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Volume 2, Number 2, (February, 2012)
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Equity Valuation Of Indian Tobacco Company (ITC) Ltd.
*Preeti Singh
Abstract:
In this research paper an effort has been made for the valuation of equity of Indian Tobacco
Company (ITC) Ltd. The primary objective of equity research is to analyze the earnings
persistence. In accounting and finance, equity is the residual claim or interest of the most junior
class of investors in assets, after all liabilities are paid. Equity investments generally refers to
the buying and holding of shares of stock on a stock market by individuals and firms in
anticipation of income from dividends and capital gain as the value of the stock rises. It also
sometimes refers to the acquisition of equity (ownership) participation in a private (unlisted)
company or a startup (a company being created or newly created). ITC is one of India's foremost
private sector companies with a market capitalization of over US $ 33 billion and a turnover of
US $ 7 billion. ITC is rated among the World's Best Big Companies. ITC is a board-managed
professional company, committed to creating enduring value for the shareholder and for the
nation. It has a rich organizational culture rooted in its core values of respect for people and
belief in empowerment. Its philosophy of all-round value creation is backed by strong corporate
governance policies and systems. The method used in this valuation is Discounted Cash Flow
analysis (DCF) as this method is easier
Introduction:
In accounting and finance, equity is the residual claim or interest of the most junior class of
investors in assets, after all liabilities are paid. In an accounting context, Shareholders' equity (or
stockholders' equity, shareholders' funds, shareholders' capital or similar terms) represents the
interest in assets of a company, spread among individual shareholders of common or preferred
stock. At the start of a business, owners put some funding into the business to finance assets.
This creates liability on the business in the shape of capital as the business is a separate entity
from its owners. Businesses can be considered to be, for accounting purposes, sums of liabilities
and assets; this is the accounting equation.
* Research Scholar, Mewar University, Rajasthan, Email: singhpreeti001@rediffmail.com
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Volume 2, Number 2, (February, 2012)
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This definition is helpful to understand the liquidation process in case of bankruptcy. At first, all
the secured creditors are paid against proceeds from assets. Afterward, a series of creditors,
ranked in priority sequence, have the next claim/right on the residual proceeds. Ownership equity
is the last or residual claim against assets, paid only after all other creditors are paid. In such
cases where even creditors could not get enough money to pay their bills, nothing is left over to
reimburse owners' equity. Thus owners' equity is reduced to zero. Ownership equity is also
known as risk capital.
What is Equity Shares? Total equity capital of a company is divided into equal units of small
denominations, each called a share. For example, in a company the total equity capital of Rs
2,00,00,000 is divided into 20,00,000 units of Rs 10 each. Each such unit of Rs 10 is called a
Share. Thus, the company then is said to have 20, 00,000 equity shares of Rs 10 each. The
holders of such shares are members of the company and have voting rights. Equity investments
generally refers to the buying and holding of shares of stock on a stock market by individuals
and firms in anticipation of income from dividends and capital gain as the value of the stock
rises. It also sometimes refers to the acquisition of equity (ownership) participation in a private
(unlisted) company or a startup (a company being created or newly created). When the
investment is in infant companies, it is referred to as venture capital investing and is generally
understood to be higher risk than investment in listed going-concern situations.
Equity investments generally refers to the buying and holding of shares of stock on a stock
market by individuals and firms in anticipation of income from dividends and capital gain as the
value of the stock rises. It also sometimes refers to the acquisition of equity (ownership)
participation in a private (unlisted) company or a startup (a company being created or newly
created). When the investment is in infant companies, it is referred to as venture capital investing
and is generally understood to be higher risk than investment in listed going-concern situations.
Why should one invest in Equity in particular?
When you buy a share of a company you become a shareholder in that Company .Equities have
the potential to increase in value over time. It also provides your portfolio with the growth
necessary to reach your long term investment goals. Research studies have proved that the
equities have outperformed most other forms of investments in the long term.
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Volume 2, Number 2, (February, 2012)
(ISSN 2250-3404)
Equities are considered the most challenging and the rewarding, when compared to other
investment options. Research studies have proved that investments in some shares with a longer
tenure of investment have yielded far superior returns than any other investment. However, this
does not mean all equity investments would guarantee similar high returns. Equities are high risk
investments. One needs to study them carefully before investing.It is important for investors to
note that while equity shares give highest return as compared to other investment avenues it also
carries highest risk therefore it is important to find ‘ real value’ or ‘ intrinsic value’ of the
security before investing in it. The intrinsic value of a security being higher than the security’s
market value represents a time to buy. If the value of the security is lower than its market price,
investors should sell it. To be able to value equity, we need to first understand how equity is to
be analyzed using fundamental analysis.
ITC was incorporated on August 24, 1910 under the name Imperial Tobacco Company of India
Limited. As the Company's ownership progressively Indianised, the name of the Company was
changed from Imperial Tobacco Company of India Limited to India Tobacco Company
Limited in 1970 and then to I.T.C. Limited in 1974. In recognition of the Company's multibusiness portfolio encompassing a wide range of businesses - Cigarettes & Tobacco, Hotels,
Information Technology, Packaging, Paperboards & Specialty Papers, Agri-business, Foods,
Lifestyle Retailing, Education & Stationery and Personal Care - the full stops in the Company's
name were removed effective September 18, 2001. The Company now stands rechristened
'ITC Limited'.
ITC is one of India's foremost private sector companies with a market capitalization of over US $
33 billion and a turnover of US $ 7 billion. ITC is rated among the World's Best Big Companies,
Asia's 'Fab 50' 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 AgriInternational Journal Of Innovative Research in Commerce & Management
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Volume 2, Number 2, (February, 2012)
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Exports, it is rapidly gaining market share even in its nascent businesses of Packaged Foods &
Confectionery, Branded Apparel, Personal Care and Stationery. As one of India's most valuable
and respected corporations, ITC is widely perceived to be dedicatedly nation-oriented. Chairman
Y C Deveshwar calls this source of inspiration "a commitment beyond the market". In his own
words: "ITC believes that its aspiration to create enduring value for the nation provides the
motive force to sustain growing shareholder value.
Objectives of the study:
The primary objective of equity research is to analyze the earnings persistence. Some key aspects
that affect the earnings persistence can be summarized as follows:

