VST Industries, combined, hold approximately 20% share of the Indian cigarette market.
Less than 5% of the total market by value, but 48% by volume, is served by over 300
unorganized cigarette and leaf-rolled tobacco manufacturers, which pose a low-price substitute to
branded cigarettes. By launching branded products at lower price points, ITC has been able to
effectively compete with these unbranded tobacco producers, and improve its market share over
time.

ITC holds a greater-than-majority share of India's organized cigarette market, and has been able
to raise prices while maintaining volume growth. Given that most smokers remain brand loyal
for a long time, and are addicted not only to smoking but also to the taste of their particular
brand, we believe that ITC has a narrow economic moat and will sustain its leadership in the
Indian cigarette market, despite competitive and regulatory pressures.

3
 INTRODUCTION

COMPANY PROFILE
ITC Limited or ITC is an Indian conglomerate headquartered in Kolkata, West Bengal. Its
diversified business includes five segments: Fast Moving Consumer Goods (FMCG), Hotels,
Paperboards & Packaging, and Agri Business & Information Technology.  In 2013-14, the
company had an annual turnover of US$ 8.31 billion and a market capitalization of US$ 45
billion. The company had its registered office at Kolkata. It started off as the Imperial
Tobacco Company, and shares ancestry with Imperial Tobacco of the United Kingdom, but it
is now fully independent, and was rechristened to India Tobacco company in 1970 and then to
I.T.C limited in 1974. The company is currently headed by Yogesh Chander Deveshwar. It
employs over 25,000 people at more than 60 locations across India and is part of Forbes
2000 list. ITC Limited completed 100 years on 24 August 2010. ITC had a diversified
presence in FMCG (Fast Moving Consumer Goods), Hotels, Paperboards and Specialty
Papers, Packaging, Agri-Business and Information Technology. While ITC is an outstanding
market leader in its traditional businesses of Hotels, Paperboards, Packaging, Agri- Exports
and cigarettes, it is rapidly gaining market share even in its nascent businesses of Packaged
Foods & Confectionery, Branded Apparel, Personal care and Stationery.

HISTORY & EVOLUTION

ITC was incorporated on August 24, 1910 under the name Imperial Tobacco Company of
India Limited. As the Company's ownership progressively Indianised, the name of the
Company was changed from Imperial Tobacco Company of India Limited to India Tobacco
Company Limited in 1970 and then to I.T.C. Limited in 1974. In recognition of the
Company's multi-business portfolio encompassing a wide range of businesses - Fast Moving
Consumer Goods comprising 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 - the full stops in the
Company's name were removed effective September 18, 2001. The Company now stands
rechristened as ITC Limited, where ‘ITC’ is today no longer an acronym or an initialized
form. The Company's beginnings were humble. A leased office on Radha Bazar Lane,

4
Kolkata, was the center of the Company's existence. The Company celebrated its 16th
birthday on August 24, 1926, by purchasing the plot of land situated at 37, Chowringhee,
(now renamed J.L. Nehru Road) Kolkata, for the sum of Rs 310,000. This decision of the
Company was historic in more ways than one. It was to mark the beginning of a long and
eventful journey into India's future. The Company's headquarter building, 'Virginia House',
which came up on that plot of land two years later, would go on to become one of Kolkata's
most venerated landmarks.

ITC PERFORMANCE RECORD

In Rs crs. 1995-96 2013-14 17-yr CAGR 95-96 to 12-
13

Net Revenue 2,536 29,606 15.6%

PBDIT 584 11,566 19.2%

PBIT 536 10,771 19.3%

PBT 452 10,684 20.4%

PAT 261 7,418 21.8%

Capital Employed 1,886 23,569 16.0%

ROCE % 28.4 45.7

Market Capitalization 5,571 244246 24.9%

Total Shareholder Returns % 26.4%

Sensex (CAGR 95-96 to 12-13): 10.7%

5
SEGMENT REVENUE FY2013

In the above figure it’s clearly found that the major chunk of the revenue comes from the
cigarettes business which is equivalent to 60%. The other FMCG goods do accommodate 13% of
the total revenue figuring 7012.3 crores for the financial year 2013. The Agri-business revenue
being 7020.73 crores also contribute 13% of the total revenue.

COMPETITORS OF ITC LIMITED

Main competitors of ITC limited

 Hindustan Unilever
 Godfrey Philips India limited
 RTCL Ltd
 VST Industries Ltd
 Marico Ltd
 Nestle India

6
 ITC BUSINESSES
FMCG
The Indian FMCG sector is the fourth largest in the economy and has a market size of US$13.1
billion. Well-established distribution networks, as well as intense competition between the
organized and unorganized segments are the characteristics of this sector. FMCG in India has a
strong and competitive MNC presence across the entire value chain. It has been predicted that
the FMCG market will reach to US$ 33.4 billion in 2015. The middle class and the rural
segments of the Indian population are the most promising market for FMCG, and give brand
makers the opportunity to convert them to branded products. Most of the product categories like
jams, toothpaste, skin care, shampoos, etc., in India, have low per capita consumption as well as
low penetration level, but the potential for growth is huge.

The Indian Economy is surging ahead by leaps and bounds, keeping pace with rapid
urbanization, increased literacy levels, and rising per capita income. The big firms are growing
bigger and small-time companies are catching up as well. According to the study conducted by
AC Nielsen, 62 of the top 100 brands are owned by MNCs, and the balance by Indian
companies. Fifteen companies own these 62 brands, and 27 of these are owned by Hindustan
Lever. Pepsi is at number three followed by Thums Up. Britannia takes the fifth place, followed
by Colgate (6), Nirma (7), Coca-Cola (8) and Parle (9). These are figures the soft drink and
cigarette companies have always shied away from revealing. Personal care, cigarettes, and soft
drinks are the three biggest categories in FMCG. Between them, they account for 35 of the top
100 brands.

The new FMCG businesses comprising Branded Packaged Foods, Personal Care Products,
Education and Stationery Products, Lifestyle Retailing, Incense Sticks (Agarbattis) and Safety
Matches have grown at an impressive pace over the past several years, crossing 7000 crores
mark during the year 2012-2013.

THE TOP COMPANIES IN FMCG SECTOR

7
 1. Hindustan Unilever Ltd.
2. ITC (Indian Tobacco Company)
3. Nestle India
4. Godrej Consumer Products
5. Marico Industries
Rapid Scale up of FMCG businesses

CIGGARETES:

ITC is the market leader in cigarettes in India. With its wide range of invaluable brands,
ITC has a leadership position in every segment of the market. ITC's highly popular portfolio of
brands includes Insignia, India Kings, Lucky Strike, Classic, Gold Flake, Navy Cut, Players,
Scissors, Capstan, Berkeley, Bristol, Flake, Silk Cut, Duke & Royal.

The Company has been able to consolidate its leadership position with single minded
focus on continuous value creation for consumers through significant investments in creating &
bringing to market innovative product designs, maintaining consistent & superior quality, state-
of-the-art manufacturing technology, & superior marketing and distribution. With consumers &
consumer insights driving strategy, ITC has been able to fortify market standing in the long-term,
by developing & delivering contemporary offers relevant to the changing attitudes & aspirations
of the constantly evolving consumer.

8
ITC's pursuit of international competitiveness is reflected in its initiatives in overseas markets. In
the extremely competitive US market, ITC offers high-quality, value-priced cigarettes and Roll-
the-own solutions. In West Asia, ITC has become a key player in the GCC markets through its
export operations.

ITC's cigarettes are manufactured in state-of-the-art factories at Bengaluru, Munger, Saharanpur,

Kolkata and Pune, with cutting-edge technology & excellent work practices benchmarked to the
best globally. An efficient supply-chain & distribution network reaches India's popular brands
across the length & breadth of the country.

FOOD

ITC's Branded Packaged Foods business is one of the fastest growing foods businesses in India,
driven by the market standing and consumer franchise of its seven popular brands - Aashirvaad,
Sunfeast, Bingo!, KITChens of India, mint-o, Candyman and Yippee! The Foods business is
today represented in 4 categories in the market - Staples, Snack Foods, Ready to Eat Foods and
Confectionery.

ITC's uncompromising commitment to the health and safety of its consumers ensures adherence
to the highest levels of quality, safety and hygiene standards in manufacturing processes and in
the supply chain. All ITC-owned manufacturing units are Hazard Analysis and Critical Control
Point (HACCP) certified. The quality performance of all manufacturing units is monitored
continuously online. Going beyond process control, ITC ensures that quality standards are

9
scrupulously adhered to while choosing ingredients that go into the preparation of its food
products.

