2. Overview of ITC ITC - India's foremost private sector
companies with a marketcapitalisation of over US $ 33 billion and a
turnover of US $ 7 billion Diversified presence in FMCG, Hotels,
Paperboards & Specialty Papers,Packaging, Agribusiness, and IT
Market leader in its traditional businesses of Cigarettes,
Hotels,Paperboards, Packaging and Agri-ExportsBusiness Valuation2
3. Divisions of ITCBusiness Valuation3 4. StrengthWeaknesses No
global exposureStrong top management Strong supply network
(E-chaupal) Vertically integrated supply chain High cash reserves
and debt capacitySWOT OpportunitiesThreat Economic Growth ITCs
Brand Positioning Leveraging IT Business ValuationIndian taxation
policies Illegal tobacco trade Low consumption Import restrictions
4 5. Ratio AnalysisBusiness Valuation5 6. Advanced DuPont Analysis
Financial Year200820092010201120122013Net Operating
Margin0.2240.2160.2260.2440.2470.246Net Operating Asset
Turnover1.2551.2221.3301.4301.4151.397Return on Net Operating
Assets0.2810.2640.3000.3490.3500.344Net Borrowing Cost
(NBC)0.0620.0970.3360.3610.0910.091Spread (RNOA
NBC)0.2190.167(0.036)(0.012)0.2590.253Financial
Leverage(LEV)0.0190.0160.0100.0080.0080.008ROE = RNOA
+LEV*Spread0.2850.2660.3000.3490.3520.346Business Valuation6 7.
Advanced DuPont Analysis 1.61.4Net Operating Margin1.2Net Operating
Assets Turnover 1Return on Net Operating Assets Net Borrowing
Costs0.8Spread (RNOA-NBC) 0.6Financial Leverage ROE0.40.20
200820092010201120122013-0.2Business Valuation7 8. Cost of equity
calculation Assumptions CAPM was used to find the cost of equity Rm
and Beta has been calculated using S&P CNX 500 index for
theperiod 2007-2011 5 years were taken to normalize the abnormal
market movements due toeconomic downturn in 2008-09 Rf calculated
on 10 year government bonds since horizon used is 10 yearsBusiness
Valuation8 9. Cost of capital parameters
ParametersValuesRf7.66%Rm14.92%Cost of equity12.36%Beta0.55Cost of
debt10.50%Cost of capital12.36%Business Valuation9 10. Important
forecasting assumptions Sales growth put at 4.5% given ITCs
potential and the long termgrowth possibilities in India COGS has
been approximated to the 5 year average for the terminalperiod
considering the nature of the industry R&D sales has been
expected to stay up as per MD&A Interest expense/ debt
fluctuating but due to low D/E ratio leftunchanged Dividend payout
ratio left constant at 40.2% as is been the trend Business
Valuation10 11. Valuation models used Dividend discount
modelDiscounted cash flow modelResidual earnings valuation Steady
payout ratio of 40% in last fours years FCFE almost equal to FCFF
Uncertainty of earnings in the terminal period Dividends are paid
& rest is invested in operating assets & marketable
securities Model not recommended since ITC has substantial
investment in marketable securities Consistent & predictable
dividend payout Use of model is recommended ITC is diversifying
into other sectors; beta is 0.55 (less than 1) Business Valuation
Model is less sensitive to terminal value estimations Model
overvalued the stock as compared to dividend discount11 12.
Forecasted values ParameterActualDDMResidual
earningsPrice182225281P/E ratio12.8815.9319.89Forecasts as on April
1st 2011 using different modelsBusiness Valuation12 13. Sensitivity
AnalysisBusiness Valuation13 14. Sensitivity AnalysisBusiness
Valuation14 15. Accounting Flags Horizontal Analysis RnD, SGA,
COGS, Revenue rise inconsistently in FY 2011 Huge jump in current
liability in FY 2010 Vertical Analysis Operating Cash and
Equivalents as share of Total Assets quadruple in FY 2009 Other
factors Inventory lying with 3rd parties not accounted forPositive
Signals Besides these, good corporate governance practices exist
Beneish M-score of -3.32 (