The stability of the equity under consideration

The predictability of the value of the given equity under the given circumstances

The variability of the given equity, given the various variance factors.
SWOT Analysis Of ITC Ltd
Strengths

Strong Financial Performance

Products Portfolio

Distribution Network

Environmental Friendly

Research & Development

Socially Responsibility

Brand Equity
Weakness

Dependency on the tobacco business

Not present in many important sectors

Local Company
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Volume 2, Number 2, (February, 2012)
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Opportunities

Leveraging its brand equity

Right size at the right time

Synergies across businesses and leveraging domain expertise for growth in other sectors

The unique reach and distribution network of E-choupal
Threats

Competition

Pressure groups and Government Policy

Wide income disparities
Growth Drivers Of ITC LTD
We believe the growth opportunity in all of ITC’s businesses remains exciting; ITC has made
aggressive investment plans to sustain the 17.2% PAT CAGR it has seen in the last 10 years.
Investment in its paper and hotel businesses should be largely funded by its own cash flows.
Buy, target price Rs229. Cigarette business outlook intact despite recent tax hikes. Recent VAT
increases in three states – Rajasthan (20% to 40%), Gujarat (13.5% to 20%) and J&K (12.5% to
20%) – have not materially increased ITC’s weighted average VAT incidence, which we
estimate at around 15.5% because these states are not significant contributors to ITC’s overall
cigarette volume. In terms of cigarette sales, ITC’s key states are Tamil Nadu, Karnataka,
Maharashtra and West Bengal – Tamil Nadu and West Bengal will announce new budgets in a
few months after state government elections. The current VAT duty structure will migrate into a
GST (Goods & Services Tax) structure next year, which we expect to be governed centrally and
consist of a uniform tax levy.
ITC preparing for sustained growth in all businesses
Despite the launch of new brands such as Marlboro, ITC’s cigarette business continues to
dominate the domestic market, based on a combination of attractive price points and new product
offerings. The company’s paper manufacturing division plans to increase its 0.5mmt pa capacity
by 0.1mmt within 12-18 months and to add an incremental 0.2mmt pa of greenfield capacity to
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Volume 2, Number 2, (February, 2012)
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its existing facility in Andhra Pradesh. Meanwhile, the hotel division is working to increase its
number of five-star rooms from 3,000 to 4,000 via the launch of the Grand Chola property in
Chennai by end-FY12 and the Kolkata expansion by end-FY13. ITC is also working to launch
new hotels in Hyderabad, Ahmadabad, Gurgaon and Delhi. We raise our estimates by 1-4% and
our TP to Rs229 We raise our three-stage DCF-based target price to Rs229 as we nudge up our
earningsestimates and increase our capex forecast. We see little risk to ITC’s growth due to its
strong competitive position and growth potential in its key business areas of cigarettes, paper and
hotels.
Growth drivers intact
ITC’s diversified growth strategy has delivered an overall PAT CAGR of 17.2% for the past
10 years vs its cigarette business’s EBIT CAGR of 13% in the same period. Thus, its