ITC's Foods brands delight millions of households with a wide range of differentiated, value-
added products developed by leveraging ITC's in-house R&D capabilities, relevant consumer
insights, a deep understanding of the Indian palate gained from its Hotels business, its agri-
sourcing & packaging strengths, exciting, innovative communication and an unmatched
distribution network. The business continues to invest in every aspect of manufacturing,
distribution and marketing to ensure that it can leverage emerging opportunities and fulfill its
aspiration of being the most trusted provider of Branded Packaged Foods in the country. ITC's
Foods business also exports its products to the key geographies of North America, Africa,
Middle East and Australia.

LIFESTYLE RETAILING

ITC's Lifestyle Retailing Business Division has established a nationwide retailing presence
through Wills Lifestyle & John Players.

Synonymous with elegance and style that is effortless and chic, Wills Lifestyle presents a
premium fashion wardrobe for men and women. Offering a tempting choice of Wills Classic

10
formal wear, Wills Sport relaxed wear, Wills Clublife evening wear and Wills Signature designer
wear, Wills Lifestyle offers a truly delightful shopping experience for the discerning customer.

John Players embodies the spirit of the modern youth that is playful, fashionable and cool. John
Players presents a complete wardrobe of meticulously crafted smart formals, trendy casuals,
dazzling party wear, edgy denims & accessories incorporating the most contemporary trends in
an exciting mix of colors, styling and fits.

PERSONAL CARE

In line with ITC's aspiration to be India's premier FMCG Company, recognized for its world-
class quality and enduring consumer trust, ITC forayed into the Personal Care business in July
2005. In the short period since its entry, ITC has already launched an array of brands, each of
which offers a unique and superior value proposition to discerning consumers. Anchored on
extensive consumer research and product development, ITC's personal care portfolio brings
world-class products with clearly differentiated benefits to quality-seeking consumers.

ITC's Personal Care portfolio under the 'Essenza Di Wills', 'Fiama Di Wills', 'Vivel', and
“Engage” and 'Superia' brands has received encouraging consumer response and is being
progressively extended nationally.

11
ITC's state-of-the-art manufacturing facility meets stringent requirements of hygiene and
benchmarked manufacturing practices. Contemporary technology and the latest manufacturing
processes have combined to produce distinctly superior products which rank high on quality and
consumer appeal.

Extensive insights gained by ITC through its numerous consumer engagements have provided
the platform for its R&D and Product Development teams to develop superior, differentiated
products that meet the consumer's stated and innate needs. The product formulations use
internationally recognized safe ingredients, subjected to the highest standards of safety and
performance.

EDUCATION AND STATIONERY

ITC made its entry to the education and stationery business with its Paper Kraft brand in the
premium segment in 2002; and later expanded into the popular segment with its Classmate brand
in 2003. By 2007, Classmate became the largest Notebook brand in the country. Together,
Classmate and Paper Kraft offer a range of products in the Education & Stationery space to the
discerning consumer, providing unrivalled value in terms of product & price. Classmate and
Paper Kraft have become a natural extension of the consumer. Meticulous understanding of

12
consumer needs helped creating a relevant and comprehensive portfolio satisfying the needs of
different sets of consumers. ITC is the manufacturer of India's first Ozone treated environment
friendly Elemental Chlorine Free (ECF) pulp, paper and paperboard. It blends its knowledge of
image processing, printing and conversion garnered from Packaging & Printing Business with its
brand building and trade marketing & distribution strengths resident in its FMCG business to
offer superior value products to consumers.

Paper Kraft Business paper and the papers used in Classmate and Paper Kraft notebooks are
superior in quality and environment-friendly. Other offerings available in education and
Stationery range are safe and certified non-toxic.

SAFETY MATCHES AND AGARBATTIS

13
As part of its strategic initiative to create multiple drivers of growth in the FMCG sector, ITC
commenced marketing safety matches sourced from the small-scale sector. The Safety Matches
business leverages the core strengths of ITC in marketing and distribution, brand building,
supply chain management and paperboard & packaging to offer Indian consumers high quality
safety matches.

ITC's range of Safety Matches includes popular brands like Aim & i Kno. With differentiated
product features and innovative value additions, these brands effectively address the needs of
different consumer segments. ITC also exports safety matches to various markets. The
acquisition of WIMCO Ltd., a subsidiary of ITC has consolidated the market standing of the
Company's Matches business through synergy benefits derived through combined portfolio of
offerings, improved servicing of proximal markets and freight optimization. Through its
participation, ITC aims to enhance the competitiveness of the small and medium scale sectors
through its complementary R&D based product development and marketing strengths, especially
the width and depth of the Company's trade marketing and distribution.

As part of ITC's business strategy of creating multiple drivers of growth in the FMCG sector, the
Company commenced marketing Agarbattis (Incense Sticks) sourced from small-scale and
cottage units in 2003. This Business leverages the core strengths of ITC in nation-wide
distribution and marketing, brand building, supply chain management, manufacture of high
quality paperboards and the creation of innovative packaging solutions to offer Indian consumers
high quality Agarbattis. With its participation in the business, ITC aims to enhance the
competitiveness of the small-scale and cottage units through its complementary R&D based
product development and strengths in trade marketing and distribution.

HOTELS

14
Launched in 1975, ITC Hotels, India's premier chain of luxury hotels, has become synonymous
with Indian hospitality. ITC Hotels pioneered the concept of 'Responsible Luxury' in the
hospitality industry, drawing on the strengths of the ITC groups exemplary sustainability
practices. Responsible Luxury personifies an ethos that integrates world-class green practices
with contemporary design elements to deliver the best of luxury in the greenest possible manner.

The Responsible Luxury commitment of ITC Hotels blends elements of nature to deliver a
unique value proposition to guests, conscious of their responsibility to be planet positive. Today,
these unique interventions have made ITC Hotels the greenest luxury hotel chain in the world
with all its ten premium luxury hotels LEED (Leadership in Energy and Environmental Design)
Platinum certified.

With over 90 hotels in 67 destinations, ITC Hotels has set new standards of excellence in the
hotel industry in Accommodation, Cuisine, Environment and Guest Safety.

ITC Hotels properties are classified under four distinct brands:

 ITC Hotels has an exclusive tie-up with Starwood Hotels & Resorts in bringing its
premium brand, the 'Luxury Collection', to India. ITC Hotels - Luxury Collection are
super deluxe and premium hotels located at strategic business and leisure locations. The
ten hotels which are part of this collection are: ITC Grand Chola in Chennai, ITC Maurya
in Delhi, ITC Maratha in Mumbai, ITC Sonar in Kolkata, ITC Grand Central in Mumbai,

15
 ITC Windsor & ITC Gardenia in Bengaluru, ITC Kakatiya in Hyderabad and ITC
Mughal in Agra and ITC Rajputana in Jaipur.

 WelcomHotels offer five-star hospitality for the discerning business and leisure traveller.
Currently there are three hotels under this brand namely, WelcomHotel Rama
International Aurangabad, WelcomHotel Vadodara and WelcomHotel Grand Bay
Vishakhapatnam. Two other WelcomHotel Sheratons - Sheraton Park Hotel and Towers,
Chennai and Sheraton New Delhi offer warm, comforting services to the global traveller
and a chance to connect.

 Fortune Hotels operates mid-market to upscale properties in the first-class, full-service

business hotel segment all over India, in major metros, mini metros, state capitals and
business towns, promising business and leisure travelers a wide choice of destinations
and accommodation.

 WelcomHeritage brings together a chain of palaces, forts, havelis and resorts that offer a
unique experience. WelcomHeritage endeavors to preserve ancient royal homes and the
historical Indian grandeur and opulence for the future Indian generations.
WelcomHeritage provides a fine range of hotel services inside these architectural legacies
present across India.

PAPERBOARDS AND SPECIALITY PAPERS

ITC's Paperboards and Specialty Papers Division is India's largest, technologically advanced and
most eco-friendly, paper and paperboards business. The business caters to a wide spectrum of
packaging, graphic, communication, writing, printing and specialty paper requirements through
its four world-class manufacturing units, 7sales offices and a network of more than 60 dealers in
India, along with a robust international trade network of distributors / agents and 5 finishing
operations close to the market for providing faster service to the customers.

Having pioneered many specialty applications, ITC's Paperboards and Specialty Papers business
enjoys market leadership in the value-added paperboards segment, and also has a significant
share of the Indian fine papers market. It is the largest exporter of coated boards from India.

16
ITC takes great pride in servicing a large cross-section of industry requirements - from cigarette
tissues to FMCG cartons, from electrical insulation papers to PLA Coated Boards, from
decorative laminate base to writing and printing papers and much more. ITC straddles the entire
spectrum of paperboards - from 100% virgin, food-grade boards which are from renewable and
sustainable sources to 100 % recycled boards

Some of ITC's prominent  brands are:

Folding Box Boards: CyberXL Pac, Cyber Cypak, Cyber Propac, Cyber Premium, Pearl XL

Solid Bleached Sulphate Boards: Safire Graphik, Art Maestro, Carte Persona, Carte Lumina, 
Digiart

Poly coated boards: Indobev, Indobarr

Recycled boards: Eco Blanca, Eco Natura, NeoWhite Bliss

Fine Papers: AlfaZap, Alfa Plus, Hi Brite, Paperkraft ,  Perma White

Specialty Papers : Bible Printing, Pharma Print, Superfine Printing

Each of the units specialises in a range of products. Together, these units have capacity close to
6,75,000 TPA of paper and paperboards that meet stringent quality requirements across the
world. All four manufacturing units are ISO 9001, ISO 14001 and OHSAS 18001 certified and
meet strict Environment, Health and Safety norms.

