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ORGANIZATION STUDY AND RATIO ANALYSIS

INDUSTRY PROFILE

1.1 SOCIO-ECONOMIC ENVIRONMENT

Following one of the deepest downturns in recent times, the global economy

staged a smart recovery during 2009/10, especially in the latter half, driven by an

extraordinary level of coordinated international action in the form of policy stimulus,

monetary as well as fiscal. As per the International Monetary Fund (IMF), world

output is estimated to grow by 4.2% in 2010 after a decline of 0.6% in 2009 with the

emerging and developing economies – led by China and India – set to grow by 6.3%

in 2010 against a modest 2.4% in 2009 and a sharp rebound by advanced economies

with a growth in output estimated at 2.3% in 2010 against a decline of 3.2% in 2009.

However, the pace and shape of recovery remains uncertain with concerns about the

recovery losing momentum once the stimulus is withdrawn. Recent developments in

Europe, with Greece, Spain and Portugal facing severe challenges in honouring their

external debt obligations, have amplified such concerns. While high levels of

unemployment and fiscal deficit and contraction of credit to productive sectors are the

key concerns for advanced economies, developing economies are faced with the

challenges emanating from high rates of inflation, sharp escalation in asset prices,

exchange rate volatility and increased capital inflows.

The Indian economy entered 2009/10 against the backdrop of a significant

slowdown in growth rate, with the GDP growing at just 6% during the second half of

2008/09. A delayed and severely sub-normal monsoon coupled with continued

recession in the developed world for the better part of 2008/09 served to exacerbate

the macroeconomic context. Yet, the economy staged a remarkable recovery to grow

at 7.2% during the year, facilitated by policy stimulus and increased government

spending. The enhanced allocations for social sector schemes like the National Rural

Employment Guarantee Scheme (NREGS), higher spends on rural infrastructure

creation, the implementation of the Sixth Pay Commission recommendations and the

scheme of debt relief to farmers acted as powerful catalysts to induce a consumption-

led recovery. Much of the growth was fuelled by the Industrial sector, with renewed

momentum in Manufacturing – which grew by 8.9% during the year after eight

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ORGANIZATION STUDY AND RATIO ANALYSIS consecutive quarters of decline in growth rates since 2007/08. While Agricultural

output declined by 0.2%, the Services sector grew, although at a slower pace of 8.7%

against 9.8% in 2008/09. The broad based nature of the recovery, a faster pace of

growth in investments after a marked decline in 2008/09, the sharp pick up in capital

inflows and a resurgent stock market are some of the key positives that augur well for

the economy. The major concern during the year was the rising food inflation –

especially in the second half. While the overall wholesale price index (WPI) based

inflation was 9.9% on a year-on-year basis in March 2010, food inflation was as high

as 16.6%, reflecting the severe adverse impact of a deficient monsoon. With persistent

supply side pressures, inflation became more generalized towards the end of the year,

with inflation in non-food manufactured products rising to 4.7% in March 2010 from

(–) 0.4% in November 2009. While inflation is expected to moderate going forward,

the trend of rising international commodity prices, particularly oil, and the revival of

private consumption pose upside risks. This apprehension is reflected in RBI’s view

that ‘‘the domestic balance of risks shifts from growth slowdown to inflation’’.

Accordingly, a related challenge in the near to medium term would be the

effective management of the burgeoning fiscal deficit. 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. Although consensus estimates point to a robust

performance of the Indian economy in 2010/11, with the GDP growth estimated to be

above 8%, it would still be well below the average of nearly 9% per annum achieved

during the 4 years preceding the economic slowdown. As aforementioned, the

combination of the threat of inflationary pressures and the inherent risks to global

economic recovery poses a tough challenge to maintaining and stepping up the growth

momentum to the desired double-digit level. With a fairly young population, skilled

manpower, rising savings and investment rates, a vibrant service sector, a potentially

large source of domestic demand (particularly rural) and the emergence of globally

competitive firms, India has multiple growth drivers which hold out the promise of a

stable and sustained future growth. The economic impact of these strengths will get

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ORGANIZATION STUDY AND RATIO ANALYSIS further augmented by the current and planned investments in infrastructure

development.

High levels of sustained economic growth is a critical necessity for India to

realize its oft quoted ‘demographic dividend’ through the creation of employment

opportunities for the nearly 15 million people expected to enter the working age each

year, the majority of whom would be from rural India. As observed in the Economic

Survey 2009-10, growth is necessary for eradicating poverty but is not a sufficient

condition. In other words, policies for promoting growth need to be complemented

with policies to ensure that more and more people join in the growth process and,

further, that there are mechanisms in place to redistribute some of the gains to those

who are unable to partake in the market process and, hence, get left behind. Equally,

the manner of industrial growth continues to take an immeasurable toll of finite

natural resources. Indeed, the key challenge for India is to sustain high rates of

economic growth even while addressing the problems of inequitable income

distribution and over-exploitation of environmental resources. A comprehensive

growth strategy for rural India, including the agricultural sector which continues to

underperform, is necessary to address the serious issues relating to sustainability and

inclusive growth. The government’s focus on social sector programs such as Bharat

Nirman, NREGS, Sarva Shiksha Abhiyan, food security legislation and strategies to

improve benefit delivery mechanisms have the potential to transform the Indian rural

landscape.

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ORGANIZATION STUDY AND RATIO ANALYSIS 1.2 TOBACCO IN INDIA

Tobacco is a principal cash crop of National importance. It has been playing a

prominent role in the development of Nation's Economy. Although the cultivation of

Tobacco is restricted to 0.3% of the total cultivated area, it provides employment to

large number of people on the one hand. On the other hand, it makes significant

contribution to National Exchequer by way of excise revenue and foreign exchange

earnings. Tobacco being a labor intensive crop provides employment to more than 60

lakhs people who are engaged in the farming curing, re drying, packaging, grading,

manufacturing distribution, export and retailing activities. The bidi industry which

provides employment to around 44.00 lakhs essentially unskilled rural folks mostly

women is also arresting the influx of rural labor to urban centres.

Although there is nationwide anti-Tobacco campaign, the commercial

importance of Tobacco can never be underestimated due to the revenue earning

potentiality and employment generation capacity of the crop. Presently there is a call

for substitution of Tobacco with other crops, but the research findings show that there

is no economically viable alternative crop which is as remunerative as Tobacco to the

farmer.

Botanically, the Tobacco plant belongs to the family Solanacea and genus

Nicotiana. The genus embraces over 60species of which two alone are cultivated.

India grows the cultivated species, viz. Nicotiana tabacum and Nicotiana rustica. The

largest area is under Nicotiana tabacum which is grown all over the country where as

Nicotina rustica is confined to North and North Eastern States i.e., Uttar Pradesh,

Bihar, West Bengal and Assam.

About 5 to 6 per cent of the total area under Tobacco is accounted for Nicotiana

rustica varieties. The cultivation of Nicotiana tabacum has country-wise spread and

this type also accounts for more than 80% of the exchange earnings.

Specific types and varieties of Tobacco have been developed for use in

cigarette, bidi, cigar, cheroot, hookah, chewing, snuff and hookah paste. Rustica types

are used in chewing and snuff whereas tabacum types are used for all purposes.

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Even though the cultivation of Tobacco is spread all over the country, the

commercial cultivation of Tobacco is concentrated in States like Andhra Pradesh,

Karnataka, Gujarat, Maharastra, Bihar, Tamilnadu and West Bengal etc. Cigarette

Tobacco is mostly cultivated in Andhra and Karnataka, whereas bidi Tobacco is

grown in Gujarat, Karnataka and Maharastra. Cigar and Cheroot Tobacco are also

grown in Tamilnadu, Andhra Pradesh and West Bengal and Chewing Tobacco is

grown in Tamilnadu, Gujarat, Bihar, West Bengal and U.P. Hookah Tobacco is grown

in UP, and West Bengal.

The total area and production of Tobacco in India for the year 1997-98 were

463.5 thousand ha and 646 million kgs respectively.

India ranks fourth in the total tobacco consumption in the world. But India's

cigarette consumption ranks tenth in the world. Out of the total production, only 19%

of the total consumption of Tobacco is in the form of cigarette whereas 81% is in

other forms like, chewing, bidi, snuff, Gutkas paste, Jarda, hookah paste etc. The per

capita consumption of cigarette in India is one of the lowest in the world in

comparison to major Tobacco consuming countries like Zimbabwe, UK, Brazil,

U.S.A and Pakistan. The annual level for demand of cigarette in India remains the

same at 96 billion sticks as it was 15 years ago, despite the cumulative growth in

population by nearly 35 percent during the same period. However the consumption of

Tobacco has been a matter of national debate in view of the emerging anti Tobacco

drive in the country.

Tobacco is traditional item of India's foreign trade. India is one of the leading

Tobacco exporting countries in the world. India accounts for 5.8% of the international

trade and ranks 5th after Brazil, U.S.A. Turkey and Zimbabwe. The principal market

for India Tobacco is U.S.S.R, U.K, Japan and Middle East countries.

Market and marketing system play a dominant role in ensuring remunerative

price for commercial crop like Tobacco. There has been significant improvement in

the marketing of VFC Tobacco with establishment of Tobacco Board. The production

and marketing of VFC Tobacco have been statutorily regulated by the Tobacco

Board. But the growers of other varieties of Tobacco are at the mercy of unscrupulous

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ORGANIZATION STUDY AND RATIO ANALYSIS traders and middlemen. Excluding VFC Tobacco, the method of marketing of

Tobacco in India differs from type to type and from State to State. In case of VFC

Tobacco the Government of India and the Tobacco Board are announcing Minimum

Support Price (MSP) from year to year with the objective of protecting the interest of

the growers of VFC Tobacco. There is need for establishment of organized marketing

system for all types of Tobacco so that the Indian tobacco can achieve significant

share in the International market.

Research on Tobacco has been playing an important role in the development of

Tobacco varieties in India. India grows different variety of Tobacco under different

agro-climatic conditions. As such the problem of improvement of different varieties

of Tobacco in India are numerous and complicated. The main research work on

Tobacco is being done at Central Tobacco Research Institute at Rajahmundry and its

Research Stations spread throughout India. Apart from conducting research for

development of different varieties of Tobacco for maximizing production, the CTRI,

Rajahmundry has been presently doing research for development of alternative crops

to Tobacco. CTRI, Rajahmundry has also been entrusted with the research for

development of alternative uses of Tobacco in view of anti-smoking campaign.

Earlier the Directorate of Tobacco Development was running two Non-Plan

Schemes on bidi Tobacco viz. (i) Seed and Seedlings Scheme and (ii) Farmers

Training Scheme at Gujarat Agricultural University, Anand, but both these scheme

have been terminated by the end of March 2000.

As a part of all India Comprehensive Scheme to study the cost of cultivation of

the principal crops, this Directorate is running the scheme for Assessing the Cost of

Production of VFC Tobacco in Andhra Pradesh from 1974-75 onwards. Under this

she me the data on cost of production are collected by cost aounting method by Field

staff posted in selected clusters in Tobacco belt of Andhra Pradesh. After collection

and compilation of such field data, this Directorate has been regularly sending such

Information to Directorate of Economics and Statistics. Afterwards, the estimates of

cost generated under this scheme are passed on to the Commission for Agricultural

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ORGANIZATION STUDY AND RATIO ANALYSIS Cost and Prices (CACP) for its use in recommending the Minimum Support Price

(MSP) on VFC Tobacco from year to year basis.

Tobacco Industry in India contributes in a unique manner to several important

facets of the Indian Economy, covering revenue, export, employment, and GDP

growth. The Tobacco industry in India mainly covers manufacturing of cigarette, bidi,

cigar and cheroot, hookah, snuff and other chewing Tobacco like zarda, gutkha and

other pan masala.

Cigarette industry in India is essentially capital intensive in nature. The growth

of cigarette industry both in domestic and international market represents a big

revenue opportunity for the economy. But the burden of Tobacco tax has increasingly

shifted to cigarette with the removal of duty on raw Tobacco since 1979, resulting in

discriminatory rates of duty compared to other Tobacco products.

India's share in world cigarette production has remained at around 1.7%

whereas India's exports of around 2.8 billion sticks of cigarette per year accounts for

less than 1% of the world export of cigarette. There is significant opportunity for

cigarette industry to extent and consolidate its position in intentional market due to

some recent trend like withdrawal/reduction of agricultural subsidy and escalating

cost in the traditional cigarette exporting countries.

Bidi industry is one of the foremost cottage industries in India. Total amount of

bidi Tobacco production was 150million kg and that of bidi was around 700 billion

pieces during1994-95. Around 37% of Tobacco production in India goes to bidi

making as per Indian Market Research Bureau (IMRB) report 1996.The social

significance of bidi industry derives from the fact that it generates more employment

in the economy compared to cigarette industry. During 1993-94 the bidi industry

generated around 1310 million man days of employment. There is scope for

development of bidi industry in view of excessive and biased tax treatment of

cigarette.

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Cigar and Cheroot industry is one of the oldest industries in India, and is mainly

concentrated in Tamilnadu and Andhra Pradesh. But presently this industry is in deep

dwindling condition due to unorganized marketing system

From the beginning of 17th century, Tobacco has been playing a important role

in international trade. Recently there has been world-wide anti Tobacco campaign

which resulted in modest fall in area and production of Tobacco. But consumption of

Tobacco in the world has remained more or less stable. Similarly the world cigarette

production grew steadily up to 1997and started declining slowly during 1998 and its

again shows upward trend during 1999.

As per the projection by F.A.O, the global Tobacco industry is poised to

increase at the rate of 1.9% annually which will result in an deficit of 2% projected

global demand. Assets such as experienced farming community confer a significant

competitive advantage for India. With an increase in the world import requirements

translating in to a rise in export potential, Indian Tobacco industry is presented with

significant opportunities to consolidate and extent its position in the global market.

1.3 CONSUMPTION PATTERN OF TOBACCO IN INDIA

Chewing tobacco has been a tradition in India for centuries. Of the total amount

of tobacco produced in the country, around 48% is in the form of chewing tobacco,

38% as bidis, and only 14% as cigarettes. Thus, bidis, snuff and chewing tobacco

(such as gutka, khaini and zarda) form the bulk (86%) of India’s total tobacco

production. In the rest of the world, production of cigarettes is 90% of total

production of tobacco related products.

The per capita consumption of cigarettes in India is merely a tenth of the world

average. This unique tobacco consumption pattern is a combination of tradition and

more importantly the tax imposed on cigarettes over the last 2 decades. Cigarette

smokers pay almost 85% of the total tax revenues generated from tobacco.

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ORGANIZATION STUDY AND RATIO ANALYSIS 1.4 MAJOR PLAYERS IN THE INDIAN TOBACCO MARKET

The major players in the Indian tobacco market are

ITC Ltd

Godfrey Phillips

GTC(Golden Tobacco Limited)

VST Industries Limited

1.4.1 ITC LTD

ITC Limited is an Indian conglomerate with a turnover of US $ 6 billion and a

market capitalization of over US $ 22 Billion. The company has its registered office

in Kolkata.

The company is currently headed by Yogesh Chander Deveshwar. It employs

over 26,000 people at more than 60 locations across India and is listed on Forbes

2000. ITC Limited completes 100 years on 24th August, 2010.

ITC has a diversified presence in Cigarettes, Hotels, Paperboards & Specialty

Papers, Packaging, Agri-Business, Packaged Foods & Confectionery, Information

Technology, Branded Apparel, Personal Care, Stationery, Safety Matches and other

FMCG products. While ITC is an outstanding market leader in its traditional

businesses of Cigarettes, Hotels, Paperboards, Packaging and Agri-Exports, it is

rapidly gaining market share even in its nascent businesses of Packaged Foods &

Confectionery, Branded Apparel, Personal Care and Stationery.

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ITC's aspiration to be an exemplar in sustainability practices is manifest in its

status as the only company in the world of its size and diversity to be 'carbon positive',

'water positive' and 'solid waste recycling positive.' In addition, ITC's businesses have

created sustainable livelihoods for more than 5 million people, a majority of whom

represent the poorest in rural India.

List of products

Cigarettes: W. D. & H. O. Wills, Gold Flake, Navy Cut, Insignia, India Kings, Classic

(Verve, Regular, Mild & Ultra Mild), Silk Cut, Scissors, Capstan, Berkeley, Bristol,

Lucky Strike and Flake.

1.4.2 GODFREY PHILLIPS

The success of Godfrey Phillips India is the result of the Company’s

commitment to innovations, enhanced operational efficiencies and adoption of

internationally acclaimed business processes. Driven to excel, innovate and win, we

intend to emerge as one of the most respected Company in the tobacco industry.

As the second largest player in the Indian cigarette industry, our annual turnover

exceeds INR 2200 crores (approx. US $458.05 million). We own some of the most

popular cigarette brands in the country like Four Square,

Red and White, Jaisalmer, Cavanders and Tipper. Over the years we have also

set our own benchmarks in innovation with revolutionary brands like Stellar, the first

slim cigarette and I-gen, the first euro norm cigarette in India.

Products are distributed over an extensive India wide network of more than 500

distributors and 800,000 retail outlets. With the Corporate Office in Delhi, the

Company has offices all across India in over 8 locations.

Godfrey Phillips India has two major stakeholders, one of India's leading

industrial houses - the K. K. Modi Group and one of the world's largest tobacco

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ORGANIZATION STUDY AND RATIO ANALYSIS companies, Philip Morris. The Company also enjoys a strong backing of over 12,000

shareholders.