noncigarette businesses have driven growth, and we see this trend continuing. ITC’s noncigarette business – including paper, agribusiness and hotels – have delivered an overall PAT
CAGR of 17.2% over the last 10 years, much higher than its core cigarette business’s 13% EBIT
CAGR for the same period. In our view, the company’s most significant achievement in the last
10 years has been the turnaround of its hotel business. While its division ‘other MCGbusinesses’
is currently losing money due to the initial gestation period for many of the businesses, we
believe the division has the potential to contribute to overall profitability in the next 5-10 years.
Hotel and paper businesses funding their own growth
While the paper and hotel businesses used cash generated by the cigarette business to fund
their initial investments, both have generated enough cash flow to fund their own growth for the
past seven years. Going forward, we expect both to fund the majority of their capex via internal
cash generation.
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Volume 2, Number 2, (February, 2012)
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Financial Analysis
Profit & loss A/C of ITC LTD
in Rs. Cr.
Mar '07
Mar '08
Mar '09
Mar '10
Mar '11
Income
12 mths
12 mths
12 mths
12 mths
12 mths
Sales Turnover
19,519.99
21,467.38 23,247.84
26,399.63
30,633.57
Excise Duty
7206.16
7435.18
7832.18
9512.74
Net Sales
12,313.83
14,032.20 14,985.81
18,567.45
21,120.83
13.95%
6.80%
23.90%
13.75%
y-o-y growth
8262.03
Other Income
276.22
516.5
426.21
545.05
775.76
Stock Adjustments
322.96
32.46
630.3
-447.54
308.42
Total Income
12,913.01
14,581.16 16,042.32
18,664.96
22,205.01
Raw Materials
5807.48
6307.79
6864.96
7140.69
8601.13
Power & Fuel Cost
253
309.9
394.12
387.34
421.68
Employee Cost
630.15
745.00
903.37
1,014.87
1,178.46
Other Manufacturing Expenses
65.32
73.52
402.88
413.79
560.57
Selling and Admin Expenses
1,299.17
1,609.33
1,684.41
2,093.87
2,408.03
Miscellaneous Expenses
601.28
682.72
516.9
1,008.91
1,120.89
Preoperative Exp Capitalised
-42.52
-112.75
-72.55
-71.88
-60.54
Total Expenses
8,613.88
9,615.51
10,694.09
11,987.59
14,230.22
3,699.95
4,416.69
4,291.72
6,579.86
6,890.61
4,022.91
4,449.15
4,922.02
6,132.32
7,199.03
4,299.13
4,965.65
5,348.23
6,677.37
7,974.79
PBDIT
4,299.13
4,965.65
5,348.23
6,677.37
7,974.79
Interest
16.04
24.61
47.65
90.28
78.11
Expenditure
Operating Profit
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Volume 2, Number 2, (February, 2012)
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PBDT
4,283.09
4,941.04
5,300.58
6,587.09
7,896.68
Depreciation
362.92
438.46
549.41
608.71
655.99
Other Written Off
0
0
0
0
0
Profit Before Tax
3,920.17
4,502.58
4,751.17
5,978.38
7,240.69
Extra-ordinary items
61.94
117.41
81.52
48.65
35.21
PBT (Post Extra-ord Items)
3,982.11
4,619.99
4,832.69
6,027.03
7,275.90
Tax
1263.07
1480.97
1565.13
1965.43
2,287.69
Reported Net Profit
2,699.97
3,120.10
3,263.59
4,061.00
4,987.61
Total Value Addition
2,806.40
3,307.72
3,829.13
4,846.90
5,629.09
Preference Dividend
0
0
0
0
0
Equity Dividend
1166.29
1319.01
1396.53
3818.18
3443.47
Corporate Dividend Tax
198.21
224.17
237.34
634.15
558.62
Shares in issue (lakhs)
37,622.23
37,686.10 37,744.00
38,181.77
77,381.44
Earning Per Share (Rs)
7.18
8.28
8.65
10.64
6.45
Equity Dividend (%)
310
350
370
1000
445
Book Value (Rs)
27.59
31.85
36.24
36.69
20.55