ITC's Paperboards and Specialty Papers business has also been a first-mover in the field of
collecting and recycling post-consumer waste from residential localities, corporate and
educational institutes through its WOW programme. ITC reaches out directly to consumers with
its Wealth Out of Waste (WOW) campaign, that has been successfully implemented in select
locations across southern India, and has plans to expand into other locations across the Country.

17
PACKAGING

ITC's Packaging & Printing Business is the largest value added converter of paperboard
packaging in South Asia. It converts over 70,000 tonnes of paper, paperboard and laminates per
annum into a variety of value-added packaging solutions for the food & beverage, personal
products, cigarette, liquor and consumer goods industries.

The Division, which was set up in 1925 as a strategic backward integration for ITC's Cigarettes
business, is today India's most sophisticated packaging house. State-of-the-art technology, world-
class quality and a highly skilled and dedicated team have combined to position ITC as the first-
choice supplier of high value added packaging.

The Division supplies value-added packaging to ITC's various FMCG businesses. Its client list
includes several well-known national and international companies like Nokia, Colgate
Palmolive, Pernod Ricard, Diageo, British American Tobacco, Philip Morris International, Agio
Cigars, UB Group, Tata Tetley, Tata Tea, Reckitt Benckiser, Radico Khaitan, Akbar Brothers,
Surya Nepal, VST Industries, etc. With three packaging factories at Tiruvottiyur near Chennai
(in the South), Munger in Bihar (in the East), and Haridwar (in the North of India), the Company
offers a comprehensive product range in packaging backed by its packaging expertise over the
decades and cutting edge technology making it truly a "One stop shop for Packaging".

Product Lines

ITC's Packaging Business has 3 major product lines

 Carton Board Packaging

o Printed Cartons
o Fluted cartons
 Flexible Packaging
 Tobacco Packaging

18
AGRI-BUSINESS

ITC's pre-eminent position as one of India's leading corporates in the agricultural sector is based
on strong and enduring farmer partnerships that has revolutionized and transformed the rural
agricultural sector. A unique rural digital infrastructure network, coupled with deep
understanding of agricultural practices and intensive research, has built a competitive and
efficient supply chain that creates and delivers immense value across the agricultural value chain.
One of the largest exporters of agri products from the country, ITC sources the finest of Indian
Feed Ingredients, Food Grains, Marine Products, Processed Fruits & Coffee.

ITC's Agri Business Division is the country's second largest exporter of agri-products. It
currently focuses on exports and domestic trading of:

 Feed Ingredients - Soyameal

 Food Grains - Wheat
 Marine Products - Shrimps and Prawns
 Processed Fruits - Fruit Purees/Concentrates, IQF/Frozen Fruits, Organic Fruit Products
 Coffee

A Customer Centric Approach

ITC's Agri Business Division continues to use innovation as its core strategy to retain its position
as the one-stop shop for sourcing agri-commodities from India. Besides setting benchmarks in
quality, reliability and value-added services, ITC is a trendsetter in customer care particularly in
commodity trading. Major customers include Cargill, Marubeni, Toepfer, among others, who
source agriculture commodities and food products from India. Customers can log
onto www.ITCabd.com, and readily access information on crop production and forecast, market
updates, the latest shipment status and the prevailing foreign exchange rates.

Sourcing for ITC

ITC's Agri business is progressively aligning its commodity portfolio with the sourcing needs of
the Company's Foods business to generate higher order value from its agri procurement

19
infrastructure. The business has commenced procurement of chipstock potatoes, one of the
critical raw materials in the manufacture of the Company's 'Bingo!' brand of potato chips. The
acquisition of Technico, an Australian company with technology leadership in the production of
early generation seed potatoes, helped the business access a ready pipeline of new high-yielding
varieties of chipstock potato seeds.

AGRIBUSINESS –ILTD

ITC pioneered the cultivation and development of Leaf Tobaccos in India. Nearly a century of
creating customer delight ensures that globally, ITC's Leaf Tobacco business is synonymous
with being "The One Stop Shop for Quality Indian Tobaccos". The Leaf Tobacco business'
partnership with the farmer is also almost a 100 years old. In a spirit that truly embodies the
Company's "commitment beyond the market", ITC has helped the Indian farmer grow quality
leaf tobaccos and linked him to global markets.

ITC is the largest buyer, processor and exporter of leaf tobaccos in India - creating a global
benchmark as the single largest integrated source of quality tobaccos. Serving customers in 50
countries across more than 70 destinations, ITC co-creates and delivers value at every stage of
the leaf tobacco value chain.

ITC buys nearly 50 per cent of all cigarette tobacco types grown in India. It has a team of
experienced, highly skilled and professional buyers and classifiers who source and segregate
tobaccos to exacting customer specifications. A large inventory base of quality tobaccos provides
an edge in serving customers through product customization, portfolio rationalization, product
bundling and value added services. This strategic direction insulates customers from crop
fluctuations, a key 'winning proposition' acknowledged worldwide.

ITC's comprehensive and sophisticated R&D facilities cover all aspects of cultivation, product
development and processing through fundamental and applied research. Thus, ITC's value
proposition to its customers is "On Time In Full" delivery of quality tobaccos spanning across all
tobacco types at competitive prices.

20
FY2013 AGRI BUSINESS HIGHLIGHTS

ITC’s Agri business reported a sales growth of 26% YoY(year on year) to 72.0 bn in FY’13,
driven by strong performance of leaf tobacco exports. Currently, agri business which contributes
~20% to the total revenues is the fastest growing business followed by FMCG segment, which
contributing ~ 25% to the revenues. The company trades in agriculture product like tobacco
leaves, soya, wheat and coffee; where the company enjoys strong competencies in procurement
which has been created by long-term association with farmers through its E-choupal program.
ITC has recently commissioned a threshing plant in Mysore having an annual capacity of 35 mn
kgs green leaf tobacco, which in turn will augur well for the company.
ITC INFOTECH

ITC Infotech is a fully owned subsidiary of ITC Ltd. Formed in 2000, ITC Infotech has today
carved a niche for itself in the arena of global IT services and solutions. The company has
established technology Centers of Excellence (CoE) to deepen capabilities and incubate cutting-
edge technical competencies. A robust outsourcing model, comprehensive suite of differentiated
solutions & services and focus on excellence in execution has provided the company a leadership
position in chosen domains.

With over 5600 employees, ITC Infotech conforms to the highest standards in process quality,
with ISO 27001, ISO 9001 and CMMi Level 3 accreditations. ITC Infotech’s customer
centric go-to-market approach is organized by industry verticals:

 Banking Financial Services & Insurance (BFSI),

21
  Consumer Packaged Goods,
 Retail, Manufacturing,
 Media & Entertainment, Travel, Hospitality, Life Sciences and Transportation &
Logistics.

The company enjoys the rare advantage of having a practitioner's expertise in some of these
industry verticals, which has in part been bequeathed by parent ITC Limited, which runs market
leading businesses in these verticals. While an enterprise range of technology capabilities and
world class quality processes form the foundation of ITC Infotech's cutting-edge IT service
strength ensures that IT services delivery always places business needs ahead of technology.

World’s leading companies trust ITC Infotech

 Services for the Banking, Financial Services & Insurance industry

 ITC Infotech is working with a bevy of Fortune listed global customers. Today, ITC
Infotech has a customer base of over 200 globally; 9 out of the top 10 customers have
been with ITC Infotech for over 5 years.

 The company has established 7 development centers globally, with offices in 18 countries
and client engagements in 35+ countries. ITC Infotech's service delivery footprint spans
five continents and is spread across 140 countries.

22
 FINANCIAL STATEMENT ANALYSIS

INTRODUCTION

The term financial analysis also known as analysis and interpretation of financial
statements refers to the process of determining financial strength and weakness of the firm by
establishing strategic relationship between the items of the balance sheet, profit and loss account
and other operative data.

The purpose of financial analysis is to diagnose the information contained in financial

statement so as judge the profitability and financial soundness of firm the analysis and
interpretation of financial statements is essential to bring out the mystery behind the figures in
financial statements. Financial statements analysis is an attempt to determine the significance
meaning of the financial statement data so earnings, ability to pay interest and debt maturities
and profitability of a sound dividend policy.