Range of products

Stellar

Igen

Four Square

Jaisalmer

Red & White Flak

Northpole

Cavanders

1.4.3 GTC (GOLDEN TOBACCO LIMITED)

Golden Tobacco Limited is a professionally managed organization in the field

of tobacco and tobacco related products.

Established in the year 1930 by the late Shri. Narsee Monjee, Golden Tobacco

is the first wholly owned indigenous company in the country, taken over by Dalmia

Group in the year 1979. The group is headed by Mr. Sanjay Dalmia as Chairman &

Mr. Anurag Dalmia as Vice Chairman.

Nurtured under the leadership and guidance of Mr. J P Khetan the Managing

Director of Golden Tobacco, the company offers customers an exceptional variety of

the finest tobacco products, which meet world – class standards of quality and

consistency, and is a valid example of contemporary manufacturing techniques,

professional Marketing, good HR practice and quality control systems.

Golden Tobacco has manpower strength of 2000 employees spread across

manufacturing, purchasing, processing, sales and marketing. The Company has two

major production facilities in Mumbai as well as Baroda. To keep the pace with its

strategy of providing quality cigarettes to its national and international customers,

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ORGANIZATION STUDY AND RATIO ANALYSIS Golden Tobacco, Vadodara has recently implemented ISO 9001:2000 and has been

certified by world’s one of the most reputed accreditation agency RWTUV.

The company’s offerings are grouped under the Brand families of Panama,

Chancellor, Golden’s and Steel. Each Brand family has several strong offerings in its

portfiolio, such as Panama Virginia Regular and Panama Filter, Chancellor Browns

and Chancellor Exclusive, and Golden’s Gold Flake.

Product range

Products Variants

Panama

Panama Virginia Regular, Panama Filter, Panama

Premium Filter, Panama Gold, Panama Delight, Panama

Menthol and Panama Mini Kings

Chancellor Chancellor Browns, Chancellor Royale, Chancellor

Exclusive, Chancellor Harvard Luxury, Chancellor Light

Golden Golden’s Gold Flake , Golden’s Major

Style Mini Kings No Variants

Taj Chapp No Variants

Steel No Variants

June No Variants

1.4.4 VST INDUSTRIES LIMITED

VST Industries Limited (VST) is an India-based company. The Company is

engaged in tobacco and related products business. The Company has sales in India

and outside India. Its products include cigarettes, unmanufactured tobacco, cut

tobacco and other articles of paper and paper board. VST Distribution, Storage &

Leasing Company Private Limited is the Company's subsidiary.

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Product range:

Shah-I-Deccan, Gold Reserve, Gold Premium, Charminar, Start Up, Moments

Charms, Think, Vijay, Shaan, Xl

1.5 ECONOMIC SIGNIFICANCE OF TOBACCO

India is the world’s second-largest producer of leaf tobacco. It is also a very

large consumer of tobacco products. Tobacco is one of the important cash crops in the

country, and makes a significant contribution to the Indian economy in terms of

employment, income and government revenue. It generates nearly Rs 20 billion of

income per annum. The economic importance of the crop can be considered at three

levels: farm households engaged in tobacco growing and processing; major tobacco

producing States; and central government level.

1.5.1 FARM LEVEL

There are an estimated 850 000 growers of tobacco in the country, characterized

by small family farms, with farmers owning less than 2 ha of land forming about half

of all tobacco growers. However, based on field surveys carried out by Gujarat

Agricultural University, Anand, in selected tobacco growing districts in Gujarat and

Karnataka, the small-scale producers account for about a quarter of the tobacco area.

In total, nearly 6 million farmers and workers depend on this sector for their

livelihood. In addition, the tobacco sector provides direct and indirect employment to

a large number of people in many related industries.

1.5.2 STATE LEVEL

The tobacco sector contributes to the States’ economies through crop production

and to the exchequer through excise duty, as well as from their share in the net central

excise duties. Tobacco cultivation is concentrated in three states: Andhra Pradesh,

Gujarat and Karnataka. The additional excise duties on tobacco, which is distributed

only among tobacco growing states, increased from Rs 3477 million in 1979/80 to Rs

28532 million in 2008/09. During the fiscal years 2003 to 2008, the State

Governments received annually 47.5 percent of the net proceeds of union excise duty

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ORGANIZATION STUDY AND RATIO ANALYSIS levied on a number of commodities, including on tobacco products. It amounted to

around Rs 240000 million annually, of which the share from the tobacco sector is

estimated to have been around 9 percent. These are an important source of revenue for

the States.

1.5.3 CENTRAL GOVERNMENT REVENUE

In India, excise duty is imposed on the entire range of manufactured tobacco

products. In 2008/09, tobacco contributed about Rs 79400 million to the central

government’s revenue or 10.6 percent of total excise collection. Tobacco contributed

Rs 17790 million to export earnings in 2008/09, which was around 5 percent of the

foreign exchange earnings from agricultural products. In addition, the central

government also realized on average around Rs 9000 million per annum from tobacco

enterprises in the form of corporate tax during the last three tax years.

However, raw tobacco was exempted from excise with effect from 1979/80,

primarily because the administration and collection of excise duty on raw tobacco was

expensive as well as cumbersome, and control was ineffective. The consequent

revenue loss from the exemption was more than compensated for by steep increases in

tax rates on manufactured items. Although most manufactured tobacco products

attract excise duties, tobacco products from cottage industries (bidis, etc.) are taxed at

a much lower rate than those from the organized sector (i.e. cigarettes).

Bidi manufacturers producing less than 2 million pieces annually do not have to

pay any excise duty. Bidis (other than paper rolled) produced without the aid of

machines pay Rs 5 per thousand pieces. Other bidi manufacturers currently pay Rs

l5.5 per thousand pieces. Pan masala is taxed 40 percent ad valorem (24 percent basic

duty plus a special duty of l6 percent). Chewing tobacco and snuff with a brand name

attract 50 percent excise duty (ad valorem).

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INDIAN TOBACCO COMPANY LIMITED

2.1 COMPANY OVERVIEW

ITC is one of India's foremost private sector companies with a market

capitalization of over US $ 22 billion and a turnover of US $ 6 billion. ITC is rated

among the World's Best Big Companies, Asia's 'Fab50' and the World's Most

Reputable Companies by Forbes magazine, among India's Most Respected

Companies by Business World and among India's Most Valuable Companies by

Business Today. ITC ranks among India's `10 Most Valuable (Company) Brands', in a

study conducted by Brand Finance and published by the Economic Times. ITC also

ranks among Asia's 50 best performing companies compiled by Business Week.

ITC has a diversified presence in Cigarettes, Hotels, Paperboards & Specialty

Papers, Packaging, Agri-Business, Packaged Foods & Confectionery, Information

Technology, Branded Apparel, Personal Care, Stationery, Safety Matches and other

FMCG products. While ITC is an outstanding market leader in its traditional

businesses of Cigarettes, Hotels, Paperboards, Packaging and Agri-Exports, it is

rapidly gaining market share even in its nascent businesses of Packaged Foods &

Confectionery, Branded Apparel, Personal Care and Stationery.

ITC's diversified status originates from its corporate strategy aimed at creating

multiple drivers of growth anchored on its time-tested core competencies: unmatched

distribution reach, superior brand-building capabilities, effective supply chain

management and acknowledged service skills in hoteliering. Over time, the strategic

forays into new businesses are expected to garner a significant share of these

emerging high-growth markets in India.

ITC's Agri-Business is one of India's largest exporters of agricultural products.

ITC is one of the country's biggest foreign exchange earners (US $ 3.2 billion in the

last decade). The Company's 'e-Choupal' initiative is enabling Indian agriculture

significantly enhance its competitiveness by empowering Indian farmers through the

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ORGANIZATION STUDY AND RATIO ANALYSIS power of the Internet. This transformational strategy, which has already become the

subject matter of a case study at Harvard Business School, is expected to

progressively create for ITC a huge rural distribution infrastructure, significantly

enhancing the Company's marketing reach.

ITC's wholly owned Information Technology subsidiary, ITC InfoTech India

Ltd, provides IT services and solutions to leading global customers. ITC InfoTech has

carved a niche for itself by addressing customer challenges through innovative IT

solutions.

ITC's production facilities and hotels have won numerous national and

international awards for quality, productivity, safety and environment management

systems. ITC was the first company in India to voluntarily seek a corporate

governance rating.

ITC employs over 26,000 people at more than 60 locations across India. The

Company continuously endeavors to enhance its wealth generating capabilities in a

globalizing environment to consistently reward more than 3,60,000 shareholders,

fulfill the aspirations of its stakeholders and meet societal expectations. This over-

arching vision of the company is expressively captured in its corporate positioning

statement: "Enduring Value. For the nation. For the Shareholder.

2.2 VISION

Sustain ITC's position as one of India's most valuable corporations through

world class performance, creating growing value for the Indian economy and the

Company’s stakeholders.

2.3 MISSION

To enhance the wealth generating capability of the enterprise in a globalizing

environment, delivering superior and sustainable stakeholder value.

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2.4 BUSINESS SEGMENTS

FMCG

o Cigarettes

o Foods

o Lifestyle Retailing

o Personal Care

o Education & Stationery

o Safety Matches

o Agarbattis

HOTELS

PAPERBOARDS & PACKAGING

o Paperboards &Specialty Papers

o Packaging

AGRI-BUSINESSES

o Agri Commodities

o Leaf Tobacco

INFORMATION TECHNOLOGY

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ITC BUSINESS PORTFOLIO

2.4.1 FMCG

2.4.1.1 CIGARETTES

ITC is the market leader in cigarettes in India. With its wide range of invaluable

brands, it has a leadership position in every segment of the market. It's highly popular

portfolio of brands includes Insignia, India Kings, Classic, Gold Flake, Silk Cut, Navy

Cut, Scissors, Capstan, Berkeley, Bristol and Flake.

The Company has been able to build on its leadership position because of its

single minded focus on value creation for the consumer through significant

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ORGANIZATION STUDY AND RATIO ANALYSIS investments in product design, innovation, manufacturing technology, quality,

marketing and distribution.

All initiatives are therefore worked upon with the intent to fortify market

standing in the long term. This in turns aids in designing products which are

contemporary and relevant to the changing attitudes and evolving socio economic

profile of the country. This strategic focus on the consumer has paid ITC handsome

dividends.

ITC's pursuit of international competitiveness is reflected in its initiatives in the

overseas markets. In the extremely competitive US market, ITC offers high-quality,

value-priced cigarettes and Roll-your-own solutions. In West Asia, ITC has become a

key player in the GCC markets through growing volumes of its brands.

ITC's cigarettes are produced in its state-of-the-art factories at Bengaluru,

Munger, Saharanpur, Kolkata and Pune. These factories are known for their high

levels of quality, contemporary technology and work environment.

2.4.1.2 FOODS

ITC made its entry into the branded & packaged Foods business in August 2001

with the launch of the Kitchens of India brand. A more broad-based entry has been

made since June 2002 with brand launches in the Confectionery, Staples and Snack

Foods segments.

The packaged foods business is an ideal avenue to leverage ITC's proven

strengths in the areas of hospitality and branded cuisine, contemporary packaging and

sourcing of agricultural commodities. ITC's world famous restaurants like

the Bukhara and the Dum Pukht, nurtured by the Company's Hotels business,

demonstrate that ITC has a deep understanding of the Indian palate and the expertise

required to translate this knowledge into delightful dining experiences for the

consumer. ITC has stood for quality products for over 98 years to the Indian

consumer and several of its brands are today internationally benchmarked for quality.

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The Foods business carries forward this proud tradition to deliver quality food

products to the consumer. All products of ITC's Foods business available in the

market today have been crafted based on consumer insights developed through

extensive market research. Apart from the current portfolio of products, several new

and innovative products are under development in ITC's state-of-the-art Product

Development facility located at Bengaluru.

Leadership in the Foods business requires a keen understanding of the supply

chain for agricultural produce. ITC has over the last 99 years established a very close

business relationship with the farming community in India and is currently in the

process of enhancing the Indian farmer's ability to link to global markets, through

the e-Choupal initiative, and produce the quality demanded by its customers.

The Foods business is today represented in 4 categories in the market. These

are:

Ready to Eat Foods

Staples

Confectionery

Snack Foods

In order to assure consumers of the highest standards of food safety and

hygiene, ITC is engaged in assisting outsourced manufacturers in implementing

world-class hygiene standards through HACCP certification. The unwavering

commitment to internationally benchmarked quality standards enabled ITC to rapidly

gain market standing in all its 6 brands:

Kitchens of India

Aashirvaad

Sunfeast

mint-o

Candyman and Bingo

2.4.1.3 LIFESTYLE RETAILING

21


ITC’s Lifestyle Retailing Business Division has established a nationwide

retailing presence through its Wills Lifestyle chain of exclusive specialty stores. Wills

Lifestyle, the fashion destination, offers a tempting choice of Wills Classic work

wear, Wills Sport relaxed wear, Wills Clublife evening wear, fashion accessories and

Essenza Di Wills – an exclusive range of fine fragrances and bath & body care

products and Fiama Di Wills - a range of premium shampoos and shower gels. Wills

Lifestyle has also introduced Wills Signature designer wear, designed by the leading

designers of the country.

With a distinctive presence across segments at the premium end, ITC has also

established John Players as a brand that offers a complete fashion wardrobe to the

male youth of today. With its brands, ITC is committed to build a dominant presence

in the apparel market through a robust portfolio of offerings..

Wills Lifestyle was named Superbrand 2009 by the Superbrands Council of

India recently. Wills Lifestyle has been twice declared 'The Most Admired Exclusive

Brand Retail Chain of the Year' at the Images Fashion Awards in 2001 & 2003. as

well as 'Most Admired Fashion Brand of the year - Fashion Forward' in 2009.

Wills Lifestyle is the title partner of the country’s most premier fashion event -

Wills Lifestyle India Fashion Week. Taking the celebration of the event to its stores.

Wills Lifestyle has partnered with several leading designers whose new edition of

Designer wear is now available at Wills Lifestyle stores.

Wills Lifestyle complements the range of premium apparel with a tempting

choice of fashion accessories. This season a wider choice of accessories will be

offered across ties, cuff links, socks, caps, hand bags, wallets, belts, eyewear and

shoes.

John Players offers a complete and vibrant wardrobe of Casual wear, Party

wear, Work wear, Denims, Outer wear and Suits & Jackets, incorporating the most

contemporary trends, an exciting mix of colors, playful styling, trendy textures and

comfortable fits. The brand is available across the country through a nation-wide

network of over 225 exclusive stores and 1200 multi-brand outlets.

22


At the Images Fashion Awards 2005, John Players was declared 'The Most

Admired Shirt Brand of the Year'.At the Images Fashion Awards 2007, John Players

was awarded the 'The Most Admired Fashion Campaign of the Year' award.

2.4.1.4 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 Di Wills' 'Vivel UltraPro', 'Vivel' and 'Superia' brands has received encouraging

consumer response and is being progressively extended nationally.

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.

2.4.1.5 EDUCATION & STATIONERY

ITC's Education and Stationery Products are marketed under the brands

"Classmate" and "Paperkraft".

The Paperkraft range of products aims at satisfying the stationery needs &

office consumables need of office executives & working professional. The

continuously expanding product range under Paperkraft includes Premium Business

Paper, Paper Stationery, Markers & Highlighters.

Classmate Notebooks, Classmate Math Instruments, Classmate Scholastic

Products(HB Jet Black writing pencils, erasers & sharpeners), Classmate Writing

23

ORGANIZATION STUDY AND RATIO ANALYSIS Instruments(Ball Pens: Classmate Safari, Classmate Ilet & Classmate Edge and Gel

Pens: Classmate Glider & Classmate Octane)

2.4.1.6 SAFETY MATCHES

ITC’s range of Safety matches include popular brands like i Kno, Mangaldeep,

Aim, Aim Mega and Aim Metro. With differentiated product features and innovative

value additions, these brands effectively address the needs of different consumer

segments. The Aim brand is the largest selling brand of Safety Matches in India. ITC

also exports regular and premium safety matches brands to markets such as Middle

East, Africa and the USA. The successful acquisition of Wimco Ltd. by Russell Credit

Ltd., a wholly owned 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 breadth and depth of the

Company's trade marketing and distribution

2.4.1.7 AGARBATTIS

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.

Mangaldeep Agarbattis are available in a wide range of fragrances like Rose,

Jasmine, Bouquet, Sandalwood, Madhur, Durbar, Tarangini, Anushri, Ananth and

Mogra.

In line with ITC's Triple Bottom Line philosophy of every business

contributing to the nation's economic, environmental and social capital, Mangaldeep

agarbattis are manufactured by small scale and cottage units, providing livelihood

24

ORGANIZATION STUDY AND RATIO ANALYSIS opportunities for more than 8500 people. Six out of 11 Mangaldeep Agarbatti

manufacturing units are ISO 9000 certified. Mangaldeep ASHA (Assistance in Social

Habilitation through Agarbattis) is an ITC initiative to improve the quality of raw

agarbatti production and provide better value realization for women rollers. Under the

project, ITC has extended support to NGOs in states and like Bihar, Tripura, Tamil

Nadu, who are setting up agarbatti units, training village women in rolling agarbattis

and employing them in these units. In the latest initiative, ITC signed a MoU with

Orissa Government run Orissa Rural Development and Marketing Society (ORMAS)

for marketing raw incense sticks in the state- a move that is expected to provide

employment opportunities to over 3000 rural women.