Per share data (annualised)
Balance Sheet Of ITC LTD
In Rs Cr.
Mar '07
Mar '08
9-Mar
Mar '10
Mar '11
12 mths
12 mths
12 mths
12 mths
12 mths
Total Share Capital
376.22
376.86
377.44
381.82
773.81
Equity Share Capital
376.22
376.86
377.44
381.82
773.81
Share Application Money
0
0
0
0
0
Preference Share Capital
0
0
0
0
0
Reserves
10,003.78
11,624.69
13,302.55
13,628.17
15,126.12
Sources Of Funds
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Volume 2, Number 2, (February, 2012)
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Revaluation Reserves
57.08
56.12
55.09
54.39
53.34
Networth
10,437.08
12,057.67
13,735.08
14,064.38
15,953.27
Secured Loans
60.78
5.57
11.63
0
1.94
Unsecured Loans
140.10
208.86
165.92
107.71
97.26
Total Debt
200.88
214.43
177.55
107.71
99.20
Total Liabilities
10,637.96
12,272.10
13,912.63
14,172.09
16,052.47
Gross Block
7,134.31
8,959.70
10,558.65
11,967.86
12,765.82
Less: Accum. Depreciation
2,389.54
2,790.87
3,286.74
3,825.46
4,420.75
Net Block
4,744.77
6,168.83
7,271.91
8,142.40
8,345.07
Capital Work in Progress
1,130.20
1,126.82
1,214.06
1,008.99
1,333.40
Investments
3067.77
2934.55
2,837.75
5,726.87
5,554.66
Inventories
3354.03
4050.52
4599.72
4549.07
5267.53
Sundry Debtors
636.69
736.93
668.67
858.80
907.62
Cash and Bank Balance
103.54
153.34
68.73
120.16
98.77
Total Current Assets
4,094.26
4,940.79
5,337.12
5,528.03
6,273.92
Loans and Advances
1,390.19
1,949.29
2,150.21
1,929.16
2,173.89
Fixed Deposits
796.62
416.91
963.66
1,006.12
2144.47
Total CA, Loans & Advances
6,281.07
7,306.99
8,450.99
8,463.31
10,592.28
Deffered Credit
0
0
0
0
0
Current Liabilities
3,113.01
3,619.76
4,121.59
4,619.54
5,668.10
Provisions
1472.84
1,645.33
1,740.49
4549.94
4104.84
Total CL & Provisions
4,585.85
5,265.09
5,862.08
9,169.48
9,772.94
Net Current Assets
1,695.22
2,041.90
2,588.91
-706.17
819.34
Miscellaneous Expenses
0
0
0
0
0
Total Assets
10,637.96
12,272.10
13,912.63
14,172.09
16,052.47
Contingent Liabilities
129.56
308.08
261.36
258.73
251.78
Book Value (Rs)
27.59
31.85
36.24
36.69
20.55
Application Of Funds
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Volume 2, Number 2, (February, 2012)
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Valuation
For Valuation purpose DCF valuation method has been used since it is easier to use for the firms
whose
1. Cash Flows are currently positive
2. Can be estimated with some reliability for future periods
3. Where a proxy risk that can be used to obtain the discount rates is available.
FCFF Calculations
FCFF = EBIT (1 – Tax Rate) +Depreciation – Capital Expenditure – Increase In Non Cash
Working Capital
In Rs Cr.
Mar '07
Mar '08
Mar '09
Mar '10
Mar '11
12 mths
12 mths
12 mths
12 mths
12 mths
Profit Before Tax
Interest
EBIT
Tax rate
Depriciation
CAPEX
Woriking Capital (C.A. - C.L.)
Change in Working Capital
3,920.2
16.0
3,936.2
32%
362.9
794.6
1,695.2
4,502.6
24.6
4,527.2
32%
438.5
886.7
2,041.9
346.7
4,751.2
47.7
4,798.8
32%
549.4
754.13
2,588.9
547.0
5,978.4
90.3
6,068.7
33%
608.7
1,247.9
-706.2
-3,295.1
7,240.7
78.1
7,318.8
31%
656.0
1,087.8
819.3
1,525.5
FCFF
2,256.0
2,281.1
2,492.9
6,745.5
3,060.3
Retention Ratio (b)
ROE (NI/Equity)
0.49
25.9%
0.48
25.9%
0.49
23.8%
-0.12
28.9%
0.17
31.3%
Growth (b*ROE)
12.6%
12.4%
11.6%
-3.5%
5.3%
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Volume 2, Number 2, (February, 2012)
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FCFF Forecasting