The term financial statement analysis includes both analysis and interpretation. A
distinction should, therefore, be made between two terms analysis is used to mean the
simplification of financial data by methodical classification of the data given in the financial
statements. Interpretation means exploring the meaning and significance of the data so
simplified.

MEANING AND SCOPE OF FINANCIAL MANAGEMENT:

Financial is considered as the life-blood of any business. It is defined as the provision of

money at the time it is needed. All the plans of businessman would remain mere dreams unless
adequate money is available to convert them into reality.

23
 Finance management is very important to every type of organization. It refers to that
part of managerial activity concerned with the procurement and utilization of funds for business
purposes. The financial manager is also responsible for affective utilization of funds. He is to
point out situations where the funds are being kept idle or where a proper use of funds is not
being made. This is also as an important consideration in dividend decision. Hence, it is crucial
to employ the funds properly and profitably.

The funds have to invest that the company can produce at its optimum level without
endangering its financial solvency. Thus financial implications of each asset are to be properly
analyzed. For this, the financial manager must have a detailed knowledge of techniques of capital
budgeting and qualifying uncertainty.

He must also keep in view the needs of working capital and ensure that while true
forms enjoy an optimum level of working capital they do not keep to much Funds blocked
inventories, book debts and cash etc.

The twin aspects of procurement and effective utilization of funds therefore, are the
crucial tasks which the financier manager performs.

Thus financial management is concerned with:

(a) Estimation of the fixed and working capital requirements,

(b) Formulation of capital,
(c) Procurement of fixed and working capital, and
(d) Management of earnings.

IMPORTANCE OF FINANCIAL MANAGEMENT:-

The importance of financial management cannot be over emphasized. In every

organization where funds are involved, sound financial management is necessary. As Collin
Brooks has remarked, Bad production management and bad sales management have slain in
hundreds, but faulty financial management has slain in thousands.

24
 Financial management also helps in ascertain how the company would perform in future
it helps in indicating whether the firm will generate enough funds to meet its various
obligations. It also helps in profit planning, capital spending, measuring costs, controlling
inventory accounts, receivable, etc.

Functions of financial management:-

In the context of achieving the goals like maximization of risks, liquidity, profitability,
wealth maximization etc. The total functions of financial management can be dividing into three
different groups.

 Liquidity function

 Profitability functions

 Management functions

 Managing funds and

 Management assets

Liquidity function:-
In seeking sufficient liquidity to carry the firms activities the financial managers perform the
following the tasks. Forecasting the cash flows and managing the flow of internal funds.

Profitability function:-

The other function of financial manager is to provide reasonable and adequate return on capital
employed. With respect tom profitability important financial functions are cost control and
measuring required return.

25
Managing functions:-
Managing functions are divided into two types. They are

1. Managing assets.

2. Managing funds

1. Managing assets:-
Assets are the resources by which the firm is able to conduct business. The
function of asset management recognizes the decision making role of financial manager.
Asset management includes knowing the total amount of the assets needed by the firm to
carry out its operation.

2. Managing funds:-

Funds may be viewed as the liquid assets of a firm the term includes cash held by the
firm, money, borrowed by the firm and money gained from purchases of common and
preferred stock.

Financial Ratio Analysis

 A Liquidity Ratio provides information on a company's ability to meet its short−term,
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.

26
  A Market Ratio describes the company's financial condition in terms of amounts per
share of stock.

Liquidity Ratio

INTERPRETATION

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

Current ratio indicates ITC's ability to meet short-term debt obligations. The current ratio
measures whether or not a firm has enough resources to pay its debts over the next 12 month.

27
Profitability Ratio

INTERPRETATION

An increase in profit margin compared to the previous period's margin signals an improvement
in both operational efficiency and profitability means the company improved 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.

28
Activity Ratio

INTERPRETATION

A high debtor turnover ratio implies either that the company operates on a cash basis or that its
extension of credit and collection of accounts receivable are efficient. Also, a high ratio reflects a
short lapse of time between sales and the collection of cash, while a low number means
collection takes longer.

A low inventory turnover ratio can be seen because of rescission but it is very well aligned with
FMCG industry average.

29
Leverage Ratio

INTERPRETATION

A very high interest cover suggest that the company is not capitalizing on the relatively cheaper
source of finance (i.e. debt) and in such instances an increase in gearing ratio may actually add
value to the enterprise.

Interest coverage is an indication of the margin of safety it does not run the risk of non-payment
of interest cost which could potentially threaten its solvency.

30
Market Ratio

PE Ratios 33.2

Current Share price 337.70

INTERPRETATION

Generally, stocks that are expected to grow earnings will have a higher P/E, ITC companies with
high growth have a higher ratio. ITC with the higher P/E is said to be overvalued by the market.

The share price should reflect a firm’s future value creation potential, greater value creation can
indicate greater future dividends from the company. A higher P/E ratio should reflect greater
expected future gains because of perceived growth opportunities and/or some competitive
advantages and/or lesser risk, but at the same time it indicates that the share price is relatively
more expensive.

31
Du Point Analysis

DuPont analysis tells us that ROE is affected by three things:

 Operating efficiency, which is measured by profit margin

 Asset use efficiency, which is measured by total asset turnover
 Financial leverage, which is measured by the equity multiplier

Mar'13 Mar'12

 ROA (%) 23.55 22.65

 ROE (%) 36.21 35.58

 ROCE (%) 52.45 51.66

The return on capital employed is another measure of the returns that the business generates.
This is expressed as the ratio between the profit before interest and taxes (PBIT) to the Capital
Employed (Loans and Owner’s Fund) in the business. The ROCE is increased to 52.45% from
51.66% signifies that the company is getting good return out of its investment decisions.

The return on Total Assets is yet another method of calculating the return of the company. This
is calculated by taking the ratio between the PBIT (Profit before Interest and Taxes) to the Total
Assets of the company. Earning power of the company, i.e. 23.55%is quiet good and the
company is doing well.

Trend Analysis

From the analysis we can see that company is growing at steady rate and remarkable points are:

1. We can see below that company’s capital is increased by 105.33%, this is because of
issue of bonus shares in the year 2010-2011. This shows that the company’s owned fund

32
 is increasing. Reserve and Surplus is constantly increasing which shows that the
company’s accumulated profits are increasing. It shows that company is making more
profit.
2. By analyzing sources of fund we can state that, company is more dependent on owners
fund rather than borrowed fund.
3. Investment is also growing at increasing rate. In last 4 years it has increased by 89.28%.
4. Current asset is increasing by 45.09%. This is due to increase in cash and bank balance
and other current assets.

Net income and expenses are increasing by 51.02% and 47.38% respectively. This shows that the
income of the company is 3.64% higher than its expenses.

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. The reason why the ratio increases/decreases
mainly is because of a more than proportionate increase/decrease of the current assets when
compared to the current liabilities.

Current Ratio
2.5

1.5
RATIO

Current Ratio
1 Linear (Current Ratio)

0.5

0
2009 2010 2011 2012 2013

YEAR

Debt-Equity Ratio: The debt-to-equity ratio offers one of the best pictures of a company's
leverage. The higher the figure, the higher is the leverage the company enjoys. Mathematically,

33
 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 ten years, ITC Limited has shown a mix-match of the debt-
equity ratio. From the graph it is evident that the company’s D/E ratio has been declining and

this affects the leverage of the company. The difference between company’s long term and
total debt - equity ratio is close to 0 which shows total debt of company comprises of long term
debts. The company can go for raising funds through loans as it has very low debt as compared
to its equity.

D/E RATIO
0.014
0.012
0.01
0.008
D/E RATIO
DER

0.006
0.004
0.002
0
2009 2010 2011 2012 2013
YEAR

Earnings per share: (EPS): 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 a company's profitability. The PAT (profit after tax or earnings) for ITC
Limited has risen by over 41.54% in the last five years of operation. The PAT has considerably
increased over the years due to which the EPS has risen consistently. In 2010 there was a 100%
bonus issue which is reflected in 2011. Diluted EPS values are taken into consideration as they
are more conservative.

34
 EARNINGS PER SHARE
10
9 9.39
8 7.88
7
6.45
6
5 5.31 EPS
EPS

4 4.29
3
2
1
0
2009 2009.5 2010 2010.5 2011 2011.5 2012 2012.5 2013
YEAR

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 company’s debt burden. This is measured as the ratio between the profit
before interest and taxes to the interest amount paid that year.

The graph below shows the interest coverage ratio of ITC Limited over the five year period. It is
observed that ITC has reported a gradual and continuous increase in profit over the last five years
of operation. Also, the company’s interest amount has been fluctuating over the last five years.
This has resulted in a two way push in the figure for Interest coverage ratio, which is measured
as shown below. In FY2013 the interest coverage ratio has dropped significantly, this is because
the interest paid on the debt during this year is very much high compared to the earlier four
consecutive years.