2.4.2 HOTELS

ITC Welcomgroup, India’s premier chain of luxury hotels was launched on

October 18, 1975, with the opening of its first hotel - Chola Sheraton in Chennai.

Since then the ITC-Welcomgroup brand has become synonymous with Indian

hospitality. With over 100 hotels in more than 80 destinations.

ITC-Welcomgroup's properties are classified under four distinct brands:

2.4.2.1 ITC Hotels - Luxury Collection

In 2007, ITC-Welcomgroup entered a new phase in its collaboration with

Starwood Hotels & Resorts. ITC-Welcomgroup now has an exclusive tie-up with

Starwood in bringing its premium brand, the 'Luxury Collection', to India. These are

super deluxe and premium hotels located at strategic business and leisure locations.

The seven hotels which are part of this collection are: ITC Maurya in Delhi, ITC

Maratha in Mumbai, ITC Sonar in Kolkata, ITC Grand Central in Mumbai, ITC

Windsor & ITC Royal Gardenia in Bengaluru, ITC Kakatiya in Hyderabad and ITC

Mughal in Agra.

2.4.2.2 WelcomHotels

25


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. Four other ITC-Welcomgroup Sheraton Hotels – Sheraton

Rajputana Hotel Jaipur, Sheraton Chola Hotel Chennai and Sheraton New Delhi offer

warm, comforting services to the global traveller and a chance to connect.

2.4.2.3 Fortune Hotels

Fortune hotels offer full service properties all over India, including smaller

towns and cities, ideal for the budget traveller. Fortune Hotels have a strong presence

in Ahmedabad, Thiruvananthapuram, Calicut, Darjeeling, Jamshedpur, Vapi,

Hyderabad, Gurgaon, Indore, Ootacamund, Madurai, Jodhpur, Vijaywada, Chennai,

Visakhapatnam, Mahabalipuram, Kolkata, Bengaluru, Navi Mumbai, Tirupati and

Port Blair, while several more hotels are expected to be commissioned soon in other

key locations in India.

2.4.2.4 WelcomHeritage

Welcome heritage brings together a chain of palaces, forts, havelis and resorts

that offer a unique experience. WelcomHeritage endeavours 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 in Rajasthan, Madhya Pradesh, Uttarakhand, Himachal

Pradesh, Jammu & Kashmir, West Bengal, Karnataka, Tamil Nadu, Punjab, Haryana,

Assam, Sikkim, Meghalaya, Arunachal Pradesh, Uttar Pradesh, Maharastra, Kerala,

Andhra Pradesh and Puducherry.

2.4.3 PAPERBOARDS & PACKAGING

ITC's Paperboards and Specialty Papers Division is India's largest,

technologically advanced and most eco-friendly, paper and paperboards business. The

26

ORGANIZATION STUDY AND RATIO ANALYSIS business caters to a wide spectrum of packaging, graphic, communication, writing,

printing and specialty paper requirements through its four world-class manufacturing

units, 6 sales offices and a network of more than 50 dealers in India, along with an

international trade network of 15 distributors / agents.

The product range includes:

Packaging

Virgin Recycled

Folding Box Boards

Solid Bleached Boards

Coated Duplex White back

Coated Duplex Grey back

White Liner

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 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.

2.4.3 AGRI-BUSINESSES

ITC's pre-eminent position as one of India's leading corporate in the agricultural

sector is based on strong and enduring farmer partnerships that has revolutionized and

27

ORGANIZATION STUDY AND RATIO ANALYSIS transformed the rural agricultural sector. One of the largest exporters of agri products

from the country, ITC sources the finest of Indian Feed Ingredients, Food Grains,

Edible Nuts, Marine Products, Processed Fruits, Coffee & Spices.

ITC's Agri Business Division is the country's second largest exporter of agri-

products with exports of over Rs. 1000 Crores (Rs. 10 billion). Its domestic sales of

agri-products are in excess of Rs. 1500 Crores (Rs. 15 billion). It currently focuses on

exports and domestic trading of:

• Feed Ingredients - Soya meal

• Food Grains - Rice (Basmati & Non Basmati), Wheat, Pulses

• Edible Nuts - Sesame Seeds, HPS Groundnuts, Castor oil

• Marine Products - Shrimps and Prawns

• Processed Fruits - Fruit Purees/Concentrates, IQF/Frozen Fruits, Organic Fruit

Products, Fresh Fruits

• Coffee & Spices - Coffee, Black Pepper, Chilly, Turmeric, Ginger, Celery and

other Seed Spices

2.4.3.1 Farmer empowerment through e-Choupals

ITC's unique strength in this business is the extensive backward linkages it has

established with the farmers. This networking with the farming community has

enabled ITC to build a highly cost effective procurement system. ITC has made

significant investments in web-enabling the Indian farmer. Christened 'e-Choupal',

ITC's empowerment plan for the farmer centres around providing Internet kiosks in

villages. Farmers use this technology infrastructure to access on-line information from

ITC's farmer-friendly website www.echoupal.com. Data accessed by the farmers

relate to the weather, crop conditions, best practices in farming, ruling international

prices and a host of other relevant information. e-Choupal today is the world's largest

rural digital infrastructure.

28


The unique e-Choupal model creates a significant two-way multi-dimensional

channel which can efficiently carry products and services into and out of rural India,

while recovering the associated costs through agri-sourcing led efficiencies. This

initiative now comprises about 6500 installations covering nearly 40,000 villages and

serving over 4 million farmers. Currently, the 'e-Choupal' website provides

information to farmers across the 10 States of Madhya Pradesh, Haryana,

Uttarakhand, Uttar Pradesh, Rajasthan, Karnataka, Maharashtra, Andhra Pradesh,

Kerala and Tamil Nadu. Over the next 5 years it is ITC's Vision to create a network of

20,000 e-Choupals, thereby extending coverage to 100,000 villages representing one

sixth of rural India.

2.4.3.2 Choupal Fresh

Choupal Fresh, ITC's fresh food wholesale and retail initiative, leverages its

extensive backward linkages with farmers and supply chain efficiencies. It focuses on

stocking fresh horticulture produce like fresh fruits and vegetables. Five Choupal

Fresh retail stores are currently operational at Hyderabad. The company has also set

up a complete cold chain for ensuring the availability of fresh products in the market,

besides directly sourcing farm fresh produce from the farmers.

2.4.3.3 Marine Products

ITC has been a significant exporter of seafood from India since 1971. It exports

frozen as well as cooked shrimps and other seafood products to Japan, USA and

Europe. Its well-known brands include Gold Ribbon, Blue Ribbon, Aqua Kings, Aqua

Bay, Aqua Feast and Peninsular.

2.4.4 INFORMATION TECHNOLOGY

29


ITC Infotech, a global IT services company, is today one of India’s fastest

growing IT services and solutions providers.

Based out of a picturesque 35 acre campus in the heart of Bangalore city, ITC

Infotech, through wholly-owned subsidiaries in the UK and US, provides outsourced

IT services and solutions to leading global customers.

ITC Infotech offers IT services and solutions across five key industry verticals:

Banking, Financial Services & Insurance (BFSI), Consumer Packaged Goods (CPG)

& Retail, Manufacturing & Engineering Services, Travel, Hospitality &

Transportation and Media & Entertainment.

ITC Infotech 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, a sharp domain focus

ensures that IT and ITES delivery always places business needs ahead of technology.

ITC Infotech has carved a niche for itself as a leading global IT solutions

provider by addressing customer pain points through innovative solutions. ITC

Infotech’s leadership capabilities also accrue from business critical engagements with

leading organizations across five continents, and a service delivery footprint spanning

over 140 countries.

ITC Infotech conforms to the highest standards in international process quality,

with ISO 27001, ISO 9001, SEI CMM Level 5 and BS 7799 accreditations. These

reflect the company’s ongoing enterprise-wide focus to ensure that every engagement,

program and project delivers international quality consistently.

2.5 ORGANISATION STRUCTURE OF ITC LTD

2.5.1 THE GOVERNANCE STRUCTURE OF ITC

30


The practice of Corporate Governance in ITC is at three interlinked levels:

Strategic supervision by the Board of Directors

Strategic management by the Corporate Management

Committee

Executive management

by the Divisional / Strategic Business

Unit (SBU) Chief Executive assisted by

the respective Divisional / SBU

Management Committee

The three-tier governance structure ensures that:

(a) Strategic supervision (on behalf of the shareholders), being free from

involvement in the task of strategic management of the Company, can be conducted

by the Board with objectivity, thereby sharpening accountability of management;

(b) Strategic management of the Company, uncluttered by the day-to-day tasks

of executive management, remains focused and energized; and

(c) Executive management of a Division or Business, free from collective

strategic responsibilities for ITC as a whole, focuses on enhancing the quality,

efficiency and effectiveness of the business.

The core roles of the key entities flow from this structure. The core roles, in

turn, determine the core responsibilities of each entity. In order to discharge such

responsibilities, each entity is empowered formally with requisite powers. The

structure, processes and practices of governance enable focus on the corporate

purpose while simultaneously facilitating effective management of the wider portfolio

of businesses.

2.5.2 ROLES OF VARIOUS ENTITIES

Board of Directors (Board): The primary role of the Board is that of

trusteeship to protect and enhance shareholder value through strategic supervision of

31

ORGANIZATION STUDY AND RATIO ANALYSIS ITC, its wholly owned subsidiaries and their wholly owned subsidiaries. As trustees,

the Board ensures that the Company has clear goals relating to shareholder value and

its growth. The Board sets strategic goals and seeks accountability for their

fulfillment. The Board also provides direction and exercises appropriate control to

ensure that the Company is managed in a manner that fulfils stakeholders’ aspirations

and societal expectations. The Board, as part and parcel of its functioning, also

periodically reviews its role.

Corporate Management Committee (CMC): The primary role of the CMC is

strategic management of the Company’s businesses within Board approved direction /

framework. The CMC operates under the strategic supervision and control of the

Board.

Chairman: The Chairman of ITC is the Chief Executive of the Company. He is

the Chairman of the Board and the CMC. His primary role is to provide leadership to

the Board and the CMC for realizing Company goals in accordance with the charter

approved by the Board. He is responsible, inter alia, for the working of the Board and

the CMC, for ensuring that all relevant issues are on the agenda and for ensuring that

all Directors and CMC members are enabled and encouraged to play a full part in the

activities of the Board and the CMC, respectively. He keeps the Board informed on all

matters of importance. He is also responsible for the balance of membership of the

Board, subject to Board and Shareholder approvals. He presides over General

Meetings of Shareholders.

Divisional Management Committee (DMC) / SBU Management Committee

(SBU MC): The primary role of the DMC / SBU MC is executive management of the

Divisional / SBU business to realize tactical and strategic objectives in accordance

with Board approved plan.

Executive Director: The Executive Directors, as members of the CMC,

contribute to the strategic management of the Company’s businesses within Board

approved direction / framework. As Directors accountable to the Board for a

business / corporate function, they assume overall responsibility for its strategic

management, including its governance processes and top management effectiveness.

32

ORGANIZATION STUDY AND RATIO ANALYSIS As Directors accountable to the Board for a wholly owned subsidiary or its wholly

owned subsidiary, they act as the custodians of ITC’s interests and are responsible for

their governance in accordance with the charter approved by the Board.

Non-Executive Director: Non-Executive Directors, including Independent

Directors, play a critical role in imparting balance to the Board processes by bringing

an independent judgement on issues of strategy, performance, resources, standards of

Company conduct etc.

Divisional / SBU CEO: The Divisional / SBU CEO is the Chief Operating

Officer for a business with executive responsibility for its day-to-day operations and

provides leadership to the DMC / SBU MC in its task of executive management of the

business.

2.6 ORGANIZATIONAL STRUCTURE OF ITD (INDIAN

TOBACCO DIVISION) BANGALORE

Like any other ITC division even the ITD (Indian tobacco division) is headed

by Chief Executive Officer, Finance Head and Marketing head who monitor the

activities of all the 5 five factories which come under ITD. These officers are

accountable to the Board of directors. They play a key role in the accomplishment of

organizations goals and policies.

Five branches of ITD situated at Bangalore, Munger, Saharanpur, Kolkata and

Pune are headed by Branch managers who control the activities of their respective

factories with the assistance of various other departments functioning in the factory.

The organization structure of Bangalore factory is shown below:

33


2.6.1 BRANCH MANAGER

Branch manager is the head if ITD Bangalore, who takes care of all the

activities of the Bangalore branch. All the other department managers report to the

Branch Manager regarding the progress and development of the functions of their

respective departments. The Branch Manager reports which he feels are of importance

to the head office located in Kolkata.

All the five Branch Managers of ITD (Indian tobacco division) meet once in

three months to update each other about the proceedings in their respective branches.

.

2.6.2 PRODUCTION MANAGER

34

BRANCH MANAGER

Prod. ManagerBranch EngineerH R ManagerCommercial Manager

CES Manager M/C Design & Develop.EHS ManagerSecurity Officer MIS Manager

FACTORY ORGANISATION STRUCTURE

Pilot Plant

Flavor Dept.


Production Manager is in charge of the two manufacturing departments in ITD

Bangalore, namely,

PMD (Primary Manufacturing Department)

SMD (Secondary Manufacturing Department)

PMD

The primary function of PMD is processing of the various types of tobacco

leaves procured for manufacturing different brands of cigarettes.

PMD production plan depends on:

• SMD Consumption Plan (Bulk)

• SMD Niche Requirement

• OCM Requirements

• Current Stock in CTS

Sequence of Activities in Planning:

Plan Order – Created by HO in SAP. Plan for next month communicated by

month end.

Production Order – Plan Orders in SAP converted into Production Order by

PMD on a daily basis. Operation number generated at this stage. (Continued

till end)

Release Of Production Order – Done by Leaf Godown Clerk on availability of

material.

Bill Of Material – Material issued by Leaf Godown on the basis of BOM.

Start Of Operation – Material fed in operation lines and processing starts.

SMD

35


In SMD the processed tobacco leaves processed in PMD department is rolled in

cigarette paper. Then the cigarette paper is glued and later the cigarette rods are cut to

required lengths. And the final product is delivered out as cigarettes.

All the activities that come under PMD and SMD is monitored by the

production manager. If there is any breakdown then, the Production Manager should

visit the spot within a specified time frame and take necessary action so that the

production resumes as early as possible.

2.6.3 CES – CENTRAL ENGINEERING STORES

Central Engineering Stores (CES) in Bangalore procures stores & spares for all

factories including OCMs i.e. 5 factories and OCMs of Indian Tobacco Division. This

is with the objective of having centralized control and to reap the benefit of low prices

procuring all the spares centrally.

2.6.4 EHS (ENVIRONMENT, HEALTH, SAFETY)

36

Reservations From all

Locations enterIn SAP

MRP Run byCES, every

10 days

Generation ofPurchase

Requisition

Non-CodifiedDirect Indent

Codified PD or VB Type

Procurement

Vendor Selection Follow UpPlacing OrdersVendor Evaluation


• A commitment from the top management to ensure health and safety of

the organization, its people and the environment as a whole.

• All employees to adhere to Corporate EHS Policy.

EHS SYSTEM AND STANDARDS

Sec. 1: EHS Organization & Management

• EHS organization set-up.

• EHS committees

• Communication of EHS policy

• Training requirements

• Risk management (Safe Work )

• Audits & controls (I. Audit, Law)

• Safe work procedures w.r.t contractors

• Documentation & record keeping

Sec. 2: Occupational Health & Hygiene

• Evaluation of occupational health issues & measures of control (Noise, Dusts, Stress)

• Medical support (Ambulance, First Aid)

• Housekeeping & cleanliness (Hygiene)

• Personal protective equipment (PPE)

Sec.3: Electrical, Mechanical, Buildings, Housekeeping & Safe Work

Practices

• Electrical Safety &safe working practices

• Fencing & Guarding of dangerous machinery & parts

• Safety in buildings & housekeeping

Sec 4: Environment

37


• Air pollution, Noise pollution & Water pollution management

• Water conservation & rainwater harvesting

• Wastes management

• Hazardous chemicals

• Energy

• Ozone depleting substances

Sec. 5: Fire Safety

• Fire organization & management:

• Measures of restricting & controlling fire

• Alerting occupants

• Emergency escape arrangement

• Control of Fire

Sec. 6: Accident Reporting, Investigation & Control

• Recording Accident / Injuries / dangerous occurrences

• Investigation of all accidents / injuries / dangerous occurrences

2.6.5 MIS - MANAGEMENT INFORMATION SYSTEM

Entire MIS controls lies at Head Office, Kolkata. In B2 1 NT Server maintained

for login authentication.

HO Central Help Desk

- Central functioning cell for all locations.

- LN access SAP access – Applications collected at B2. Processing,

Approval and Creation takes place from HO. BCF MIS team has

no control. “Book a Call”.

- For any MIS issue, B2 has to book a call with the HO team and they

take care of it.

38


Hardware

Desktops provided to all managers and office associates. Laptop

given only to Level D managers. Other manager - Need basis, HOD

approval.

Software

Microsoft Windows XP Professional, Version 2002 (SP-3), Domain –

ITC.IN

Connectivity

- LAN – Local Area Network for all computers in the factory.

- WAN – Wide Area Network access for connectivity with HO and B1.