Looking at the historical growth rate we assume cash flows to grow
Growth rate in FCFF till FY-20
10%
Mar '11
12 mths
Mar '12
12 mths
1.0
Mar '13
12 mths
2.0
Mar '14
12 mths
3.0
Mar '15
12 mths
4.0
3,366.3
3,702.9
4,073.2
4,480.5
2,953.1
2,849.7
2,750.0
2,653.7
Mar '16
12 mths
5.0
Mar '17
12 mths
6.0
Mar '18
12 mths
7.0
Mar '19
12 mths
8.0
Mar '20
12 mths
9.0
4,928.6
5,421.4
5,963.6
6,559.9
7,215.9
2,560.8
23,144.7
2,471.1
2,384.6
2,301.1
2,220.6
Yrs
FCFF
3,060.3
Discounted Cashflows
Growth rate in FCFF till FY-20
10%
Yrs
FCFF
Discounted Cashflows
PV
at 10%.
Calculations
In Rs Cr.
Mar '07
12 mths
200.88
16.04
7.98%
10,437.08
1.89%
98.11%
Mar '08
12 mths
214.43
24.61
11.85%
12,057.67
1.75%
98.25%
Mar '09
12 mths
177.55
47.65
24.31%
13,735.08
1.28%
98.72%
Mar '10
12 mths
107.71
90.28
63.30%
14,064.38
0.76%
99.24%
Mar '11
12 mths
99.20
78.11
75.50%
15,953.27
0.62%
99.38%
5.59%
8.30%
17.02%
44.31%
52.85%
8%
6%
0.99
8%
6%
0.99
8%
6%
0.99
8%
6%
0.99
8%
6%
0.99
K e = R f +  e( R m - R f )
13.94%
13.94%
13.94%
13.94%
13.94%
WACC = Wd * Kd + We * Ke
Average WACC
13.78%
13.99%
13.84%
13.98%
14.17%
14.18%
Total debt
Interest paid
Interest rate (I)
Total Equity
Wd
We
Kd = I (1-t)
Risk free rate (Rf)
Market Risk Premium ( Rm - Rf )
Beta
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Volume 2, Number 2, (February, 2012)
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Terminal Value Calculations
FCFF in FY 21
7,504.6
Stable long term growth (G)
4%
Terminal value (FCFF21/(WACC-G)
75,114.5
Discounted Terminal value
23,115.0
PV of the firm = PV of Cash flows (FY12 to FY20) + PV of Terminal Value
= 23,144.7+ 23,115.0
= 46,259.7 crore.
Valuation of the stock
Total Value of the Firm
MV of debt
MV of Equity
No of shares
Intrinsic value of share
Share price as on 2nd Aug 2011
Comment
46,259.7
214.4
46,045.3
773.8
59.5
200.2
Overvalued
Comment
Using the DCF methodology, we value of the core business of ITC LTD. at Rs.59.5 per share,
assuming 10% growth in FCFF over FY12 to FY20, terminal growth rate of 4% and WACC of
13.99%.
The stock is currently trading at Rs.200.2 which indicates that the stock is overvalued and
recommendation for investors is to SELL the share.
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Volume 2, Number 2, (February, 2012)
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Conclusion
The method used in this valuation is Discounted cash flow analysis (DCF) as this method is
easier to use for the firms whose:
• Cash flows are currently positive
• Can be estimated with some reliability for future periods
• Where a proxy for risk that can be used to obtain discount rates is available.
As per the DCF analysis of equity valuation of ITC LTD, the intrinsic value of the firm is 59.5
whereas the market price as on 3nd AUGUST 2011 is 200.2 .Hence the share is
OVERVALUED.
Recommendation:
The share of the company is overvalued as it is not giving the same return as expected so, it is
recommended to sell the shares & invest in some other shares.
REFERENCES:

http://www.adityabirlamoney.com/

http://www.ibef.org/artdisplay.aspx?cat_id=444&art_id=7933

http://www.itcportal.com/

http://www.moneycontrol.com/financials/itc/balance-sheet/ITC

http://www.moneycontrol.com/financials/itc/profit-loss/ITC

http://www.bseindia.com

http://www.nseindia.com
International Journal Of Innovative Research in Commerce & Management
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