35
 INTEREST COVERAGE RATIO
600

500

400
INTEREST COVERAGE
300 RATIO
ICR

200

100

0
2009 2010 2011 2012 2013
YEAR

PBIT (Operating Income) to Sales: 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.

As reported earlier, 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 profit. Because the growth in the two
components has nearly been equal, the ratio between them has not changed significantly. The
Indian economy staged a remarkable recovery to grow at 7.2% during the year, facilitated by
policy stimulus and increased government spending. A faster pace of growth in investments, the
sharp pick up in capital inflows and a resurgent stock market are some of the key positives that
augur well for the economy.

In the given socio-economic environment in 2009 which created a deepest downturn, the
financial year 2009-2010 had a smart recovery due to which the growth in the Industrial sector
was fuelled which created a renewed momentum in Manufacturing which grew by 8.9% during
the year after eight consecutive quarters of decline in growth rates since 2007/08.

36
 PBIT TO SALES
41809.82
40000

34871.86

30000 30604.39
26259.6
23143.53 RATIO
RATIO

20000 PBIT
GROSS sales

10000 10771
8975
7337
6080
4844

0
2008 2009 2010 2011 2012 2013 2014
YEAR

PAT to Sales: PAT or, the profit after tax is directly correlated with the profit before tax. The
interest component is the sole parameter that can differentiate the trend followed by the ratio
above and this one. PAT for ITC Limited, like PBIT, has shown an upward trend. The financing
decisions and also the tax have altered the overall impact on the profitability of the company.

37
 PAT TO SALES
60000

50000 41809.82
PAT to SALES(In Millions)

40000 34871.86
30604.39 GROSS sales
30000 26259.6 PAT
23143.53 RATIO
20000

10000
7418.39
3263.59 4061 4987.61 6162.37
0
2009 2010 2011 2012 2013
YEAR

Market Capitalization: The market capitalization of the company is defined as the market value
of the number of equity shares being traded in the market at that point of time. It is evident from
the graph below that the market capitalization for the company has increased during the last five
years by about 250.17%. Also the socio-economic environment has facilitated this increase after
a slump in 2007. As the manufacturing sector reached new heights, the Market Cap made a
considerable surge. The Company’s shares are among the most liquid and actively traded shares
on the Indian Stock Exchanges and consistently rank among the top frequently traded shares,
both in terms of number of shares traded as well as in terms of value. The Company’s market
capitalization stood at 2,44,245 crores (US$ 45.04 billion) on 31st March, 2013 as compared to `
1,77,360 crores (US$ 34.87 billion) on 31st March, 2012.

38
 MARKET CAPITALISATION
300000

250000 244245
M.CAP(In Millions)

200000
177360
150000 140408 MARKET CAP

100000 100476
69751
50000

0
2009 2010 2011 2012 2013
YEAR

Return on Total Assets (ROTA): The return on Total Assets is yet another method of
calculating the return of the company. This is calculated by taking the ratio between the PBIT
(Profit before Interest and Taxes) to the Total Assets of the company.

The total assets for ITC Limited have increased by over 74.5% in the last five years. As reported
earlier, the profit before interest and tax, PBIT, has shown approximately a 80% increase in the
stipulated time period. Therefore, ROTA, which is a measure of these two figures, has shown an
increase over the years under consideration. The return on total assets has risen from about 23%
in 2004-05 to over 30.1% in 2009-2013.

39
 Return on Assets (%)
25

21.80
20
21.2581
19.625
16.714
15 17.65
Return on Assets (%)
%

10

0
2009 2010 2011 2012 2013
YEAR

Price-Earnings Ratio (PER): Price-Earnings ratio is a measure of the price paid for a share
relative to the income or profit earned by the firm per share. A higher P/E ratio means that
investors are paying more for each unit of income. The Bonus issue of 1:1 in 2011 has also
affected the stock price of the company.

P/E RATIO
353
303
253
203 P/E RATIO
EPS
P/E

153 stock price

103
53
3
2009 2010 2011 2012 2013
YEAR

40
CROSS SECTIONAL ANALYSIS

CROSS-SECTIONAL ANALYSIS-CIGGARETES
35,000.00

30,000.00

25,000.00

20,000.00 ITC Mar '13

Godfrey Phillip Mar '13
VST Mar '12
Kothari Product Mar '13
15,000.00 Golden Tobacco Mar '13

10,000.00

5,000.00

0.00
Net Net Sales PBDIT PBT PAT Dividend Earning
Worth Per Share
(Rs)
-5,000.00

As clearly seen from the above graph, ITC is the market leader in FMCG-Cigarettes segment
with more than 85% of the market share. Godfrey Philip is the immediate market player in the
Cigarettes segment. The market cap of Godfrey Philip is 30,105 crores. The introduction of a
new segment of filter cigarettes of length not exceeding 65 mm announced in the Union Budget
2012, was a positive step towards arresting the growth of illegal cigarette trade. The industry has
responded swiftly making significant investments and launched several offerings in the new
segment. While initial response from the market has been encouraging, the high central Excise
Duty rate of 689 per thousand cigarettes applicable to this segment coupled with a steep increase

41
in the rate and incidence of VAT, have made it difficult for the legitimate industry to fully
counter the menace of illegal cigarettes.

NET WORTH
24,000.00
22,287.85
21,000.00
18,000.00 18,791.89
15,000.00 15,953.27
NET WORTH

13,735.0814,064.38 GODFREY PHILIP

12,000.00
ITC
9,000.00
6,000.00
3,000.00
0.00 578.45 666.52 790.25 920.91 1041.72
2008 2009 2010 2011 2012 2013 2014
YEAR

42
 CROSS-SECTIONAL ANALYSIS-FMCG
35000

30000

25000

ITC
20000 Hindustan Unilever
Nestle India
Godrej Consumer Products
15000

10000

5000

0
NET NET SALES PBIT PBT PAT DIVIDEND
WORTH

Cigarettes account for 17% of the top 100 FMCG sales, and just below the personal care
category. ITC alone accounts for 60% volume market share and 70% by value of all filter
cigarettes in India. Therefore due to its high market share in the cigarettes segment ITC as a
whole stood out as the market leader in FMCG. Apart from cigarettes the other close competitor
in FMCG is HUL.

43
The market cap of ITC is the highest as compared to its peers. ITC holds the maximum market
cap compared to its competitors due to the diversified growth drivers it possesses and also due to
the strong position it is having in its cigarettes segment. The immediate competitor to ITC is
HUL with its establishment in the FMCG market are way back in 1932.

MARKET CAP

27,468.53
47,497.76
ITC
HUL
267,095.58 NESTLE
GODREJ

134,902.22

44
 VALUATION REPORT

Every asset, financial as well as real, has a value. The key to successfully investing in and
managing these assets lies in understanding not only what the value is but also the sources of the
value. Any asset can be valued, but some assets are easier to value than others and the details of
valuation will vary from case to case. Thus, the valuation of a share of a real estate property will
require different information and follow a different format than the valuation of a publicly traded
stock.

Valuation is useful in a wide range of tasks. The role it plays, however, is different in different
arenas. The following section lays out the relevance of valuation in portfolio management,
acquisition analysis and corporate finance.

Approaches to Valuation

Analysts use a wide range of models to value assets in practice, ranging from the simple to the
sophisticated. These models often make very different assumptions about pricing, but they do
share some common characteristics and can be classified in broader terms. There are several
advantages to such a classification -- it makes it easier to understand where individual models fit
into the big picture, why they provide different results and when they have fundamental errors in
logic.
In general terms, there are four approaches to valuation

1. Discounted cash flow (DCF) analysis

2. Multiples method
3. Market valuation
4. Comparable transactions method

1. Discounted Cash flow Valuation

While discounted cash flow valuation is one of the four ways of approaching valuation
and most valuations done in the real world are relative valuations, we will argue that it is the
foundation on which all other valuation approaches are built. To do relative valuation correctly,
we need to understand the fundamentals of discounted cash flow valuation. To apply option

45
pricing models to value assets, we often have to begin with a discounted cash flow valuation. In
this section, we will consider the basis of this approach, a philosophical rationale for discounted
cash flow valuation and an examination of the different sub-approaches to discounted cash flow
valuation.

Basis for Discounted Cash flow Valuation

This approach has its foundation in the present value rule, where the value of any asset is the
present value of expected future cash flows that the asset generates.

The cash flows will vary from asset to asset -- dividends for stocks, coupons (interest) and the
face value for bonds and after-tax cash flows for a real project. The discount rate will be a
function of the riskiness of the estimated cash flows, with higher rates for riskier assets and
lower rates for safer projects. We can in fact think of discounted cash flow valuation on a
continuum. At one end of the spectrum, you have the default-free zero coupon bond, with a
guaranteed cash flow in the future. Discounting this cash flow at the riskless rate should yield the
value of the bond. A little further up the spectrum are corporate bonds where the cash flows take
the form of coupons and there is default risk.
These bonds can be valued by discounting the expected cash flows at an interest rate that reflects
the default risk. Moving up the risk ladder, we get to equities, where there are expected cash
flows with substantial uncertainty around the expectation. The value here should be the present
value of the expected cash flows at a discount rate that reflects the uncertainty.