Dedicated leased lines for WAN. (BSNL & Reliance – 2 vendors for

contingency & backup)

Security

- Restricted with individual passwords. Automatic lock if unused for 2

minutes.

- Password to be alphanumeric with special character. Changed every

90 days.

- Employees not to share their password except with their HOD.

- Personal laptops – No LAN connection. No Company software to be

installed.

- No personal software can be installed on factory computers.

2.6.6 PILOT PLANT

39


Pilot Plant forms part of Centre for Process Development (CPD) team, Head

Office. Operations controlled by the HO. (Chief blender in HO).Project initiated by

HO. Trial runs in PP & results communicated to HO. Analyzing results, iterations

take place in blends. Continue until satisfied with the result.

- Development of samples for new products (i.e. new brands)

• Based on the recommendation of Marketing Team Survey

- Straight Grade Analysis

• Changes in crop chemical composition analyzed every year.

- Development of grades for existing blends

• Change in crop chemistry to ensure that blend remains the

same

- PMD processing for Niche Operations of SMD

• Minimum Operation Size- 250 Kgs, Maximum Capacity – 540

Kgs.

2.6.7 HR DEPARTMENT

Major Functions

• Maintaining harmonious Industrial Relations in the factory.

• Assisting in preparation of LTA with workers.

• Recruitment of workers for the factory

• Appointment of Contractor Labors in the factory.

• Responsible for functioning of Canteen, Ambulance Room, Transport

• Processing of wages for all workers

• Providing training and development facilities to the workers.

• Maintain various welfare schemes and funds for workers

HR Statistics

40


Total number of workers in the factory - 1148

Total number of managers in the factory - 99

Total number of confidential secretaries - 26

Total number of contract workers in the factory - 450-500

Long Term Agreement

• LTA is the Memorandum of Settlement entered into between the

Management on the one hand and the Union on the other hand.

• The need to enter into MOS is as prescribed by Section 12 (3) of the

Industrial Disputes Act.

• Current LTA is with effect from 1st August, 2007 for a period of 42

months.

• It prescribes workers’ entitlement and other T&C of employment in the

factory.

• Signed by BM, HRM, BE, PM from Management Side duly witnessed

by CM.

PROCESS FLOW For Wages Processing

Master Data Base à Time and Leaves Recording à Computation of

Earning Details à Deductions à Release of Net Payment

2.6.8 COMMERCIAL / FINANCE DEPARTMENT

41


The commercial department consists of the six divisions as mentioned below:

2.6.8.1 CAPEX (Capital Goods)

Fixed asset is an asset held with the intention of being used for the purpose of

producing or providing goods and services and is not held for sale in the normal

course of business.

Different types of Capex Plan

“Project” - Specific items each for Rs. 5 crores and above in value

“Specified” - Specific items each for Rs. 50 Lacs and above in value

“Clubbed” - For Items less than Rs. 50 Lacs each in value

“Flexible” - Unforeseen and emergent

Procedure for purchase of CAPEX items

42


2.6.8.2 Indirect Taxes

A. Central Excise Related Compliances

a. Monthly reconciliation of Excise Duty

Reconciliation of various Excise related GL Accounts, SAP Reports and

record of AR1 submitted for clearance of goods is done on a monthly

b. Reconciliation with Cenvat Records

On a monthly basis a report is generated for ascertaining the status of invoices.

The report is reviewed and ensured that Cenvat Credit is taken on time. Balance

entered in Register is reconciled with respective Cenvat Credit GL Accounts on a

monthly basis. Moreover, a reconciliation of Cenvat-in-Transit and Cenvat Clearing

Account is done at the month-end.

B. Service Tax Related Compliances

43


a) Monthly reconciliation of Service Tax credits availed and maintenance

of Service Tax Register

i. Person Liable to pay Service Tax

Generally the service provider. However in the case of GTA the person

who is paying the freight is liable to pay service tax. Moreover, if the

Import service provider has no place of business in India, then the service

receiver is liable to pay Service Tax and he can avail credit of service tax

paid. For Input Service Tax Credit received from ITD Head Office / ILTD

(Input Service Distributors - ISDs), service tax credit is being availed based

on the challan copies received from ISDs.

ii. Monthly Reconciliation

On a monthly basis service tax credit register dump is taken from SAP

using t-code YRF 301 – Service Tax Credit Register. The same is

reconciled with Service tax credit related GL accounts. Post reconciliation,

the entries of service tax credit utilized for payment of excise duty & any

other credit reversal entries are manually updated in the Service Tax credit

register maintained in excel sheet. The closing balance in Service tax credit

register is tallied with the GL accounts & the same is considered for

monthly ER 1 returns.

b) Service Tax Return (Half Yearly ST-3 Return – Due Date: 25th of the

month following the end of the preceding half year)

• Name of Taxable Service

• Details of Provisional Assessment made, if any

• For all services (including GTA)

• Taxable Value, Service Tax Payable, Service Tax paid in advance,

Details of Challan and Challan Date, Cenvat Credit taken and

utilized

• Self Assessment Memorandum

c) Service Tax Payment

44

ORGANIZATION STUDY AND RATIO ANALYSIS The Service Tax liability for the month on the taxable services availed in the

factory shall be paid by 5th day of the following month (6th of the following month

if the duty is paid electronically through internet banking). Service tax payment is

done at the Unit in capacity of recipient of Service as there is no output service

provided. Service tax is paid electronically through internet banking & procedures

followed for E-payment of Service Tax are similar to that of E-payment of Excise

Duty.

C. Vat Related Compliances

Availment of VAT credit & maintenance of VAT register is described as

follows

a) Identify the items which may be considered as input and capital

Consider the Intra-State purchase for the period concerned and identify

the items, which may be considered as input or as capital as per the State VAT

Act & Rules.

The segregation of input and capital is required as, in some States

treatment is different for input items and capital items. In Karnataka, VAT

Credit on Input can be taken immediately on receipt of goods; however VAT

Credit for Capital Goods can only be availed after the Capital Goods has been

put to use.

b) Compute the input tax credit available

Input Tax Credit to be computed in the manner as prescribed in the

State VAT Act.

c) Disallowance of input credit

Input credit is normally disallowed under the following circumstances:

i. Stock Transfer – Intra-State and Inter-State

ii. Sales Return – Within a period as specified in the State VAT

Act & Rules

D. Entry Tax Related Compliances

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a) Sort the Materials based on Entry Tax Rate and Material Number for the

various category of purchases

b) For Entry Tax on CAPEX Items, get the amount from CAPEX In-Charge

c) Entry Tax is payable on LSHS and CES received in the current month but GR

not done. Provision will be created for the same, which will be reversed in

the subsequent month.

d) For Bangalore Factory Purchase Orders starting with 40, 45 and 47 are DI

Items. From the Entry Tax Payable Account, sort Purchase Orders starting

with 40,45 and 47, for which Material Number is Blank and document type is

“WE” and take the sum of Entry Tax Payable.

e) Entry Tax is not payable on materials stock transferred within 6 months of

receipt. As mentioned above, for Stock Transfer Out, subtotal of Purchase

Order will not be Zero, it will show debit balance. Check Purchase Orders,

subtotal of which shows debit balances and ensure that it is stock transfer out

and then calculate the Entry Tax posted for the same

f) Entry Tax is also not payable on Materials exclusively used on Export

Brands. Obtain list of materials exclusively used for export brands from

Production Department on monthly basis and calculate maximum value of

entry tax on the same

g) Reconcile the Entry Tax Payable as per details send by HO with Entry Tax as

per Entry Tax Payable Account.

Rate of Entry Tax for the materials in ITC is as mentioned below:

• Cigarettes/Cut Tobacco - 4%

• Making Materials – Domestic/Imported - 1%

• Flavors – Domestic/Imported - 1%

• Spares – Domestic/Imported - 2%

• Capex Items - 2%

• LSHS - 5%

2.6.8.3 EXPORT – IMPORT

46


A. EXPORT

Customers:

a) Cigarettes and Smoking Mixture to King Maker Marketing (KMM),US on

consignment basis

b) Direct Sales - Cigarettes to Middle East (ME)

i. On Letter of credit(LC) basis – Kuwait, UAE, Bahrain, Qatar

ii. On advance basis – Saudi Arabia , Oman

Planning by Marketing (HO) based on orders received

For ME, the Commercial Dept. will prepare the Proforma Invoice and send to

HO which in turn will be sending it to the Customer for release of LC.

Payment Terms-

a) Letter Of Credit

The LC comes to our Banker from the Customer’s Banker. The Original

Documents will be sent to our banker who in turn will send these to Customer’s

Banker. The intimation will be given to the Customer regarding the receipt of

the docs. The original documents will be released by the Bank once the payment

is made by the Customer.

b) Advance

The Original documents are send to the Customer directly and a copy of

the same would be send to bank for closure of FIRC (Foreign Inward

Remittance Certificate) issued at the time of receipt of Advance.

Major Brands that are exported

ME – Scissors, Wills

US – Ace, Gold Crest, Hival, Smokers Friendly, Checkers (LIP / Non-LIP)

B. IMPORT

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ORGANIZATION STUDY AND RATIO ANALYSIS Mainly Import consists of the following items

(a) CAPEX

(b) WMS

(c) Tobacco

(d) Spares

Material Arrival-

i. Intimation received by CES from Vendor regarding dispatch of material.- Air

Cargo Arrival Notice from Airlines , Air Way Bill, Vendor’s Invoice

ii. CES will forward the pre-alert to CHA(Customs House Agents)

iii. Accordingly, CHA will prepare the checklist and forward to Commercial for

confirmation

iv. Once it is cleared, Commercial ask CHA to file “Bill of Entry” and Entry in

Import Register done

v. Simultaneously, Commercial will send “Duty Instruction Sheet” to Bank to

prepare a bank draft of Duty Amount in favor of Commissioner of Customs.

vi. On-line Filing of Bill of entry and payment of Duty amount by CHA.

vii. Customs Authority to do assessment and verification of material, assessable

value and duty amount

viii. On satisfaction, will release the goods from Customs (Duplicate Copy of BOE

for availing Cenvat, Triplicate Copy of BOE used for payment to Vendor.)

ix. Duty Payment made either through bank draft or by utilizing DEPB license

(Original or by Transfer Release Advice)

Vendor Payment –

a) Direct Payment – Once GR is made, payment made

The submission of documents – “Form A1, FEMA Declaration, Triplicate Copy

of BOE, Invoice and Airway Bill” to Bank for payment.

Exchange rate as intimated by bank based on the forward rate booked. After

payment, Debit Advice given by Bank.

b) DAN Payment – (Document Arrival Notice)

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Vendor’s banker forwards the documents (Invoice, Packing List,) to bank.

Intimation send to the Company vide Document Arrival Notice by bank.

Once GR made, submission of documents – “Form A1, FEMA Declaration,” to

bank for payment .Exchange rate as intimated by HDFC, Kolkata based on the

forward rate booked. After payment , Debit Advice given by Bank.

2.6.8.4 BOOKS OF ACCOUNTS

A. Trial Balance

The Trial Balance shall consist of the transactions of Bangalore Cigarette

Factory, ATC, HDC, Pilot Plant, R & D Centre

B. Balance Sheet

i. Fixed Assets

Schedule V report extracted from YRF80 should match with GL.

The sum of the General Ledger accounts in AUC should be zero at the month-

end.

Review of CWIP in transit balance and ensure that the value represents

payment made towards the assets, which have not reached the factory as on

review date.

Review the balance lying in CWIP account. Any abnormal delay in

capitalization should be taken up with concerned Engineer – Manager and

appropriate action should be taken.

Check the posting made from revaluation reserve account.

ii. Inventories

On the First of every month the PSV of Inventory takes place which is

reconciled with the balance as per Books.

The value of Inventory (Leaf, WMS, Spares, Finished Stock) should match

with the balance in GL.

iii. Deposits

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The General Ledger balances of Dep-Govt & Public Bodies and Security Deposit

is reviewed for recovery/adjustment.

iv. Sundry Debtors

Balance lying in Sundry Debtors and due date of realization is reviewed along

with status.

v. Cash & Bank balances

As at the end of the month, the Cash and Cheques in Hand GL account shows

the balance only pertaining to the receipt as the last day of the month.

The balance of Main Bank Account should be in conformity with the Balance

as per bank Statement

Schedules for Bank Reconciliation statement need to be prepared every month

and review the status of cheque deposited and not encashed and cheque issued

but not presented for payment.

Ensure necessary adjustment entries for Time Barred cheques in accordance

with policy.

vi. Advances

Review of Advances- vendor wise schedules for advance made to Vendors,

Government and employees are prepared as at the end of the month and

reviewed.

Balance lying in PLA and Cenvat Register as per GL should match with the

Excise Records.

Balance lying in Cenvat in Transit account and Service Tax Credit Receivable

Account should be reviewed. Any old balance outstanding for long period

should be examined and appropriate action should be taken.

Balance lying in Cenvat on Hold Account should be reviewed to ensure that

balance represents 50% of the amount of cenvat credit (Basic+ Education Cess

+ Secondary Cess) for asset capital goods received during the year.

vii. Sundry Creditors

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Accounts payable includes balances related to subsidiary and associated

company, payable on account of SSI vendors, payable to employees, payable on

account of overseas transactions and payable on account of Government & Public

bodies and others. GL wise schedules need to be prepared with age analysis within 6

months and beyond 6 months.

Review of Clearing Account Balance – GR/IR Clearing, Cenvat Clearing,

Freight Clearing Account.

C. Profit and Loss Account

i. Sales and Other Income

Balance appearing in Misc. Income – Claim Realized and Misc. Income –

Sundries needs to be verified.

The Product-wise details of Export Sales to tally with the GL Balance

ii. Consumption – Raw Materials

Consumption figure may be derived from “opening stock + purchase-closing

stock = Consumption” The derived consumption value will match with the

consumption value shown in the GL accounts

iii. Manufacturing, Selling etc Expenses

To Ensure that all the expenses accrued till month end have been booked.

Analytical review is done for any variation with reference to earlier periods.

iv. Depreciation

Depreciation rates are reviewed based on note circulated by Head Office.

D. VARIANCE ANALYSIS

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This is done for all Balance Sheet accounts and Revenue accounts vis a

vis the corresponding previous quarter. Schedules are prepared based on

formats provided by HO for each line item in the B/S and P/L identifying the

reasons for variances.

2.6.8.5 PROCUREMENT AND PAYMENT PROCESS

A. RAISING OF PURCHASE ORDER

i. Purchase Order (PO) of Raw Material (RM – Tobacco and WMS) are

raised at Head Office.

ii. Purchase Order (PO) of Stores & Spare Parts is raised at Unit Level.

The comprehensive procedure of the raising of purchasing order or

procurement is mentioned in the following page,

Activities Coded (PD- Demand Based/ VB- Based on Reorder

Level)

Not Coded (Direct Indent)

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Raising of Purchase

Requisition

Reservation Created by User Department. MRP Run

made by CES after every 10 days which convert Reservation into PR.

User Department directly raises Purchase Requisition.

Quotation Comparative Quotation invited by CES

Comparative Quotation invited by User Department.

Raising of PO PO are created/ raised by CES Clerk and approved by

CES Manager.

PO are created/ raised by Commercial (Need to mention GL Code and Cost

Centre).

Release of PO If Amt. < Rs. 10,000 – By CES Manager

If Amt. > Rs. 10,000 – By I/C Procure. and CM

No need to release. However, PO signed by I/C Procurement , CM and BM in

all cases.

Receipt of Goods

GRN done by CES/ Other Factory

GRN done by Concerned User Dept. (However, in this case it would be directly charged off to PL without routing through Stock Account).

• Quotations required for Amount less than 5,000 is one and for amount

greater than 5,000 is three

• Justification note in case of single quote to be signed by Indenter,

Respective HOD, Branch Engineer

B. METHOD OF BILL PROCESSING

i. On receipt of bills from vendors, the respective departments (Engineering,

Finance, Human Resource, Logistics, Production, MIS etc. ) will enter in the

Bill Register in SAP selecting the respective category (“Bill with PO” or “Bill

without PO”) via SAP

ii. Bills will be forwarded to Commercial Department with the copy of the Bill

Register Report in order to ensure that all bills sent to Commercial are entered

in the Bill Register in SAP.

iii. On receipt of the bills from respective departments in commercial, it is

received in Finance in the Bill Register vide SAP (Bill Register System)

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ORGANIZATION STUDY AND RATIO ANALYSIS iv. I/C Bill Passing will, thereafter, distribute the bills to the members of the Bill

Passing team in Commercial for processing.

v. Voucher processing (SAP T Code – YF30) is done using SAP T-Code MIRO

(Bills against Purchase/Service Orders) and F-43 (Direct Bill without PO).

vi. After processing the vouchers the SAP Document number, generated by SAP,

is written on the face of the Invoice and print out of the document number will

be taken by using the SAP T Code YSFF12.

vii. The voucher printouts are attached with the Invoices and other supporting

documents, for e.g., Challan copies, etc and the stamps are affixed on the

voucher “ SERVICE TAX “for all Service Tax related transaction vouchers

and “VAT CREDIT “ for all the transaction vouchers where Vat credit is

availed. This segregation aids in separating the original bills at a later point in

time.

viii. These vouchers are forwarded to the designated manager for

passing/approving the voucher.

ix. Processed vouchers will get approved by the designated manager and

forwarded for further release in SAP system. All supporting are defaced by

affixing voucher passed stamp.

x. The approved vouchers are sorted out vendor wise and forwarded for release

to concerned manager.

xi. The vouchers are released by using SAP T Code YRF13. (Payment Block

Release). The concerned manager also will cross check the same aspects of the

Invoice and voucher while releasing.

xii. The released voucher is sent to the Cashier who will segregate the voucher on

the basis of mode of payment and execute the payment process.

