corporate positioning statement "Enduring Value. For the nation. For the Shareholder." corporate positioning statement "Enduring Value. For the nation. For the Shareholder." GLIMPSE market capitalization of nearly US $ 19 billion Asia's 'Fab 50' turnover of over US $ 5 billion Ranks among India's `10 Most Valuable (Company) Brands' Asia's 50 best performing companies - Business Week. Employs over 26,000 people 60 locations across India more than 3, 41,000 shareholders
Financial Position Debt/Equity The debt-to-equity ratio has been hovering around 0 00 0.02:1 since the past 7 years. This shows that investment is not risky in this firm as the company is not depends on debt financing. But is also implies that the firm has not leveraged at all. Equity in the form of The firm has Equity in form of Retained Earnings. The Shares comprise of Equity shares of Re 1 each. Total No. of shares as on 31 st of March 2009 were Approx 377.44 Crores. And the Retained earnings comprises of Rs. 13650.72 Crs. Also the Company issues ESOPs (Employee Stock Option Plans) Regularly.
Cash flows The net turn-over grew by 10.3 %, driven by a robust 20% growth in the non-cigarette FMCG business. The Company’s relentless efforts to create value through international quality products, significant investments in technology and product development and a strong portfolio of brands have enabled it to maintain its leadership position in terms of market standing and share. Segment revenues in FMCG (Others) grew by 20% over last year and Education & Stationery Products business registered an impressive sales growth of 60% over the previous year.
200120022003200420052006200720082009 Equity245248 249376 377 Net Worth353544145366641078969061104371205813735 Avg. Capital Employed 392346145190608275689012103081196413798 Net Turnover420850595866647076399791121641394815388 EBITDA183620462323258530283613429350155393 EBIT169618472086234427163281393045764844 PAT100611901371159318372280270031203264
Cost of Debt Long Term Debt = 46.365 Secured Loans Term Loans = 18.04Other Loans = 0.81 Unsecured Loans Other loans from banks = 27.06
Cost of Debt IgnoredIgnored a Short term Loan from Bank of amount of Rs.50 Crores b Sales tax deferment of Rs. 90.75 Crores c interest on short-term loans
Cost of Debt INTEREST : the interest paid on Term Loans is as on 31 st March, 2009 is 9.47 Crores. TAX RATE: Tax rates taken for computation of cost of debt are 32.60% for the year 2009. In the previous year, tax rate was 32.02% 1 ASSUMPTION : the assumption has been made that the loan has been raised at middle of the year. Thus Interest is calculated on the average of Opening and closing balance of loans.
Cost of Debt Computation of Cost of Debt K d = Long Term Interest / Long Term Debt K d = 9.47/46.365 = 20.42% 20.42 X (1 – t) = 20.42 X (1 – 0.32) = 13.89 %
Cost of Equity BSE Sensex Alpha0.000349752 Beta0.652006636 R Square0.296757148 Adjusted R Square0.296440515 Regression Equation Y= 0.000349752 + 0.652006636X
Cost of Equity The value of the intercept (α=0.000349752) shows that the security provides a return of 0.000349752% when there is no movement in the market i.e. x=0. Also, The value of the slope (β=0.652006636) reflects the sensitivity of stock returns as 0.652006636 times the market returns.
Why Use It ??? ITC is engaged in multiple businesses (ITC has 4+SBU) Each business has different risks and operates in different environments A Firm has: Business Risk ( Due to market conditions\External environments ) Financial Risks ( Due to its capital structure ) So we neutralize the financial risk and only take the business risk of the Proxy firm into consideration
Business Segment Capital Employed (in Rs. crores) Proportion/Weight Cigarette3278.95.26 Others (FMCG)2211.8.176 Hotels2263.95.18 Agri business1052.93.084 Paperboards3764.5.30 Beta of ITC ( β ITC ) = (0.51*0.26) + (0.574*0.176) + (0.544*0.18) + (0.522*0.084) + (0.358*0.3) = 0.49 Capital Employed in business segments of ITC Ltd
Pure play ApproachCAPM 7.4 + (21.25 – 7.4) * 0.483 =7.4 + (21.25 – 7.4) * 0.652 = Cost of equity (Ke )14.09%16.43% Risk Free Rate of Return R f 7.4%Return on Treasury Bills issued by Indian Government for 10 years Market Rate of Return R m 21.25%Average market returns of Sensex on Daily basis * 250
Year Dividend Per Share (DPS) 2004-053.15 2005-064.05 2006-074.75 2007-085.37 2008-09 5.69 CAGR12.55% Cost of Equity (Re) = D1 + g P0 P0 = Market Price per share as on 31 March 2009 Re = 5.69( 1 + 0.1255 ) + 0.1255 208.65 = 15.6%
ITC is very less levered with debt equity of.02 The cost of equity is almost similar to overall Cost of Capital. The Beta Using CAPM and Beta Using Pure Play are almost similar; there is a bit difference between both implying that the risks of individual SBUs are not similar to the overall risk assumed by the ITC. The “Cash EPS > Basic EPS” for all the ten years; this implies that the company has been able to generate the cash profits.
Also the EPS has been consistently increasing depicting the +ve performance of the firm over the years. The Cost of Capital tends to be lower i.e... In the range of 14% - 16%, this implies that the companies have a very low cut off point for any new and existing project. Low cost also adds value to the firm.