The Underpinnings of Discounted Cash flow Valuation

In discounted cash flow valuation, we try to estimate the intrinsic value of an asset based
upon its fundamentals. What is intrinsic value?

46
 For lack of a better definition, consider it the value that would be attached to the firm by
an all-knowing analyst, who not only knows the expected cash flows for the firm but also
attaches the right discount rate(s) to these cash flows and values them with absolute precision.
Hopeless though the task of estimating intrinsic value may seem to be, especially when valuing
young companies with substantial uncertainty about the future, we believe that these estimates
can be different from the market prices attached to these companies. In other words, markets
make mistakes. Does that mean we believe that markets are inefficient? Not quite. While we
assume that prices can deviate from intrinsic value, estimated based upon fundamentals, we also
assume that the two will converge sooner rather than later.

Categorizing Discounted Cash Flow Models

There are literally thousands of discounted cash flow models in existence. Oftentimes,
we hear claims made by investment banks or consulting firms that their valuation models are
better or more sophisticated than those used by their contemporaries. Ultimately, however,
discounted cash flow models can vary only a couple of dimensions and we will examine these
variations in this section.
Equity Valuation, Firm Valuation and Adjusted Present Value (AP V) Valuation
There are three paths to discounted cash flow valuation -- the first is to value just the equity stake
in the business, the second is to value the entire firm, which includes, besides equity, the other
claimholders in the firm (bondholders, preferred stockholders, etc.) and the third is to value the
firm in pieces, beginning with its operations and adding the effects on value of debt and other
non-equity claims. While all three approaches discount expected cash flows, the relevant cash
flows and discount rates are different under each. The value of equity is obtained by discounting
expected cash flows to equity, i.e., the residual cash flows after meeting all expenses,
reinvestment needs, tax obligations and net debt payments (interest, principal payments and new
debt issuance), at the cost of equity i.e., the rate of return required by equity investors in the firm.

47
 The dividend discount model is a specialized case of equity valuation, where the value of
the equity is the present value of expected future dividends. The value of the firm is obtained by
discounting expected cash flows to the firm, i.e., the residual cash flows after meeting all
operating expenses, reinvestment needs and taxes, but prior to any payments to either debt or
equity holders, at the weighted average cost of capital, which is the cost of the different
components of financing used by the firm, weighted by their market value proportions

The value of the firm can also be obtained by valuing each claim on the firm separately. In
this approach, which is called adjusted present value (APV), we begin by valuing equity in the
firm, assuming that it was financed only with equity. We then consider the value added (or taken
away) by debt by considering the present value of the tax benefits that flow from debt and the
expected bankruptcy costs.

Value of firm = Value of all-equity financed firm + PV of tax

Benefits + Expected Bankruptcy Costs

48
In fact, this approach can be generalized to allow different cash flows to the firm to be
discounted at different rates, given their riskiness. While the three approaches use different
definitions of cash flow and discount rates, they will yield consistent estimates of value as long
as you use the same set of assumptions in valuation. The key error to avoid is mismatching cash
flows and discount rates, since discounting cash flows to equity at the cost of capital will lead to
an upwardly biased estimate of the value of equity, while discounting cash flows to the firm at
the cost of equity will yield a downward biased estimate of the value of the firm.

3. Market Valuation

Market valuation, as it is the simplest way to value a publicly traded firm. A publicly traded firm
is one that is registered on a stock exchange (like the NSE or BSE). The company’s stock can be
bought and sold on that exchange. Most companies we are familiar with, such as The Coca-Cola
Company, IBM, and General Motors, are publicly traded. Every publicly traded company is
required to publish an annual report, which includes financial figures such as annual revenues,
income, and expenses. The value of a publicly traded firm is easy to calculate. All you need to do
is find the company’s stock price (the price of a single share), multiply it by the number of shares
outstanding, and you have the equity market value of the company. (This is also known as
market capitalization or “market cap”).The market price of a single share of stock is readily
available from YAHOO Finance and GOOGLE Finance and from various quote services
available on the Internet; the number of shares outstanding can be obtained from the cover of the
most recent 10-K or 10-Q of the company,
Example
Company A stock price $60/share

No. of shares outstanding= 200 million

___________________________
Equity Market Value (market cap) = $60 x 200 million = $12 billion

Once you determine the market value of a firm, you need to figure out either the discount or
premium that it would sell for if the company were put on the market. When a company sells for
a discount it is selling for a value lower than the market value; when it sells for a premium, it is
selling for a value greater than the market value. Whether a company sells at a premium or a
discount depends on those supply and demand .Typically, if someone wants to acquire a firm, it
49
will sell for a price above the market value of the firm. This is referred to as an acquisition
premium. If the acquisition is a hostile takeover, or if there is an auction, the premiums are
pushed even higher. The premiums are generally decided by the perception of the synergies
resulting from the purchase or merger.

4. Comparable Transaction method

To use the “comparable transactions” technique of valuing a company, you need to look at the
“comparable” transactions that have taken place in the industry and accompanying relevant
metrics such as “multiples” or ratios(e.g., price paid: EBITDA). With the comparable
transactions method, you are looking for a key valuation parameter. That is, were the companies
in those transactions valued as a multiple of EBIT, EBITDA, revenue, or some other parameters.
If you figure out what the key valuation parameter is, you can examine at what multiples of those
parameters the comparable companies were valued. You can then use a similar approach to value
the company being considered.

VALUATION METHODOLOGY FOLLOWED

The DCF method is one of most scientific methods amongst all the valuation methods in the
terms of conceptual framework. As DCF Analysis gives a more conservative value we followed
DCF analysis by calculating the free cash flows. The valuation is conducted by using discounted
cash flow analysis in which free cash flows are generated.

WACC CALCULATION

Assumptions

 CAPM was used to find the cost of equity

 Rm and Beta has been calculated using S&P CNX 500 index for the period 2003-2013

 Rf calculated on 10 year government bonds since horizon used is 10 years.

50
The company’s free cash flows are calculated by using PBT, interest, tax rate and net working
capital. After calculating the free cash flows the future cash flows are calculated by assuming the
growth rate of 10% and from this with a discount rate of 12.47% the discounted cash flows are
calculated. The discount rate will be a function of the riskiness of the estimated cash flows, with
higher rates for riskier assets and lower rates for safer projects.

Taking the WACC calculations we get the discount rate. By using the following formula we
create the discounted cash flows where

n= number of years

Discounted Cash Flows = Free cash flows/(1+discount rate)^n

The stable long term growth is assumed to be 5%. The terminal value is calculated by taking the
Future cash flows, WACC and Growth%(G). The terminal value of an asset is its anticipated
value on a certain date in the future.  An asset's terminal value is a projection that is useful in
budget planning, and also in evaluating the potential gain of an investment over a specified time
period. 

The present value of the firm is calculated by using the future cash flows. Through this we find
the value of the firm. When we divide the value of firm to the no.of shares outstanding we get
the share price of each share. In this case we got the intrinsic value of as 67.58 whereas the
market value is 309.10. The company’s goodwill and the growth in the market over the years
give the stipulated market value.

51
 FINDINGS

ITC has posted a strong performance across all financial parameters, leveraging its corporate
strategy of creating multiple drivers of growth. This performance is even more encouraging
when viewed against the backdrop of the extremely challenging business context in which it was
achieved, namely, the continued economic slowdown, steep increase in taxes /duties on
Cigarettes, gestation costs relating to the new FMCG businesses and recent investments in the
Paperboards, Paper and Packaging and Hotels businesses.
 Gross Revenue for the year FY2013 grew by 19.9% to 41809.82 crores.Net Revenue at
29605.58 crores grew by19.4% primarily driven by a 26.4% growth in the non-cigarette
FMCG segment, 26.4% growth in Agri business segment and 13.4% growth in the
Cigarettes-segment.
 Profit before tax increased by 20.1% to 10684.18 crores while Net Profits at 7418.39
crores registered a growth of 20.4%.
 Earnings per Share for the year stand at 9.45. Cash flows from Operations aggregated
9596.24 crores compared to 8333.56 crores in the previous year
 Continuing with the Company’s chosen strategy of creating multiple drivers of growth,
the Company is today, the leading FMCG marketer in India, a trailblazer in ‘green
hoteliering’ and the second largest Hotel chain in India, the clear market leader in the
Indian Paperboard and Packaging industry and the country’s foremost Agri-business
player. The Company’s wholly-owned subsidiary, ITC InfoTech India Limited, is one of
India’s fast growing Information Technology companies in the mid-tier segment.
 The Company is one of India’s most admired and valuable corporations with a current
market capitalization of over 260000 crores and has consistently featured amongst the top
10 private sector companies in terms of market capitalization and profits. Additionally,
over the last 17 years, the Company’s Net Revenue and Net Profit recorded an impressive
compound growth of 15.6% and 21.8% per annum respectively.
 During the five year period, Return on Capital Employed improved substantially from
28.4% to 45.7% while Total Shareholder Returns, measured in terms of increase in
market capitalization and dividends, grew at a compound annual growth rate of over

52
26%, placing the Company amongst the foremost in the country in terms of efficiency of
servicing financial capital.