SWOT ANALYSIS OF ITC

ITC is one of India's biggest and best-known private sector companies. In fact it

is one of the World's most high profile consumer operations. Its businesses and brands

are focused almost entirely on the Indian markets, and despite being most well-known

54

ORGANIZATION STUDY AND RATIO ANALYSIS for its tobacco brands such as Gold Flake, the business is now diversifying into new

FMCG (Fast Moving Consumer Goods) brands in a number of market sectors -

including cigarettes, hotels, paper, agriculture, packaged foods and confectionary,

branded apparel, personal care, greetings cards, Information Technology, safety

matches, incense sticks and stationery. Examples of its successful new FMCG

products include:

Aashirvaad - India's most popular atta brand with over 50% market

share. It is also present in spices and instant mixes.

Mint-o - Mint-0 Fresh is the largest cough lozenge brand in India.

Bingo! - a new introduction of finger snacks.

Kitchens of India - pre-prepared foods designed by ITC's master chefs.

Sunfeast - is ITC's biscuit brand (and the sub-brand is also used on some

pasta products.

3.1 STRENGTHS

ITC leveraged it traditional businesses to develop new brands for new

segments. For example, ITC used its experience of transporting and

distributing tobacco products to remote and distant parts of India to the

advantage of its FMCG products. ITC master chefs from its hotel chain are

often asked to develop new food concepts for its FMCG business.

ITC is a diversified company trading in a number of business sectors

including cigarettes, hotels, paper, agriculture, packaged foods and

confectionary, branded apparel, personal care, greetings cards, Information

Technology, safety matches, incense sticks and stationery.

3.2 WEAKNESSES

The company's original business was traded in tobacco. ITC stands for

Imperial Tobacco Company of India Limited. It is interesting that a business

55


that is now so involved in branding continues to use its original name, despite

the negative connection of tobacco with poor health and premature death.

To fund its cash guzzling FMCG start-up, the company is still dependent

upon its tobacco revenues. Cigarettes account for 47 per cent of the company's

turnover, and that in itself is responsible for 80% of its profits. So there is an

argument that ITC's move into FMCG (Fast Moving Consumer Goods) is

being subsidized by its tobacco operations. Its Gold Flake tobacco brand is the

largest FMCG brand in India - and this single brand alone holds 70% of the

tobacco market.

3.3 OPPORTUNITIES

Core brands such as Aashirvaad, Mint-o, Bingo! And Sun Feast (and

others) can be developed using strategies of market development, product

development and marketing penetration.

ITC is moving into new and emerging sectors including Information

Technology, supporting business solutions.

e-Choupal is a community of practice that links rural Indian farmers

using the Internet. This is an original and well thought of initiative that could

be used in other sectors in many other parts of the world. It is also an

ambitious project that has a goal of reaching 10 million farmers in 100,000

villages.

ITC leverages e-Choupal in a novel way. The company researched the

tastes of consumers in the North, West and East of India of atta (a popular type

of wheat flour), then used the network to source and create the raw materials

from farmers and then blend them for consumers under purposeful brand

names such as Aashirvaad Select in the Northern market, Aashirvaad MP

Chakki in the Western market and Aashirvaad in the Eastern market. This

concept is tremendously difficult for competitors to emulate.

Chairman Yogi Deveshwar's strategic vision is to turn his Indian

conglomerate into the country's premier FMCG business.

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Per capita consumption of personal care products in India is the lowest in

the world offering an opportunity for ITC's soaps, shampoos and fragrances

under their Wills brand.

3.4 THREATS

The obvious threat is from competition, both domestic and international.

The laws of economics dictate that if competitors see that there is a solid profit

to be made in an emerging consumer society that ultimately new products and

services will be made available. Western companies will see India as an

exciting opportunity for themselves to find new market segments for their own

offerings.

ITC's opportunities are likely to be opportunities for other companies as

well. Therefore the dynamic of competition will alter in the medium-term.

Then ITC will need to decide whether being a diversified conglomerate is the

most competitive strategic formation for a secure future.

RESEARCH METHODOLOGY

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4.1 RESEARCH DESIGN OF THE STUDY:

Research simply means a search for facts, answer to questions and solution to

problems. Research is a systematic and logical study of an issue or problem or

phenomenon through scientific method. It is a systematic and objective analysis and

according of controlled observations that may lead to development generalization

principle resulting in prediction and possibly ultimate control of events. A research

design is arrangements of condition for the collection and analysis of data in a manner

that aims to combine relevance to the research purpose with economy procedure.

There various research design methods but descriptive and analytical research design

is more suitable for the study.

This research is by and large a desk research and involved the following methods.

a) Scanning though standard textbooks to understand the theory behind financial

performance appraisal.

b) Collection of company’s specific literature i.e., companies profile and annual

reports over this study period.

c) Identification of financial ratios likely to reflect financial performance adequately.

d) Calculation of these ratios over the study period and tabulation.

e) Finally, forwarding certain recommendations and conclusions to the company.

4.2 METHODOLOGICAL ASSUMPTIONS:

(a) Definition used for various financial ratios in the project is assumed to be

universal.

(b) It is assumed that financial performance is the ultimate index of performance of

company.

(c) It is also assumed that ratios selected for this study reflects financial performance

well and adequately.

4.3 STATEMENT OF THE PROBLEM:

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Changes in the financial performance of the company could be due to several

reasons, changes in profit, changes in operating efficiency, changes in quality of

debtors and many more other reasons. The financial position of the company cannot

be stationary, but it is dynamic owing to the shift in its financial position with regard

to various financial parameters.

Analysis of the financial performance tries to find out the reasons for shift in

position and tires to establish a trend of the direction in which the business is moving

in. Therefore using general terminology, the statement of the problem could be

generalized as a detection of reasons for variation in the financial position of the

company.

4.4 NEED AND PURPOSE OF THE STUDY:

The ultimate performance indicator of any company could financial indicators

because obviously all costs and efficiencies will get reflected in the financial mirror,

once again reasons for variations in the financial position could be several.

By analyzing systematically the identified financial ratios, which reflect

financial performance well and adequately, the company could understand its own

position over time. Such a broad understanding will be of great relevance to the

managers of the company investors (present potential) as well as to any other

party/parties interested in the company.

In other words financial performance evaluation will serve as an eye opener to

any company and the company in question is no exception has this study.

4.5 OBJECTIVES OF STUDY:

a) Analysis of the financial performance of the company.

b) To detect certain financial ratios which are likely to reflect the variability in

profit?

c) To conduct firm comparison over the study period from 2004-05 to 2009-10.

4.6 SCOPE OF THE STUDY:

59


Financial performance evaluation as well as proved area and innumerable

studies have proved the utility and usefulness of this analytical technique by analyzing

financial performance employing certain selected financial ratios the company in

question managers, present and potential investors, outside parties as such as creditors

and sectors of the government employees and many more could get an idea of the

performance of the company over the study period (any other two period). While

doing so the project has dealt upon obtaining an understanding of general competition

in this line of activity also. Therefore scope of the study extends over parties both

insider and outsides of the firms.

4.7 TOOLS OF DATA COLLECTION:

Data was collected through discussion and interview with concerned

Executives in the ITC

4.8 SOURCES OF DATA:

Primary as well as secondary data has been collected for the purpose of the

study. The primary data is collected in the information from the concerned to

officials. The secondary data collected from the records

4.9 LIMITATIONS OF THE STUDY:

a) Ratio analysis is a widely used technique to evaluate the financial position and

performance of a business but these is certain problem in using ratios. The

analyst should be aware of these problems.

b) The major constraint for the study was the timing of the study the vastness of

the financial statement was another factor of limitation. The study is based on

the data given by the officials and reports of the company the confidentiality

of some facts and figures are also limitation.

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c) Financial statement analysis is based on balance sheet, profit and loss account

prepared as per accounting practice. This practice is some cases may lead

window-dressing to cover up bad financial position.

d) Financial Statements analysis is suffers from inherent weakness of accounting

practice such as their historical nature matching principle etc.

e) This study is based on only 6 years.

RATIO ANALYSIS

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5.1 FINANCIAL STATEMENTS:

Financial statements, as used incorporate business houses, refer to a set of

reports and schedules, which an accountant prepares at the end of the period of time

for a business enterprise. The financial statements are the means with the help of

which the accounting system perform its main function affairs of the business. These

statements comprise balance sheet and profit and loss account. In India, every

company has to present its financial statements in the form and contents as prescribed

under section 211 of the Companies Act 1956.

5.2 BALANCE SHEET:

Balance sheet is a statement showing the nature and amount of a company’s

assets on one side and liabilities and capital on the other. It shows the financial

conditions of a company at the end of a given period usually at the end of one-year

period. Balance sheet shows how the money has been made available to the business

of the company and how the money is employed in the business.

5.3 PROFIT AND LOSS ACCOUNT:

Earning profit is the principal objective of all business enterprise and profit

and loss account is the document, which indicates the extent of success achieved by

the business in meeting this objectives. Profits are of primary importance to the Board

of Directors in evaluating the management of a company, to shareholders in making

investment decisions and to bank and other creditors in judging the loan repayment

capacities and ability of the company.

5.3.1 Nature of Financial Statements:

Financial statements are prepared for the purpose of presenting periodical

review or report on the progress by the management and deal with-

(a) Status of the Investments in the Business.

(b) Results achieved during the period under review.

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ORGANIZATION STUDY AND RATIO ANALYSIS The Data exhibited in these financial statements are the result of the combined effect

of

1. Recorded facts

2. Accounting conventions.

3. Postulates or assumptions made to implement conventional procedures

4. Personal judgments used in the applications of conventions and postulates and

5. Accounting Standards and guidance notes.

5.3.2 Objectives of Financial Statements:

The accounting principles Board of America mentions the objectives of

financial statements as follows:

1) To provide reliable financial information about economic resources and

obligations of a business enterprise.

2) To provide reliable information about the net resources (resources less

obligations) of an enterprise that results from its activities.

3) To provide financial information that assists in estimating the earning

potentials of a business.

4) To provide other needed information about changes in economic resources and

obligations.

5) To disclose to the extent possible, other information related to the financial

statements that is relevant to the needs of the users of these statements.

5.3.3 Importance of Financial Statements:

The most important objective of financial statements is to present information

for the use of different categories of persons as mentioned below:

Management: Financial statements and accounts are of a very great help in

understanding the progress, position and prospects of the business. Financial

statements, by helping the management to be acquainted with the causes of the

business results, enable them to formulate appropriate policies and course of action

for the future. A comparative analysis of financial statements should enable

63

ORGANIZATION STUDY AND RATIO ANALYSIS management to see the trends in the progress and position of and make suitable

modifications in policies to avert unfavorable situation.

Public: Business is a social entity. Various group of the society, though not directly

connected with business, position and prospects of a business enterprise. These

groups are financial analysts, trade associations, labor unions, financial press, students

and teachers, etc. It is only through the published financial statements that the people

can analyze, judge, and comment upon the business enterprise.

Shareholders and Lenders: The financial statements serve as a useful guide for the

shareholders the suppliers and the lenders of a company. It is through critical

examination of the financial statements that these groups can come to know about the

efficiency and effectiveness of the management and position, progress and prospects

of the company. For this purpose, it is necessary that the financial statements should

contain accurate, complete and systematic facts and figures. So that these people can

get full and accurate ideas regarding the present position and the future of the

company.

Labor and Trade Union: In India workers are entitled to Bonus, under the payments

of Bonus act, depending upon the size of the profit as disclosed by audited and a

profit and loss account. Thus Profit and loss account becomes greatly important to the

workers. In wage negotiations also, the size of profits and the profitability achieved

are greatly relevant.

5.3.4 Limitations of Financial Statements:

1) Financial statements are prepared primarily for shareholders; other interested

parties have to generally make many adjustments before they use them

profitably.

2) It is not always possible to discover false figures in financial statements;

unscrupulous managements generally resort to “Window dressing” in the

preparation of such statements.

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3) Quite often financial statements do not disclose current worth of the business.

Only historical facts are presented and the true current worthies not reflected.

4) Financial statements take into consideration only the financial factors. They

fail to bring out the significance of non-financial factors.

5.3.5 Analysis of Financial Statements:

Analysis of financial statements refers to the treatment of information

contained in the financial statement in a way so as to afford a full diagnose of the

profitability and financial position of the firm concerned.

The process of analyzing financial statements, involves the rearranging,

comparing and measuring the significance of financial and operating data. Such a step

helps to reveal the relative significance and effect of items of the data in relation to

the time period and/or between two organizations.

According the Myers, “Financial statement analysis is a largely a study of

relationship among the various financial factors in business ad disclosed by a single

set of statements and a study of the trend of these factors as shown in a series of

statements”.

5.3.6 Types of Financial Statement Analysis:

1. Horizontal Analysis: When financial statements for a number of years are

reviewed and analyzed, the analysis is called ‘Horizontal Analysis’. As it is

based on date from year to year rather than on one date or period of time as a

whole, this is also known as ‘Dynamic Analysis’. This is very useful for Long-

term trend analysis and planning.

2. Vertical Analysis: It is frequently used for referring to ratios developed for

one date or for one accounting period. Vertical analysis is also called ‘Static

Analysis’. This is not very conductive to proper analysis of the firm’s financial

position and its interpretation as it does not enable to study data in perspective.

This can only be provided by study conducted over a number of years so that

comparisons can be affected. Therefore, vertical analysis is not very useful.

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ORGANIZATION STUDY AND RATIO ANALYSIS 5.3.7 Methods of Analyzing Financial Statements:

Analytical methods and devices used in analyzing financial statements are as

follows:

1) Comparative Statements.

2) Common-size statements

3) Trend ratio

4) Fund flow Statements

5) Ratio Analysis

1. Comparative Statements: The comparative Balance Sheet analysis in the

study of the trend of the same items group of the items and computed items in

two or more balance sheet of the same business enterprise on different dates.

The changes in the period balance sheet items at the end of a period can be

observed, which reflects the conduct of a business.

2. Common-size Statement: Common-size statements facilities both type of

analysis horizontal as well as vertical analysis. It not only compares across

years but each individual item of group of assets and liabilities is related to the

total of the group in respect of each year. It means individual current asset is

shown as a percentage of total current assets. Main advantage of common-size

statements is that a comparison of performance and financial condition in

respect of different units of the same industry can also be done.

3. Trend Analysis: The easiest way to evaluate the performance of a bank is to

compare its percent ratio with the past ratio when financial ratios over a period

of time are compared it is known as time series or trend analysis. It gives an

indication of change and reflects whether financial performance has improved

or has deteriorated or has remained constant over time.

4. Fund flow Statements: The Fund flow statements is a method by which we

study changes in the financial position of a business enterprises between

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beginning and ending financial statements dates. It is a statement showing

sources and application of funds for a period of time. It is a complimentary

statement to the income statement. Fund flow statements considers both

capital and revenue items.

5.3.8 Objectives of Financial Statements Analysis:

1) The analysis would enable the present and the future earning capacity and the

profitability of the concern.

2) The operational efficiency of the concern as a whole as well as department

wise can be assessed. Hence, the management can easily locate the areas of

efficiency and inefficiency.

3) The solvency of the firm, both short-term and long-term, can be determined

with the help of the financial statement analysis which is beneficial to trade

creditors and denture holders

4) The comparative studying regard tone firm with another firm or one

department with another department is possible by the analysis of financial

statements.

5) Analysis of past results in respects of earning and financial position of the

enterprise is of great helping forecasting the future results. Hence, it helps in

preparing Budget.

5.3.9 Limitations of Financial Statements Analysis:

1) Analysis of financial statements is a tool, which can be used profitably by an

expert analyst but may lead to faulty conclusions if used by unskilled analyst.

So the result cannot be taken as judgments or conclusions.

2) Financial statements are interim reports and therefore cannot be final because

the final gain or loss can be computed only at the termination of the business.

Financial statement reflects the progress of the position of the business so

analyses of these statements will not conclusive evidence of the performance

of the business.

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3) The reliability of analysis depends on the accuracy of the figures used in the

financial statements. The analysis will be vitiated by manipulations in the

income statements or balance sheet and accounting procedure adopted by the

accountant for recording.

4) The results for indications derived from analysis of financial statements may

be differently interpreted by different users.

5) There are different tool of analysis available for the analyst. However, which

to be used in a particular situation depends on the skill, training and expertise

of the analyst and the result will vary accordingly.

5.4 RATIO ANALYSIS:

Ratio analysis is one of the tool or technique of management accounting. It is

most widely used for the analysis of financial statements. Such as the profit and loss

account or the Income statements, balance sheet. These financial statements are the

financial position. These financial statements are really useful to the executives,

owners, creditors, investors etc. Based upon the financial statements, users can form

judgment about the operating performance of the firm and financial position of the

firm. A creditor can ascertain the liquidity position of the firm that is the ability of the

firm to repay its current liabilities. The management of the firm analyzes the financial

statement to judge the operating efficiency of the firm. The shareholders (owners)

analyze the financial statement of the firm to find out the profitability. The investors

analyze the financial statement of the firm to know the ability of the firm to pay

interest regularly. The future plans of the firm should be laid down in the view of the

firm’s financial strength and weakness. The financial statement contains the items

relating to profit and loss of a firm. But these figures are not enough to be much use,

if they are consider individually. They will be very useful only when one item is

compared with another item Individual items comparison in financial statements

efficiently is possible only by ratio analysis technique. Simply we can say Ratio is the

relationship between two accounting figures, expressed mathematically.