53
 RECOMMENDATIONS

Non cigarette FMCG business will provide strong earning visibility

ITC’s non-cigarette FMCG business grew by 26% YoY in FY’13, surpassing the industry
growth, a sign that ITC is fast gaining market share in the Indian FMCG industry, which is still
dominated by HUL, with a 15% market share. In a short span of time, ITC has penetrated
successfully in segments like food & confectionery and personal care products. The company has
leveraged its strong distribution network developed over the years for its cigarette business to
penetrate the FMCG market. The company plans to enter into dairy products soon. Its foods
division already has positive cash flows; the personal care division would take at least another
six months to turn positive. Consequently we expect non-cigarette businesses to add to the
earnings in FY’15 in a better way.

Strong pricing power would aid ITC in maintaining healthy margin growth

During FY’13, ITC has reported 16.8% YoY growth in revenue from its Cigarette business to
271.4 bn, contributing 41% of total revenues on account of ~ 16-17% rise in cigarette prices in
FY’13. While in Q4FY’13, net sales grew by ~11% to 3.6 bn, due to ~2.5% volume growth. The
launch of new 64 mm new variant cigarette and strong pricing power in cigarette business helped
the company to counter increase in excise duty. With the recent hike in a pack of 10 cigarettes of
69 mm Gold Flake and Gold Fake Premium would further placed ITC in to better position to
compete with cheaper substitutes that are available via unorganized/illicit channel as hike in the
regular-sized cigarette brand is positive will push the consumers to premium cigarette brands as
it would reduce the difference between the two brands, thus bolstering margins.

54
Risk

The major risks facing ITC stem from potential changes in government regulations related to
taxation, manufacturing licenses, and advertising or distribution bans. More specifically, if the
government drastically increases the excise tax rate on cigarettes (similar to past actions), the
company's production volumes and profitability could suffer. Apart from regulatory risks, we
also believe there is a risk that ITC management may expand further into less profitable
businesses--and away from its core competencies in cigarettes--which would not be in the best
interest of its shareholders.

55
 CONCLUSION

 ITC has strengthened its market share in FMCG sector via the launch of new products
with innovative ideas, penetration into new segments and enhancing distribution channels
The company has launched several FMCG products to enhance its market share. The
products have met with encouraging consumer response.

 The company’s revenue from the cigarettes business, which contributed 44.3% to net
sales, grew 16.8% YoY in FY’13, due to higher price realization and volume growth.
Revenues from both non-cigarette FMCG and agri business rose ~26.0% YoY each, in
FY13. Paper board revenue increased 9.0% YoY with product mix enrichment and higher
volumes but the steep hike in input prices particularly of wood, coal and chemicals
restrained segmental profit growth in the paper board segment. Hotel business witnessed
a muted growth of 6.5% YoY, due to a slowdown in the growth of foreign tourist
arrivals.

 Healthy revenue growth and improved operational efficiency across all segments will
continue to drive growth momentum in the next quarter. Moreover, higher return form
cigarette segment and improving contribution from other FMCG segment will continue to
result in to improve Return on equity (ROE) and Return on capital employed (ROCE) in
the coming years.

 The steps taken to introduce cheaper cigarettes in order to win over the other tobacco
products have significantly reaped profits which is a good sign of innovative
development.

56
 ANNEXURE

Comparative Balance Sheet Statement

Particulars MAR'14 MAR'13

(₹ Cr.) (₹ Cr.) Absolute %Change

change

EQUITY AND LIABILITIES

Share Capital 781.84 773.81 8.03 1.04%

Share Warrants & Outstanding’s

Total Reserves 18,010.05 15,179.46 2830.59 18.65%

Shareholder's Funds 18,791.89 15,953.27 2838.62 17.79%

Long-Term Borrowings 0 0 0 0.00%

Secured Loans 0 0 0 0.00%

Unsecured Loans 77.32 86.58 -9.26 -10.70%

Deferred Tax Assets / Liabilities 872.72 801.85 70.87 8.84%

Other Long Term Liabilities 15.52 20.82 -5.3 -25.46%

Long Term Trade Payables 0 0 0 0.00%

Long Term Provisions 107.12 93.82 13.3 14.18%

Total Non-Current Liabilities 1,072.68 1,003.07 69.61 6.94%

Current Liabilities

Trade Payables 1,424.84 1,395.31 29.53 2.12%

Other Current Liabilities 3,371.27 3,067.77 303.5 9.89%

Short Term Borrowings 1.77 1.94 -0.17 -8.76%

Short Term Provisions 4,303.95 4,012.46 291.49 7.26%

57
Total Current Liabilities 9,101.83 8,477.48 624.35 7.36%

Total Liabilities 28,966.40 25,433.82 3532.58 13.89%

ASSETS

Non-Current Assets 0 0 0 0.00%

Gross Block 14,144.35 12,765.86 1378.49 10.80%

Less: Accumulated Depreciation 5,045.16 4,420.75 624.41 14.12%

Less: Impairment of Assets 0 0 0 0.00%

Net Block 9,099.19 8,345.11 754.08 9.04%

Lease Adjustment A/c 0 0 0 0.00%

Capital Work in Progress 2,269.26 1,322.60 946.66 71.58%

Intangible assets under development 7.49 10.8 -3.31 -30.65%

Pre-operative Expenses pending 0 0 0 0.00%

Assets in transit 0 0 0 0.00%

Non-Current Investments 1,953.28 1,563.30 389.98 24.95%

Long Term Loans & Advances 1,193.61 1,146.47 47.14 4.11%

Other Non-Current Assets 0 0 0 0.00%

Total Non-Current Assets 14,522.83 12,388.28 2134.55 17.23%

Current Assets Loans & Advances

Currents Investments 4,363.31 3,991.32 371.99 9.32%

Inventories 5,637.83 5,269.17 368.66 7.00%

Sundry Debtors 986.02 885.1 100.92 11.40%

Cash and Bank 2,818.93 2,243.24 575.69 25.66%

Other Current Assets 136.89 93.26 43.63 46.78%

Short Term Loans and Advances 500.59 563.45 -62.86 -11.16%

Total Current Assets 14,443.57 13,045.54 1398.03 10.72%

58
 Net Current Assets (Including Current Investments) 5,341.74 4,568.06 773.68 16.94%

Total Current Assets Excluding Current 10,080.26 9,054.22 1026.04 11.33%

Investments

Miscellaneous Expenses not written off 0 0 0 0.00%

Total Assets 28,966.40 25,433.82 3532.58 13.89%

Contingent Liabilities 287.08 255.17 31.91 12.51%

Total Debt 89.12 99.2 -10.08 -10.16%

Book Value (in ₹) 23.97 20.55 3.42 16.64%

Adjusted Book Value (in ₹) 23.97 20.55 3.42 16.64%

Comparative Income statement

Parameter MAR'14 MAR'13 Absolute Change %
change

(₹ Cr.) (₹ Cr.)

Gross Sales 42,105.51 35,220.89 6,884.62 19.55%

Less :Inter divisional transfers 0 0 0.00 0.00%

Less: Sales Returns 0 0 0.00 0.00%

Less: Excise 12,204.24 10,073.43 2,130.81 21.15%

Net Sales 29,901.27 25,147.46 4,753.81 18.90%

EXPENDITURE: 0.00

Increase/Decrease in Stock -246.35 -65.59 -180.76 -275.59%

Raw Materials Consumed 12,312.13 9,697.02 2,615.11 26.97%

Power & Fuel Cost 550.11 453.02 97.09 21.43%

Employee Cost 1,387.01 1,257.62 129.39 10.29%

59
Other Manufacturing Expenses 1,157.02 1,053.51 103.51 9.83%

General and Administration Expenses 1,234.39 1,049.68 184.71 17.60%

Selling and Distribution Expenses 2,088.32 1,954.62 133.70 6.84%

Miscellaneous Expenses 800.09 878.92 -78.83 -8.97%

Expenses Capitalised 0 0 0.00 0.00%

Total Expenditure 19,282.72 16,278.80 3,003.92 18.45%

PBIDT (Excl OI) 10,618.55 8,868.66 1,749.89 19.73%

Other Income 967.1 825.34 141.76 17.18%

Operating Profit 11,585.65 9,694.00 1,891.65 19.51%

Interest 105.91 97.96 7.95 8.12%

PBDT 11,479.74 9,596.04 1,883.70 19.63%

Depreciation 795.56 698.51 97.05 13.89%

Profit Before Taxation & Exceptional Items 10,684.18 8,897.53 1,786.65 20.08%

Exceptional Income / Expenses 0 0 0.00 0.00%

Profit Before Tax 10,684.18 8,897.53 1,786.65 20.08%

Provision for Tax 3,265.79 2,735.16 530.63 19.40%

PAT 7,418.39 6,162.37 1,256.02 20.38%

Extraordinary Items 0 0 0.00 0.00%

Adj to Profit After Tax 0 0 0.00 0.00%

Profit Balance B/F 1,972.59 548.67 1,423.92 259.52%

Appropriations 9,390.98 6,711.04 2,679.94 39.93%

Equity Dividend (%) 525 450 75.00 16.67%

Earnings Per Share (in ₹) 9.39 7.88 1.51 19.11%

Book Value (in ₹) 28.14 23.97 4.17 17.41%

60
Common size Balance Sheet Statement
Particulars Mar'13 Mar'14

EQUITY AND LIABILITIES

Share Capital 2.699127 3.042445

Share Warrants & Outstanding’s 0 0

Total Reserves 62.17566 59.68219

Shareholder's Funds 64.87479 62.72463

Long-Term Borrowings 0 0

Secured Loans 0 0

Unsecured Loans 0.26693 0.340413

Deferred Tax Assets / Liabilities 3.01287 3.152692

Other Long Term Liabilities 0.053579 0.08186

Long Term Trade Payables 0 0

Long Term Provisions 0.369808 0.368879

Total Non-Current Liabilities 3.703187 3.943843

Current Liabilities 0 0

Trade Payables 4.918941 5.486042

Other Current Liabilities 11.63855 12.06177

Short Term Borrowings 0.006111 0.007628

Short Term Provisions 14.85842 15.77608

Total Current Liabilities 31.42203 33.33152

Total Liabilities 100 100

61
ASSETS

Non-Current Assets 0

Gross Block 48.8302 50.19246

Less: Accumulated Depreciation 17.41728 17.38138

Less: Impairment of Assets 0 0

Net Block 31.41291 32.81108

Lease Adjustment A/c 0 0

Capital Work in Progress 7.834111 5.200163

Intangible assets under development 0.025858 0.042463

Pre-operative Expenses pending 0 0

Assets in transit 0 0

Non-Current Investments 6.743261 6.14654

Long Term Loans & Advances 4.120671 4.507659

Other Non-Current Assets 0 0

Total Non-Current Assets 50.13681 48.7079

Current Assets Loans & Advances 0 0

Currents Investments 15.06335 15.69296

Inventories 19.46334 20.71718

Sundry Debtors 3.404013 3.480012

Cash and Bank 9.731724 8.81991

Other Current Assets 0.366677

Short Term Loans and Advances 1.728175 2.215357

Total Current Assets 49.86319 51.2921

62
Net Current Assets (Including Current 18.44116 17.96057
Investments)

Total Current Assets Excluding Current 34.79984 35.59914

Investments

Miscellaneous Expenses not written off 0 0

Total Assets 100 100

Contingent Liabilities

Total Debt

Book Value (in ₹)

Adjusted Book Value (in ₹)

Common size Income Statement

Particulars Mar'14 Mar'13

Gross Sales 100.00 100.00

Less :Inter divisional transfers 0 0

Less: Sales Returns 0 0

Less: Excise 28.9849 28.60073

Net Sales 71.0151 71.39927

EXPENDITURE: 0 0

Increase/Decrease in Stock -0.58508 -0.18622

Raw Materials Consumed 29.24114 27.53201

Power & Fuel Cost 1.306504 1.286225

Employee Cost 3.294129 3.570665

Other Manufacturing Expenses 2.747906 2.991151

General and Administration Expenses 2.931659 2.980277

63
Selling and Distribution Expenses 4.959731 5.549604

Miscellaneous Expenses 1.900203 2.495451

Expenses Capitalised 0 0

Total Expenditure 45.79619 46.21916

PBIDT (Excl OI) 25.21891 25.18011

Other Income 2.296849 2.343325

Operating Profit 27.51576 27.52344

Interest 0.251535 0.27813

PBDT 27.26422 27.24531

Depreciation 1.889444 1.983226

Profit Before Taxation & Exceptional Items 25.37478 25.26208

Exceptional Income / Expenses 0 0

Profit Before Tax 25.37478 25.26208

Provision for Tax 7.756206 7.765732

PAT 17.61857 17.49635

Extraordinary Items 0 0

Adj to Profit After Tax 0 0

Profit Balance B/F 4.684874 1.557797

Appropriations 22.30345 19.05415

Equity Dividend (%) 1.246868 1.277651

Earnings Per Share (in ₹) 0.022301 0.022373

Book Value (in ₹) 0.066832 0.068056

64
65
66
 VALUATION RESULTS

ITC valuation

YEAR 2008 2009 2010 2011 2012 2013

PBIT 4844 6080 7337 8975 10771

Tax rate 32.37% 32.48% 31.37% 30.74% 30.56%
Depreciation 549.41 608.71 655.99 698.51 795.56
CAPEX 1580.15 1247.9 1087.8 2331.6 2085.81
17591.4
current assets 8248 8989 11614 13037 14463 7
10330.7
current liabilities 4465 4696 7819 8477.48 9126.21 3
working capital 3783 4293 3795 4559.52 5336.79 7260.74
Net working capital 510 -498 764.52 777.27 1923.95

3964.02 3839.05 4265.18

FCF 1735.2572 6 3 3805.725 2

Where

FCF-Free Cash Flows

EBIT-Earnings Before Income And Tax

CAPEX- Capital Expenditure

67
 growth
rate @
years 10%
present value @
FCF 11.15%
2013 (base year) 4265.182
2014 4691.7 4221.052812
2015 5160.87 4177.3802
2016 5676.957 4134.159443
2017 6244.653 4040.255581
2018 6869.118 4049.054835
2019 7556.03 4007.16178
2020 8311.633 3879.379729
2021 9142.796 3924.67151
2022 10057.08 3884.065372

SUM OF PRESENT
VALUE : 36317.18126

growth
rate @
Years 20%
present value @
FCF 11.15%
4265.18
2013 (base year) 2
5118.21
2014 8 4604.784885
6141.86
2015 2 4971.427676
7370.23
2016 4 5367.263348
8844.28
2017 1 5794.616301
10613.1
2018 4 6255.996006
SUM OF 12735.7 PRESENT
VALUE: 2019 7 6754.111747 57411.88
15282.9
2020 68 2 7291.888526
2021 18339.5 7872.484239
2022 22007.4 8499.30822
 growth
rate @
Years 30%
present value @
FCF 11.15%
2013 (base year) 4265.182
2014 5544.737 4988.516959
2015 7208.158 5834.522759
2016 9370.605 6824.003227
2017 12181.79 7981.290324
2018 15836.32 9334.842484
2019 20587.22 10917.94443
2020 26763.38 12769.52564
2021 34792.4 14935.11771
2022 45230.12 17467.97393

SUM OF PRESENT VALUE: 91053.73

WACC calculation
2009 2010 2011 2012 2013
Total debt 177.55 107.71 99.2 89.12 77.6
Interest 18 65 69 77 87
Interesr rate (I) 10% 60.35% 69.56% 86.40% 112%
Equity 13,735.08 14,064.38 15,953.27 18,791.89 22,287.85
Wd 1.28% 0.7600% 0.618% 0.472% 0.347%
We 0.987 0.992 0.994 0.995 0.997
tax rate 32.37% 32.48% 31.37% 30.74% 30.56%

Kd=I*(1-t) 6.86% 40.75% 47.74% 59.84% 77.85%

Risk free rate (Rf) 8.05% 8.05% 8.05% 8.05% 8.05%
Rm 13.10% 13.10% 13.10% 13.10% 13.10%
Market risk premium 5.05% 5.05% 5.05% 5.05% 5.05%
Beta 0.58 0.58 0.58 0.58 0.58
Ke=Rf+beta*(Rm-Rf) 10.98% 10.98% 10.98% 10.98% 10.98%
WACC= (Wd*Kd)+ 11.2096
(We*Ke) 10.93% 11.2052% 11.2062% % 11.2110%
Average WACC 11.15%

The above table represents WACC calculation

69
 15085.6 67845.1797
Cash flow in 2023 1 33011.1 7
215508. 471587. 969216.853
Terminal value 8 2 8
Discounted terminal 74880.7 163857. 336764.486
value 7 9 9

111197. 221269. 427818.224

PV of the firm 9 8 3

The above table represents the discounted cash flows for different growth rates.

70
REFERENCES

www.yahoo.in/finance

www.google.com/finance

Bloomberg Finance

www.moneycontrol .com

www.itcportal.com

www.morningstar.in

www.dionglobal.in

71