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According to Prof. Springfield, Prof. Mass & Prof. C. Merrium, a ratio is

defined as “The indicated Quotient of two mathematical expressions” and as “The

relationship between two or more things”.

5.4.1 Nature and scope of Ratio Analysis:

Ratio analysis is effective tool of financial analysis available to a financial

analyst. Ratio analysis is a one of the tool or technique of financial analysis. The other

tools of financial analysis are:

(1) Comparative financial statement analysis.

(2) Common-size statement analysis.

(3) Trend analysis or Trend percentage.

(4) Fund flow Analysis.

(5) Cash flow Analysis.

Ratio Analysis is a process of determining and interpreting numerical

relationship of different figures in the financial statements. It is statistical yardstick

that provides a measure of relationship between two accounting figures; this

relationship can be expressed in the terms of percentage or as a quotient. (One of them

as a certain number of times the other item).

There are several ratios, which an analyst can adopt, but the type of ratios he

would precisely use depends upon the purpose for which the analysis is made. Ratio

analysis simplifies the understanding of financial statements. It facilitates inter-firm

comparison and as well as intra-firm comparison. Ratio analysis is useful not only to

the insiders. But also to outsiders like creditors, investors etc.

5.4.2 Objectives of Ratio Analysis:

1) To analyze the financial position of the firm by using the various accounting

ratios.

2) To know the liquidity position of the firm that is the firm’s relative strengths

and weakness of the firm.

3) To know the various source utilized by the firm.

4) To know the amount of debt in the firm.

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5) To provide information to the investors in Investment Decision.

6) To compare financial position of the firm in the current year with the previous

years’ financial position.

7) To know the season effects in the firm, that is cost position of the firm

between the profit making and loss-making period.

8) To help the management in planning, controlling and decision making.

9) To finds out the solution to the unfavorable financial conditions and financial

performance.

10) To take the suitable corrective measures when the firm’s financial conditions

and performance are unfavorable to the firm when compared to other firms in

the same industry.

5.4.3 Statement of the Study:

A financial Statement contains income statement showing sales, purchase,

revenue, tax, expenses etc.; on the other side, the balance sheets show the liabilities

and sets position during the year.

A study of financial performance is compared of the following:

a) Analysis of the liquidity and profitability of current assets and current liabilities.

b) Analysis of the long-term financial position of current assets and current

liabilities.

c) Analysis of various components of working capital (cash, receivables, inventories,

etc.).

5.4.4 Limitations of Ratio Analysis:

1) Usefulness of ratios depends upon the abilities and intentions of the persons

who handle them. It will be affected considerably by the bias of such persons.

2) Ratios are worked out on the basis of money values only. They do not take

into account the real valves of various items involved. Thus, the technique is

not realistic in its approach.

3) Historical values (especially in balance sheet) are considered in working out

the various ratios. Effects of charges in the price level of various items are

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ignored and to that extent the comparisons and evaluations of performance

through ratios become unrealistic and unreliable.

4) One particular ratio, in isolation is not sufficient to review the whole business.

A group of ratios are to be considered simultaneously to arrive at any

meaningful and worthwhile opinion about the affairs of the business.

5) Since management and financial policies and practices different from concern

to concern, similar ratios may not reflect similar state of affairs of different

concerns. Thus, comparisons of performance on the basis of ratios may be

confusing.

6) Since ratios are calculated on the basis of financial statements, which are

themselves affected greatly by the firm accounting policies, and changes these

in, the ratios may not be able to bring out the real situations.

5.5 CLASSIFICATION OF RATIOS:

1. Short-term solvency Ratios:

(a) Current Ratio

(b) Quick Ratio

(c) Absolute Liquid Ratio

(d) Inventory to working capital ratio

2. Long-term solvency Ratios:

(a) Debt-Equity Ratio

(b) Proprietary Ratio

(c) Solvency Ratio

(d) Fixed Assets to net worth Ratio

(e) Current assets to net worth ratio

(f) Current Liabilities to net worth ratio

(g) Fixed Assets ratio

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3. Turnover or Activity Ratios:

(a)Stork turnover Ratio

(b)Debtors turnover Ratio

(c)Creditor turnover Ratio

(d)Cash turnover Ratio

(e)Working capital turnover Ratio

(f)Fixed Assets turnover Ratio

(g)Current Assets turnover Ratio

(h)Total Assets Turnover Ratio

(i)Sales to net worth Ratio

4. Profitability Ratios:

(a)Gross profit Ratio

(b)Net profit Ratio

(c)Operating Cost Ratio

(d)Operating Profit Ratio

(e)Total Assets Ratio

(f)Return on Equity Ratio.

5.5.1 Short Term Solvency or Liquidity Ratios:

There are the ratios, which measures the short-term solvency or financial

position of the firm. These ratios are calculated to comment upon the short-term

paying capacity of a concern or the firm’s ability to meet its current obligations.

1) Current Ratio: The current ratio is calculated by dividing current assets by current

liabilities. Current assets include cash and other assets which can be converted into

cash within the normal course of the business (that is normal 12 months) such as bills

receivable, securities, advances, outstanding accrued income and prepaid expenses.

All obligations maturing within a year are included in current liabilities. Thus, current

liabilities include bills payable, sundry creditors, provision for income tax, unclaimed

72

ORGANIZATION STUDY AND RATIO ANALYSIS dividend, proposed dividend and long-term debt maturing in the current year. Current

ratio measures the firm’s short-term solvency position. It indicates the availability of

current assets in rupees for everyone rupee current liability. If the ratio is more than

two means that the firm has more current assets, shows high liquidity position of the

firm. When current liabilities are more than current assets means the liquidity position

of the firm is poor. Standard or ideal current ratio is 2:1. The current assets fixed at

two times the current liabilities. The idea behind this fixation is to leave a margin of

safety to cover any fall in the value of current assets and also leave sufficient working

capital after the payment of current liabilities. Current assets twice of current

liabilities or more considered to be satisfactory.

Current Assets

Current Ratio = ----------------------

Current Liabilities

2) Quick Ratio: The quick or acid test ratio is a more defined measure of the firm’s

liquidity. This ratio establishes a relationship between quick or liquid assets and

current liabilities. An asset is liquid, if it can convert into cash immediately or

reasonably soon without loss of value. Cash is the most liquid asset. The other assets,

which are considered relatively liquid and included in the quick assets, are book debts

and marketable securities. Stock or inventory and prepaid expenses are considered to

be less liquid. Inventories normally require sometime for realizing into cash. The

quick ratio is found out by dividing the total of the quick assets by the total current

liabilities. The quick or acid test ratio is sometimes called “Liquidity Ratio”.

Quick/Liquid Assets

Quick/ Acid Test Ratio = -------------------------

Current Liabilities

Quick assets include cash and book debts (debtors and bills receivable) only.

Inventories are excluded because it takes time to sell finished goods and convert raw

73

ORGANIZATION STUDY AND RATIO ANALYSIS materials and work in progress into finished goods. There is also uncertainty as to

whether or not the inventories can be sold. Since the prepaid expenses cannot be

converted into cash the prepaid expenses are excluded. By conversion a quick ratio of

1:1 considered satisfactory. It is considered that, if quick assets are equal to current

liabilities, then the concern can meet its obligations.

3) Absolute Liquid Ratio: It is calculated by dividing absolute liquid assets by liquid

liabilities. It is a measure of firm’s present liquidity position to pay its immediate

payments.

Absolute Liquid Assets

Absolute Liquid Ratio = -------------------------

Liquid Liabilities

Absolute liquid assets include cash in hands and cash at bank only. Ideal absolute

liquid Ratio is 0.5:1.

4) Inventory to Working Capital Ratio: It is the ratio of inventory to working

capital. Inventory to working capital ratio is usually expressed as a percentage. It is

expressed as

Inventory

Inventory to Working Capital Ratio = --------------------- x 100

Working capital

This ratio indicates the proportion of working capital tied up in inventories or stocks.

It also indicates whether there is overstocking or under stocking. As per the standard

inventory to working capital ratio the inventories should not absorb more than 75% of

working capital. As such a low inventory to working capital ratio (that is a ratio of

less than 75%) indicates under stocking, and so high liquid position, while a high

inventory to working capital ratio (i.e., a ratio over 75%) indicates overstocking

capital and so, a low liquid position

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ORGANIZATION STUDY AND RATIO ANALYSIS 5.5.2 Long-Term Solvency Ratios / Leverage Ratios:

Long-term solvency ratio conveys a firm’s ability to meet the interest/costs

and repayment schedule of its long-term obligations. These ratios are helpful to

management in proper administration of capital. It also helps the creditors to know the

capacity of a business concern to pay debt in future.

a) Debt-Equity Ratio: The term debt signifies total indebtedness of the company as

shown by its short and long-term obligations. Equity refers to the aggregate

ownership interest measured by the total share capital plus any reserves, which may

rightly and legitimately be appropriate to the shareholders.

The ratio can be calculated in two ways:

(1) Total Debt/Net worth

(2) Net worth/Total Debt

Both these methods are in practice but the interpretation of each requires a

great deal of caution. The fundamental objective of it is to measure the relative

interest of owners and creditors in the enterprise. It also measures the extent of trading

on equity. From the creditors point of view it signifies the extent to which their

interests are covered by net worth of the enterprise. The creditors, however, prefer a

lower debt to equity ratio as it gives them greater cushion against possible loss in the

event of the liquidation of the enterprise. The owners, on the other hand, prefer a high

debt to equity ratio as this will give them better returns with a smaller capital

contribution.

If the debt is less than two times the equity, the logical conclusion is that the

financial structure of the concern is sound. On the other hand, if the debt is more than

two times the equity, the conclusion is the financial structure of the undertaking is

weak.

Debt

Debt Equity Ratio = ---------

Equity

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ORGANIZATION STUDY AND RATIO ANALYSIS b) Proprietary Ratio: It is a variant of the debt equity ratio. It is the ratio, which

expresses the relationship between the net worth or equity and total assets.

Net worth

Proprietary Ratio = ----------------

Total Assets

i. It is an index of the amount of the proprietors funds invested on the total

assets of a concern

ii. It is also indicates the proportion between owned capital (i.e., proprietors

fund) and loaned capital (i.e., borrowed funds or liabilities).

iii. It indicates the relative risks of the owners and the creditors of an enterprise.

The higher the proprietary ratio the stronger is the financial position of the concern

and lower the proprietary ratio, the weaker is the financial position of the enterprise.

c) Solvency Ratio: This ratio measures the long term solvency of the business. It

reveals the relationship between total assets and total external liabilities. External

liabilities mean all long term and short liabilities. It is the difference of 100 and

proprietary ratio. It is calculated as follows:

Total liabilities

Solvency Ratio = ---------------------------

Total Assets

The ratio measures the proportion of total assets provided by creditors (long-term as

well as short-term) of the firm. That is what part of assets is being financed from

loans. If total assets are more than external liabilities, the firm is treated as solvent.

So, the higher the ratio, greater is the amount of creditors that is being used to

generate profits for the owners the firm.

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ORGANIZATION STUDY AND RATIO ANALYSIS d) Fixed Assets Ratio: This ratio is also called the capital employed to fixed assets.

As per sound financial policy acquisition of fixed assets should be financed form

long-term funds only. To test whether this policy is properly followed or not, this ratio

is calculated. It expresses the relationship between long-term funds or capital

employed and fixed assets of the firm. Expressed as a formula, the ratio is

Long-term Funds Capital Employed

Fixed Assets Ratio = ---------------------- or ----------------------

Fixed Assets Fixed Assets

Long-term funds include equity share capital, preference share capital, all reserves

and surplus and long-term loans. Fixed Assets mean net fixed assets. That is fixed

assets after deducting depreciation and long-term investments including shares of

subsidiary companies.

This ratio indicates whether proper adjustment between long-term sources and long-

term uses of capital exists or not Fixed Assets Ratio of more than one reveals that

long-term funds have been employed to finance current assets on the contrary a ratio

of less than one indicates that a part of fixed assets is financed by short-term funds.

e) Fixed Assets to Net worth Ratio: It is the ratio between fixed assets to net worth.

Net Fixed Assets

Fixed Assets to Net worth Ratio = -------------------------

Net worth

This ratio indicates the proportion of fixed assets financed by the owner. In other

words it indicates as to what extent the owners have invested funds on the fixed

assets, which constitute the main structure of the business.

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ORGANIZATION STUDY AND RATIO ANALYSIS f) Current Assets to Net worth Ratio: It is the ratio between current assets and net

worth.

Current Assets

Current Assets to Net worth = -------------------

Net worth

This ratio indicates the proportion of current assets financed by the owners. There is

no standard for this ratio but one can say that if this ratio is high the financial strength

is good and if it is low the financial position of the concern is weak.

g) Current Liabilities to Net worth Ratio: Current Liabilities to net worth ratio is

the ratio between Current liabilities to Net worth.

Current Liabilities

Current Liabilities to Net worth Ratio = ----------------------

Net worth

This ratio indicates the relative contributions of the short-term creditors and the

owners in the capital of an enterprise. If the ratio is very high, it would mean that the

liability base of the concern will not provide an adequate cover for long-term

creditors. That means it would be difficult for the concern to obtain long-term funds.

5.5.3 Activity Ratios / Performance Ratios / Turnover Ratios:

Activity ratios refer to ratios, which measure the level of activities,

performance or the operating efficiency of enterprise.

a) Stock Turnover Ratio: It is the ratio, which indicates the no. Of times the stock is

turned (i.e., sold) during a year. It is the ratio between stock and the cost of goods

sold.

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Cost of Goods Sold

Stock Turnover Ratio = ------------------------

Average Stock

It can also be expressed in terms of so many months, weeks or days.

Average stock X Months X Weeks or days in a year

------------------------------------------------------------

Cost of goods sold

This ratio indicates the velocity with which goods move out of the business, i.e., it

indicates the member of times the average stock of finished goods is turned over or

sold during a year. It also indicates whether this is over stocking or lender stocking of

finished goods. It helps the management to know whether the stock of finished goods

held sales are reasonable or unreasonable as compared with predetermined standard.

Again it helps to determine even the liquidity of a concern as it indicates the rate at

which the inventory or stock is converted into sales and then into cash. A stock

turnover of 8 times a year is considered ideal.

b) Receivable Turnover, Debtors Turnover or Debtors velocity: It is the ratio,

which indicates the relationship between debtors, and sales, it indicates the number of

times the debt is collected in a year.

Net Annual Credit Sales

Debtors Turnover Ratio = --------------------------------

Average Debtors

This ratio indicates the rate at which the amounts are collected from the debtors. This

also indicates the liquidity of the concern as the rate at which debts are collected

influences the liquidity of the concern.

Debt collection period: This is the ratio, which indicates the extent to which Debt has

been collected in time. In other words this is the ratio, which indicates the average

79

ORGANIZATION STUDY AND RATIO ANALYSIS time taken by the firm to collect debts. It is the ratio, which indicates the average

collection period or the average period of credit allowed to debtors. If the actual

period of credit allowed is more than the normal period of credit or the ideal period of

credit like 30days the indication is that the credit period is not efficient.

c) Creditors Turnover Ratio or Creditors Velocity: Creditors Turnover Ratio is the

ratio between creditors and purchases. It is the ratio, which indicates the number of

times the creditors are paid in a year.

Net Annual Credit Purchases

Creditors Turnover Ratio = ---------------------------------------

Average Creditors

This indicates the rate at which payments are made to creditors or the number of times

payments are made to creditors.

Debt Payment Period: This is the ratio, which is used to indicate the time within

which payments are made to the creditors.

No. Of Days in a year

Debt Payment period = -----------------------------------

Creditors Turnover

This ratio indicates the average period of credit received from creditors further a

comparison of this ratio with debt collection period ratio will indicate the time lag

between the two period of credit and the time lag between tow credit periods will

indicate the duration for which working capital is required to be arranged. The Debt

payment as calculated is compared with the standard or ideal payment viz., 30 days

And conclusions are drawn.

d) Cash Turnover Ratio: It is the ratio between Cash and Turnover or Sales.

Net Annual Sales

Cash Turnover Ratio = ------------------------

Cash

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This ratio indicates the extent to which cash resources are efficiently utilized by the

enterprise. It is also helpful in determining the liquidity of a concern.

e) Working Capital Turnover Ratio: It is the Ratio between working capital and

turnover.

Net Sales

Working Capital Turnover Ratio = -------------------

Working Capital

This ratio indicates the efficient or inefficient utilization of the working capital of an

enterprise. There is no standard or ideal working capital turnover ratio. But one can

say that the higher the working capital turnover ratio the greater is efficiency. It

should be noted that a very high working capital turnover ratio means over trading,

and a very low working capital turnover ratio means under trading. None-of which is

good for a concern.

f) Fixed Assets Turnover Ratio: Fixed Assets turnover ratio is the ratio between

fixed assets and turnover. Fixed assets, here, means net fixed assets, i.e., fixed assets

less depreciation. This ratio indicates as to what extent the fixed assets of a concern

have contributed to sales.

Net Sales

Fixed Assets Turnover Ratio = ---------------

Fixed Assets

A fixed assets turnover ratio of 5 times or more indicates better utilization of fixed

assets. It may be noted that a very high fixed assets turnover ratio means under

trading, which is not good for the business.

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ORGANIZATION STUDY AND RATIO ANALYSIS g) Current Assets Turnover Ratio: Current assets turnover ratio is the ratio between

current assets and sales (Net sales).

Net Sales

Current Assets Turnover Ratio = -----------------

Current Assets

This ratio indicates the contribution of current assets to net sales. There is no standard

or ideal current assets turnover ratio. Yet, the inference is that a high current assets

turnover ratio is an indication of a better utilization of current assets on the other

hand; a low current assets turnover ratio suggests that the current assets have not been

utilized effectively.

h) Total Assets Turnover Ratio: This is the ratio between total assets and Net sales.

Net Sales

Total Assets turnover Ratio = ------------------

Total Assets

This ratio indicates the efficiency or inefficiency in the use of total resources

or assets of a concern. The standard ratio is that the sales should be at least two times

the value of the assets. A total assets turnover ratio of 2 times or more indicates that

the assets of a concern have been utilized effectively.

i) Sales to Net worth ratio: It is also called as owned capital turnover ratio. It is the

ratio between net annual sales and net worth that is owners’ fund.

Net Annual Sales

Sales to Net worth Ratio = ------------------------

Net worth

This ratio is a good index of the utilization of the owner’s funds. It is also indicates,

whether there is over trading or under trading. Again it indicates whether there is over

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ORGANIZATION STUDY AND RATIO ANALYSIS capitalization or under capitalization. If the volume of sales in relation to net worth is

reasonable, the indication is the owner’s funds have been effectively utilized.

5.5.4 Profitability Ratios:

They are the ratios, which measure the profitability of a concern in other

words they are ratios, which reveal the total effect of the business transaction on the

profit position of an enterprise and indicated how far the enterprise has been

successful in its aim.

(1) Gross Profit Ratio or Turnover Ratio: It is the ratio, which expresses the

relationship between gross profit and sales.

Gross Profit

Gross Profit Ratio = ----------------------- x 100

Net Sales

This ratio indicates the gross results of trading or the overall margin within

which a business undertaking most limit its operation expenses to earn sufficient

profit. It also indicates whether the average markup on the goods has been maintained

or not. The actual gross profit ratio is compared with the gross profit ratio of the

previous year and those are concern carrying on similar business, If it is high then it is

an indication good results and vice versa.

(2) Net Profit Ratio: Net Profit means final balance of operating and Non-operating

incomes after meeting all expenses, that is both operating and non-operating. Sales

mean total sales, but net sales, i.e., total sales minus sales returns.

Net Profit

Net Profit = ------------ x 100

Net Sales

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ORGANIZATION STUDY AND RATIO ANALYSIS This ratio indicates the quantum of profit earned by a concern. A high net profit ratio

indicates that the profitability of the concern is good. A low net profit ratio indicates

that the profitability of the enterprise is poor.

(3) Operating Cost Ratio: Operating Cost refers to all expenses incurred for

operating or running a business. It comprises cost of goods sold plus operating

expenses, such as office and administration expenses and selling and distribution

expenses.

Operating Cost

Operating Cost Ratio = ------------------ x 100

Net Sales

The operating ratio indicates the efficiency of the management in the conduct of the

business. A low operating ratio is indication of the operating efficiency of the

business; on the other hand, a high operating ratio is an indication of the operating

inefficiency of the business.

(4) Operating Profit Ratio: Operating profit is the net profit earned forms the

business for which the concern is started. In other words, it is the excess of net sales

over the operating cost. The operating profit ratio is, generally expressed as a

percentage.

Operating Profit

Operating Profit Ratio = --------------------- x 100

Net Sales

The operating profit ratio also indicates the operating efficiency or inefficiency of a

business. An operating profit ratio of 10% or more is an indication of the operating

efficiency of the business, while an operating profit ratio of less than 10% is an

indication of the operating inefficiency of the business.

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ORGANIZATION STUDY AND RATIO ANALYSIS (5) Return on Total Resources Ratio: Return on Total Resources is also called as

Total Assets Ratio. Return on total resource ratio is the ratio of net profit after taxes,

i.e., final net profit. Return here, means net profit after taxes, i.e., final net profit.

Total resources or total assets means all realizable assets, including Intangible assets,

it they are realizable. This ratio is usually, expressed as a percentage.

Net profit

Return on Total Resources Ratio = ----------------- x 100

Total Assets

This ratio measures the productivity of the total assets or total resources of a

concern. If the actual ratio is 10% or more, it is an indication of higher productivity.

(6) Return on Equity or Net worth or Shareholders Fund Ratio: It is the ratio,

which expresses the relationship between Net profit and shareholders fund.

Net profit

Return on Equity = ------------ x 100

Net worth

i. This Ratio indicates the productivity of shareholder’s fund.

ii. It also gives the shareholders and idea of the return of their funds.

iii. It is also useful for inter-firm and inters industry comparisons.

85


ANALYSIS AND INTERPRETATION OF DATA

6.1 SHORT-TERM SOLVENCY RATIOS:

6.1.1 Current Ratio: Current Assets / Current Liabilities

Year 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10

Current

Assets3539.29 5161.90 6289.72 7019.27 8161.11 8127.08

Current

Liabilities3033.82 3579.07 3857.59 4432.30 4705.01 8048.24

Current

Ratio1.1617 1.4422 1.6305 1.5837 1.7346 1.0098

2004-05 2005-06 2006-07 2007-08 2008-09 2009-100

0.2

0.4

0.6

0.8

1

1.2

1.4

1.6

1.8

2

1.1617

1.44219999999999

1.6305 1.58369999999999

1.7346

1.00979999999999

Current Ratio

Interpretation: The ideal or standard ratio is 2:1. The above trend shows that the

current ratio is fluctuating in nature. There is a moderate decrease in the financial year

2009-10. This shows that the company is not following steady working capital policy.

ITC can be said to be insufficiently liquid and there is a shortage of working capital.

86

ORGANIZATION STUDY AND RATIO ANALYSIS 6.1.2 Quick Ratio: Quick Assets / Quick Liabilities

Year 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10

Quick

Assets1536.3 2525.61 2935.69 2968.75 3561.39 3578.01

Quick

Liabilities3033.82 3579.07 3857.59 4432.30 4705.01 8048.24

Quick

Ratio0.5064 0.7057 0.7610 0.6698 0.7569 0.4446

2004-05 2005-06 2006-07 2007-08 2008-09 2009-100

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

0.5064

0.705700000000004

0.76100.66980000000000

6

0.756900000000004

0.4446

Quick Ratio

Interpretation: The ideal or standard ratio is 1:1. The above trend shows that the

Quick Ratio is fluctuating in nature. The company’s Quick Ratio for the past six years

has been below ideal ratio and in the current year it has deteriorated further. Since the

quick ratio is less than the standard, there is concern required regarding liquidity

position and it is difficult to pay off its short-term liabilities out of Quick realizable

assets.

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ORGANIZATION STUDY AND RATIO ANALYSIS 6.1.3 Absolute Liquid Ratio: Absolute Liquid Assets / Liquid Liabilities

Year 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10

Absolute

Liquid

Assets

55.66 855.82 900.16 570.25 1032.39 1126.28

Liquid

Liabilitie

s

3033.82 3579.07 3857.59 4432.30 4705.01 8048.24

Absolute

Liquid

Ratio

0.0183 0.2391 0.2333 0.1286 0.2194 0.1399

2004-05 2005-06 2006-07 2007-08 2008-09 2009-100

0.05

0.1

0.15

0.2

0.25

0.3

0.0183

0.2391 0.2333

0.1286

0.219400000000001

0.1399

Absolute Liquid Ratio

Interpretation: The ideal or standard ratio is 0.5:1. The ratio has never been ideal in

the past five years. It is also showing a fluctuating trend. Current year’s absolute

liquid ratio has further decreased. So concern is considered as not liquid.

88


6.1.4 Inventory to Working Capital Ratio: (Inventory / Working Capital) * 100

Year 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10

Inventory 2002.99 2636.29 3354.03 4050.52 4599.72 4549.07

Working

Capital505.47 1583.83 2432.13 2586.97 3456.10 78.84

Ratio 396.26% 166.45% 137.90%156.57

%133.09% 5770.00%

2004-05 2005-06 2006-07 2007-08 2008-09 2009-100.00%

1000.00%

2000.00%

3000.00%

4000.00%

5000.00%

6000.00%

7000.00%

396.26%166.45% 137.90% 156.57% 133.09%

5770.00%

Inventory to Working Capital Ratio

Interpretation: As per the standard or ideal inventory to working capital ratio, the

inventories should not absorb more than 75% of working capital. As such, a high

inventory to working capital ratio indicates over stocking, and so, a low liquid

position. The company has never maintained an ideal ratio of 75% and the current

year’s position has become even worse as compared to previous years (i.e., 5770%)

89


6.2 LONG-TERM SOLVENCY RATIOS:

6.2.1 Debt-Equity Ratio: Debt / Equity

Year 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10

Debt 245.36 119.73 200.88 214.43 177.55 107.71

Equity 7895.61 9061.48 10437.08 12057.67 13735.08 14064.38

Debt-Equity

Ratio0.0311 0.0132 0.0192 0.0178 0.0129 0.0076

2004-05 2005-06 2006-07 2007-08 2008-09 2009-100

0.005

0.01

0.015

0.02

0.025

0.03

0.035

0.0311

0.0132000000000001

0.01920.0178

0.0129

0.00760000000000001

Debt-Equity Ratio

Interpretation: The standard or ideal Debt-Equity ratio is 2:1. The debt is more than

two times of the equity, which means the Long-term creditors are relatively more. By

observing above trend it may be said that the concerned financial position of the

90

ORGANIZATION STUDY AND RATIO ANALYSIS current year is more sound when compare to previous years. The ratio was always

below ideal. It is a good sign for the company.

6.2.2 Proprietary Ratio: Net worth/ Total Assets

Year2004-05 2005-06 2006-07 2007-08 2008-09 2009-10

Net worth7895.61 9061.48 10437.08 12057.67 13735.08 14064.38

Total

Assets

11550.88 12784.04 14968.4 17249.47 19484.83 23005.34

Proprietar

y Ratio

0.6835 0.7088 0.6973 0.6990 0.7049 0.6113

2004-05 2005-06 2006-07 2007-08 2008-09 2009-100.56

0.58

0.6

0.62

0.64

0.66

0.68

0.7

0.72

0.6835

0.708800000000001

0.6973 0.6990

0.704900000000001

0.6113

Proprietary Ratio

Interpretation: The ideal Standard is 0.5:1. Lower the ratio higher the risk and vice-

versa. The above trend shows that the proprietary ratio is more or less uniform in

91

ORGANIZATION STUDY AND RATIO ANALYSIS nature except for current year. Though the current years ratio has decreased it is above

the ideal level.

6.2.3 Solvency Ratio: Total Assets / Total Liabilities

Year2004-05 2005-06 2006-07 2007-08 2008-09 2009-10

Total

Assets

11550.88 12784.04 14968.4 17249.47 19484.83 23005.34

Total

Liabilities

3279.18 3697.8 4058.47 4646.73 4882.56 8155.95

Solvency

Ratio

3.5225 3.4572 3.6882 3.7122 3.907 2.8207

2004-05 2005-06 2006-07 2007-08 2008-09 2009-100

0.5

1

1.5

2

2.5

3

3.5

4

4.5

3.5225 3.45723.6882 3.7122

3.907

2.8207

Solvency Ratio

Interpretation: Though no standard or ideal solvency ratio has been established, the

higher the solvency ratio of a concern, the stronger is it financial position The above

92

ORGANIZATION STUDY AND RATIO ANALYSIS trend shows that the Solvency Ratio was increasing till 2008-09 but in 2009-10 it

decreased which is not a good sign for the company.

6.2.4 Fixed Assets to Net worth Ratio: Fixed Assets / Net wroth

Year 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10

Fixed

Assets3950.76 4161.73 4744.77 6168.83 7271.91 8142.40

Net

worth7895.61 9061.48 10437.08 12057.67 13735.08 14064.38

Ratio 0.5004 0.4593 0.4546 0.5116 0.5294 0.5789

2004-05 2005-06 2006-07 2007-08 2008-09 2009-100

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.50040.4593 0.4546

0.5116 0.5294

0.578900000000001

Ratio

93

ORGANIZATION STUDY AND RATIO ANALYSIS Interpretation: Ideal ratio is 67%. Fixed Assets should not constitute more than 67%

of the proprietary funds. The above trend of ratios has always remained below ideal

ratio of 67% which is good but the trend for the past 4 years is gradually increasing

which indicates that the financial strongness of the concern is gradually decreasing

and risk to the creditors is increasing.

6.2.5 Current Assets to Net worth Ratio: Current Assets / Net worth

Year 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10

Current

Assets3539.29 5161.90 6289.72 7019.27 8161.11 8127.08

Net

worth7895.61 9061.48 10437.08 12057.67 13735.08 14064.38

Ratio 0.4483 0.5696 0.6026 0.5821 0.5942 0.5778

2004-05 2005-06 2006-07 2007-08 2008-09 2009-100

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.4483

0.569600000000004

0.602600000000005 0.5821 0.5942 0.57780000000000

1

Ratio

94

ORGANIZATION STUDY AND RATIO ANALYSIS Interpretation: There is no standard or ideal current asset to net worth ratio. Higher

the current asset to net worth ratio of a concern, stronger is its financial position. The

current year’s ratio has fallen as compared to the previous year. It shows the strength

of the financial position of the concern is getting weaker. The company should follow

a increasing trend in the coming years i.e., it should increase its current assets.

6.2.6 Current Liabilities To Net Worth Ratio: Current Liabilities / Net worth

Year 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10

Current

Liabilities3033.82 3579.07 3857.59 4432.30 4705.01 8048.24

Net

worth7895.61 9061.48 10437.08 12057.67 13735.08 14064.38

Ratio 0.3842 0.3950 0.3696 0.3676 0.3425 0.5722

2004-05 2005-06 2006-07 2007-08 2008-09 2009-100

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.38420.39500000000000

20.3696 0.3676

0.3425

0.5722

Ratio

95

ORGANIZATION STUDY AND RATIO ANALYSIS Interpretation: The ideal ratio is 0.33. But, the above trend shows that the ratio is

more than the desirable level, which indicates that the firm is not providing adequate

cover for long-term creditors. This means it would be difficult for the firm to obtain

long-term funds. For the current year there is a steep rise (0.5722) in the ratio which is

not a good sign. Hence, the firm should take necessary measures to obtain long-term

funds there by reducing this ratio.

6.2.7 Fixed Assets Ratio: Fixed Assets/Capital Employed

Year 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10

Fixed

Assets3950.76 4161.73 4744.77 6168.83 7271.91 8142.40

Capital

Employe

d

8140.97 9181.21 10637.96 12272.1 13912.63 14172.09

Fixed

Assets

Ratio

0.4853 0.4533 0.4460 0.5027 0.5227 0.5745

96


2004-05 2005-06 2006-07 2007-08 2008-09 2009-100

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.485300000000002

0.4533 0.446

0.5027 0.5227

0.5745

Fixed Assets Ratio

Interpretation: The standard or ideal fixed ratio is 0.67. Though the company has

maintained a ratio which is below the ideal level it is showing an increasing trend for

the past 3 years which indicates the control of company over its fixed assets is

decreasing.

6.3 TURNOVER OR ACTIVITY RATIOS:

6.3.1 Stork Turnover Ratio: Cost of Goods Sold / Average stock

Stock Conversion Period = No. Of days in a year / Stock Turnover Ratio

Year 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10

COGS 4966.38 6521.34 8442.6 9375.76 10562.37 12137.88

Average

Stock2002.99 2636.29 3354.03 4050.52 4599.72 4549.07

Stork

Turnover

Ratio

2.4795 2.4737 2.5171 2.3147 2.2963 2.6682

Stock 147.21 147.55 145.01 157.68 158.95 136.80

97

ORGANIZATION STUDY AND RATIO ANALYSIS Conversio

n Period

2004-05 2005-06 2006-07 2007-08 2008-09 2009-102.1

2.2

2.3

2.4

2.5

2.6

2.7

2.4795 2.47372.5171

2.314699999999992.2963

2.6682

Stork Turnover Ratio

Interpretation: A stock turnover of 8 times a year is considered ideal. The above

trend shows that the ratio is less than 8 times which means the concern has

accumulated unsaleable goods which shows the business is not prosperous.

6.3.2 Debtors’ Turnover Ratio: Net Credit Sales / Average Debtors

Debtors Collection Period = No. of Days in a year / Debtors Turnover Ratio

Year 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10

Net

Credit

Sales

7639.45 9790.53 12369.30 13947.53 15388.11 18153.19

Average

Debtors527.76 547.96 636.67 736.93 668.67 858.80

98

ORGANIZATION STUDY AND RATIO ANALYSIS Debtors’

Turnover

Ratio

14.4752 17.8672 19.4373 18.9265 23.0130 21.1378

Debtors

Collection

Period

25.21 20.43 18.78 19.28 15.86 17.27

2004-05 2005-06 2006-07 2007-08 2008-09 2009-100

5

10

15

20

25

14.4752

17.867219.4373 18.9264999999998

23.013

21.1378

Debtors’ Turnover Ratio

Interpretation: Debtor’s Turnover ratio of ITC is fluctuating. For the current year it

has decreased from 23.0130 to 21.1378, hence collection period has increased from

15.86 days in 2008-09 to 17.27 days in 2009-10 which is not a good sign.

6.3.3 Creditor Turnover Ratio: Net annual Credit Purchase / Average Creditors

Debt Payment Period = No. of days in a year / Creditors Turnover Ratio

Year 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10

Net 2769.55 3983.23 5384.86 6016.70 6446.78 6971.40

99


Credit

Purchase

s

Average

Creditors1925.64 2189.03 2384.75 2786.97 2964.52 3498.30

Creditors

'

Turnover

Ratio

1.4382 1.8196 2.2580 2.1589 2.1746 1.9928

Debt

Payment

Period

253.79 200.59 161.65 169.07 167.85 183.16

100


2004-05 2005-06 2006-07 2007-08 2008-09 2009-100

50

100

150

200

250

300

253.79

200.59

161.65 169.07167.8500000000

01183.16

Debt Payment Period

2004-05 2005-06 2006-07 2007-08 2008-09 2009-100

0.5

1

1.5

2

2.5

1.43819999999999

1.81959999999999

2.2582.1589 2.1746

1.9928

Creditors' Turnover Ratio

Interpretation: The graph shows that, there is high fluctuation in the trend. The Debt

payment period is about 180-250 days which is very long period. Though the

company was showing positive sign from 2006-07 to 2008-09, in the current year it

has shown a negative trend. So the company should see that payments are made

within or exactly on the due dates, which will enhance the company’s credit

worthiness.

6.3.4 Cash Turnover Ratio: Net annual Sales / Cash

Year 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10

101


Net Sales 7639.45 9790.53 12369.30 13947.53 15388.11 18153.19

Cash 55.66 855.92 900.16 570.25 1032.39 1126.28

Cash

Turnove

r Ratio

137.2520 11.4386 13.7412 24.4586 14.9053 16.1178

2004-05 2005-06 2006-07 2007-08 2008-09 2009-100

20

40

60

80

100

120

140

160

137.252

11.4386 13.741224.4585999999998

14.9053 16.1178

Cash Turnover Ratio

Interpretation: The ideal cash turnover ratio is 10:1. It may be seen that there is

fluctuation in the ratio. In 2004-05, the ratio is very high which means that the funds

were used very effectively. The cash turnover ratio for all the years is well above the

ideal standard, which indicates that cash resources of the enterprise are efficiently

utilized and hence, the company is in better position.

6.3.5 Working Capital Turnover Ratio: Net annul Sales / Working Capital

102


Year 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10

Net Sales 7639.45 9790.53 12369.30 13947.53 15388.11 18153.19

Working

Capital505.47 1583.83 2432.13 2586.97 3456.10 78.84

Working

Capital

Turnove

r Ratio

15.1136 6.1815 5.0858 5.3914 4.4524 230.2535

2004-05 2005-06 2006-07 2007-08 2008-09 2009-100

50

100

150

200

250

15.11366.1815 5.0858 5.3914 4.4524

230.2535

Working Capital Turnover Ratio

Interpretation: The above trend shows that working capital turnover ratio is highly

fluctuating in nature. Company should note that a very high working capital turnover

ratio means over trading, and a very low working capital turnover ratio means under

trading, none of which is good concern. Likewise for the current the ratio is very high

which not a good sign for the company. Hence proper measures should be taken to

tackle this problem.

6.3.6 Fixed Assets Turnover Ratio: Net annual Sales / Fixed Assets

103


Year 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10

Net Sales 7639.45 9790.53 12369.30 13947.53 15388.11 18153.19

Fixed

Assets3950.76 4161.73 4744.77 6168.83 7271.91 8142.40

Fixed

Assets

Turnover

Ratio

1.9337 2.3525 2.6069 2.2610 2.1161 2.2295

2004-05 2005-06 2006-07 2007-08 2008-09 2009-100

0.5

1

1.5

2

2.5

3

1.9337

2.35249999999998

2.6069

2.2612.1161

2.2295

Fixed Assets Turnover Ratio

Interpretation: This ratio indicates to what extent the fixed assets of the firm have

contributed to sales. The standard or ideal fixed turnover is 5 times or more, which

indicates better utilization of fixed assets. Above trend shows that the fixed assets are

underutilized as the ratio is below 5. ITC’s Fixed Assets Turnover ratio is not ideal.

104

ORGANIZATION STUDY AND RATIO ANALYSIS 6.3.7 Current Assets Turnover Ratio: Net annual sales / Current Assets

Year 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10

Net Sales 7639.45 9790.53 12369.30 13947.53 15388.11 18153.19

Current

Assets3539.29 5161.90 6289.72 7019.27 8161.11 8127.08

Current

Assets

Turnove

r Ratio

2.1585 1.8967 1.9666 1.9870 1.8855 2.2337

2004-05 2005-06 2006-07 2007-08 2008-09 2009-101.7

1.8

1.9

2

2.1

2.2

2.3

2.1585

1.8967

1.96661.987

1.8855

2.2337

Current Assets Turnover Ratio

Interpretation: The above trend shows that the current turnover ratio is highly

fluctuating in nature. As the higher ratio indicates better utilization of current assets,

the increase in the current year’s ratio is a good sign for the company.

105


6.3.8 Total Assets Turnover Ratio: Net annual sales / Total Assets

Year 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10

Net Sales 7639.45 9790.53 12369.30 13947.53 15388.11 18153.19

Total

Assets

11550.88 12784.04 14968.4 17249.47 19484.83 23005.34

Total

Assets

Turnove

r Ratio

0.6614 0.7658 0.8264 0.8086 0.7897 0.7891

2004-05 2005-06 2006-07 2007-08 2008-09 2009-100

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

0.9

0.661400000000001

0.765800000000005

0.8264 0.8086 0.789700000000001 0.7891

Total Assets Turnover Ratio

Interpretation: The ideal total assets turnover ratio is 2:1. The above trend shows

that the total assets turnover ratio is fluctuating and below the ideal standard. It

indicates that the assets of the concern are not utilized in a better manner.

106


6.3.9 Sales to Net worth Ratio: Net Annual Sales / Net worth

Year 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10

Net

Sales7639.45 9790.53 12369.30 13947.53 15388.11 18153.19

Net

worth7895.61 9061.48 10437.08 12057.67 13735.08 14064.38

Sales

to

Net

worth

Ratio

1.9676 1.0805 1.1851 1.1567 1.1203 1.2907

2004-05 2005-06 2006-07 2007-08 2008-09 2009-100

0.5

1

1.5

2

2.5

1.9676

1.08051.1851 1.1567 1.1203

1.2907

Sales to Net worth Ratio

Interpretation: If the volume of sales in relation to net worth is reasonable, the

indication is that the owner’s have been effectively utilized, from the above graph it

can be noted that even though the ratio is fluctuating, the sales is in relation to the net

worth except for the year 2004-05.

107


6.4 PROFITABILITY RATIOS:

6.4.1 Gross Profit Ratio: (Gross Profit / Net Annual Sales) * 100

Year 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10

Gross

Profit2673.07 3269.19 3926.70 4571.77 4825.74 6015.31

Net

Sales7639.45 9790.53 12369.30 13947.53 15388.11 18153.19

Gross

Profit

Ratio

34.99% 33.39% 31.74% 32.78% 31.36% 33.14%

2004-05 2005-06 2006-07 2007-08 2008-09 2009-1029.00%

30.00%

31.00%

32.00%

33.00%

34.00%

35.00%

36.00%

34.99%

33.39%

31.74%

32.78%

31.36%

33.14%

Gross Profit Ratio

Interpretation: The above trend shows that there is fluctuation in gross profit which

is steadily decreasing from the year 2004-05 till 2006-07 and started to decrease from

2007-08 and again in the current year it increased. The organization is not following

fixed policy as for as gross profit is concerned.

108


6.4.2 Net Profit Ratio: (Net profit / Net sales) * 100

Year 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10

Net

Profi

t

2191.40 2235.35 2699.97 3120.10 3263.59 4061.00

Net

Sales7639.45 9790.53

12369.3

013947.53

15388.1

118153.19

Net

Profi

t

Ratio

28.68% 22.83% 21.83% 22.37% 21.21% 22.37%

2004-05 2005-06 2006-07 2007-08 2008-09 2009-100.00%

5.00%

10.00%

15.00%

20.00%

25.00%

30.00%

35.00%

28.68%

22.83% 21.83% 22.37%21.21%

22.37%

Net Profit Ratio

109

ORGANIZATION STUDY AND RATIO ANALYSIS Interpretation: The above trend shows that there is steep decrease in the ratio from

year 2004-05 and has remained in the range of 21%-23% which is not a good sign for

the company because higher the net profit ratio higher is the profitability of the firm.

Hence the company has to adopt better policies to increase the net profit ratio.

6.4.3 Operating Cost Ratio: (Operating Cost / Net Sales) * 100

Year 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10

Operatin

g Cost5202.19 6807.42 8779.09 9986.66 11097.30 12741.26

Net Sales 7639.45 9790.53 12369.30 13947.53 15388.11 18153.19

Operatin

g Cost

Ratio

68.09% 69.53% 70.97% 71.60% 72.12% 70.19%

2004-05 2005-06 2006-07 2007-08 2008-09 2009-1066.00%

67.00%

68.00%

69.00%

70.00%

71.00%

72.00%

73.00%

68.09%

69.53%

70.97%

71.60%

72.12%

70.19%

Operating Cost Ratio

110

ORGANIZATION STUDY AND RATIO ANALYSIS Interpretation: A low operating ratio is an indication of operating efficiency of the

firm. The trend shows that the operating expenses continuously increased from 2004-

05 to 2008-09 which is not a good sign but in the current year it has decreased which

is a very good sign. The company must try to maintain its current year trend in the

future.

6.4.4 Operating Profit Ratio: (Operating Profit / Net Sales) * 100

Year 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10

Operatin

g Profit2437.26 2983.11 3590.21 3960.87 4290.81 5815.31

Net Sales 7639.45 9790.5312369.3

0

13947.5

3

15388.1

1

18153.1

9

Operatin

g Profit

Ratio

31.90% 30.47% 29.02% 28.40% 27.88% 32.03%

2004-05 2005-06 2006-07 2007-08 2008-09 2009-1025.00%

26.00%

27.00%

28.00%

29.00%

30.00%

31.00%

32.00%

33.00%

31.90%

30.47%

29.02%

28.40%27.88%

32.03%

Operating Profit Ratio

111

ORGANIZATION STUDY AND RATIO ANALYSIS Interpretation: The ideal operating profit ratio is 10%. For the graph it can be seen

that the company has always maintained a ratio of above 10% which indicates the

operating efficiency of the firm but this has continuously declined from 2004-05 to

2008-09. But in the present year it has recovered which is a very good sign. The

company should maintain the same trend in future.

6.4.5 Total Assets Ratio: (Net Profit / Total Assets) * 100

Year 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10

Net

Profit

2191.40 2235.35 2699.97 3120.10 3263.59 4061.00

Total

Asset

s

11550.88 12784.04 14968.4 17249.4

7

19484.83 23005.34

Total

Asset

s

Ratio

18.98% 17.48% 18.04% 18.09% 16.75% 17.65%

112


2004-05 2005-06 2006-07 2007-08 2008-09 2009-1015.50%

16.00%

16.50%

17.00%

17.50%

18.00%

18.50%

19.00%

19.50%

18.98%

17.48%

18.04% 18.09%

16.75%

17.65%

Total Assets Ratio

Interpretation: The above table shows that the Total Assets Ratio is fluctuating in

nature. The ideal Total Assets Ratio is 10 %. Here, the Total Assets Ratio is more

than the standard which is a very good sign for the company. It is an indication of the

higher productivity of the total resources of the firm.

6.4.6 Return on Equity Ratio: (Net Profit / Net worth) * 100

Year 2004-

05

2005-

062006-07 2007-08 2008-09 2009-10

Net Profit 2191.4

0

2235.3

5

2699.97 3120.10 3263.59 4061.00

Net worth 7895.6

1

9061.4

8

10437.0

8

12057.6

7

13735.0

8

14064.3

8

Return on

Equity

27.75% 24.67% 25.87% 25.88% 23.76% 28.87%

113


Ratio

2004-05 2005-06 2006-07 2007-08 2008-09 2009-100.00%

5.00%

10.00%

15.00%

20.00%

25.00%

30.00%

35.00%

27.75%

24.67%25.87% 25.88%

23.76%

28.87%

Return On Equity Ratio

Interpretation: The ideal return on equity ratio is 13 %. The above trend shows that

the ratio is fluctuating. Also, the ratio is well above the ideal. This shows company is

having the adequate profit to distribute to the shareholders. The company’s return on

equity is above the standard, which is adequate.

114


FINDINGS, SUGGESTIONS AND CONCLUSIONS

7.1 Findings:

The liquidity position of the firm is not satisfactory which is evident from

short term and long term liquidity ratios.

The inventory to working capital ratio indicates that the firm’s inventories are

absorbing more than 75% of working capital i.e., 5770% which shows the

liquidity position of the firm is not good.

Fixed assets to net worth ratio indicate the financial weakness of the firm since

the proprietors funds are not effectively invested in fixed assets and thus

increase the risk of the creditors

Stock turnover ratio and stock conversion period shows the rate at which

inventories are being converted into sales is very inefficient which shows bad

inventory management.

Debtors turnover ratio and average collection period ratio indicates that the

quality of debtors is suitable for credit management and it also indicates a very

strict credit and collection performance.

Creditors’ turnover ratio and average collection period indicates that the

payment made to the creditors is inefficient which reduces the credit

worthiness of the company.

Working capital turnover ratio of the company is not ideal which shows the

Company is facing the shortage of working capital.

The firm’s profitability position is getting stronger which is evident from the

profitability ratio.

Return on shareholders’ investment is adequate.

The operating cost ratio indicates the operating expenses of the current year

have come down as compared to previous years.

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ORGANIZATION STUDY AND RATIO ANALYSIS 7.2 SUGGESTIONS:

From analysis and interpretation of data, following suggestions were made to

improve the company’s financial position:

• The ITC Ltd should reduce its current liabilities and thereby improve its short

term financial strength.

• ITC Ltd should increase its working capital which can improve the operational

efficiency of the firm.

• The owners’ funds should be invested into fixed assets which increases the

credit worthiness of the company.

• The firm should reduce its stock of finished goods.

• The operating expenses of the company should be reduced further.

• The organizations investment pattern should be catered in a manner where the

returns are high.

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7.3 CONLUSIONS:

From the organisation study and financial ratio analysis conducted on ITC Ltd it can

be conclude that:

• ITC has pursued World class competitiveness in all businesses and across the

entire value chain.

• It is Best-in-class in terms of:

Internal Vitality

Market Standing

Profitability

This has helped ITC to diversify the business. Today more than half of its

revenue comes from non tobacco products i.e. cigarettes.

• Strategy of Organization and Governance processes is geared to manage

multiple businesses.

• ITC has blended core competencies and leverage ITC umbrella strengths to

create new avenues of growth.

• From the ratio analysis conducted it can be noted that the company has been

able to provide adequate returns to its shareholders consistently.

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MY LEARNING

The six weeks training I had undergone at ITC Ltd, Indian Tobacco Division,

Bangalore has given me a corporate exposure to the functioning of finance department

of a company. My specific learning during this stint at ITC Ltd, Bangalore is as

follows:

Knowledge of the various departments & divisions of ITC Ltd, Indian Tobacco

division, Bangalore.

The role of ITC Ltd in the various business sectors in India and its contribution

to the Indian economy.

Working in a large scale company like ITC Ltd helped me to know the position

of organized FMCG sector in India and will certainly help me in my future

decision making process.

Interacting with all the levels of management and workers has certainly helped

me to understand the entire functioning of the organization.

By doing research in the field of finance, I could know the practical applications

of various financial concepts.

It has also enlightened me about how to analyze the financial aspects of the

organization such as, how the ratios are calculated and how they are useful in

useful in analyzing the firm’s liquidity and financial positions

I also learnt that not all the activities of the organization are based on the

classroom theories

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BIBLOGRAPHY

BOOKS:

C.R. Kothari, “Research Methodology”, published by New Age International

(p) Ltd in the year 2002

M.Y. Khan & P.K. Jain, “Financial Management”, Fifth edition, published by

Tata McGraw hill in the year 2008

Stephen Copestake, “Excel 2007”, First edition, published by Dreamtech press

in the year 2008

JOURNALS:

ITC LTD, Annual report 2009-10

CTRI (Central Tobacco Research Institute). 1999. Status Report on Research

Programme on Alternative Crops to Tobacco.

ERC Statistics International Plc. (1998). India. pp. 1-38, in World Cigarette

Report, 1998.

Panchamukhi, P.R. 2000. Economics of shifting from tobacco: an action-cum-

basic research study. In: CMDR, 2000, q.v.

WHO (World Health Organization). 1997. Tobacco or health: a global status

report. Geneva: WHO.

WEBSITE:

www.itcportal.com

http://www.wikipedia.com

http://www.companiesandmarkets.com

http://www.capitaline.com

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http://www.companiesandmarkets.com/

http://www.wikipedia.com/

http://www.itcportal.com/