ITC Equity Research

Date of Research-12-01-2016

Price-Rs. 313.10

About the Company

Indian Tobacco Company Limited (“ITC” or the “Company”) was incorporated on 24 August 1910 under the name of Imperial Tobacco Company of India Limited and its name was changed to ITC Limited in 1974. Today, the Company is rated among world’s most reputable companies by Forbes magazine and among India’s most valuable companies by Business Today. It ranks among India’s ’10 Most Valuable (Company) Brands’, in a study conducted by Brand Finance and published by the Economic Times. The Company employs over 31,000 people at more than 60 locations across India and has a diversified presence in FMCG (Cigarettes, food, retail, personal care, education and stationary), Hotels, Paperboards & Specialty Papers, Packaging, Agri-Business, and Information Technology.

Key Financial Figures

Consolidated(Rs. Cr)
ParticularsFY 2013FY 2014FY 2015FY 2016FY 2017
Total Income from Operations31,627.5435,317.0838,834.8139,427.02 58,731.52 
Expenses20,453.2022,265.1924,633.1924,370.67 43,295.61  
Earnings Before Other Income, Interest, Tax and Depreciation (Operating Profit)11,174.3413,051.8914,201.6215,056.35 15,435.91  
Depreciation859.11964.921,027.961,113.43 1,152.79  
Finance Costs87.186.3768.1258.47 24.30  
Other income877.60970.951,256.511,548.73 1,761.53  
PBT11,105.6513,051.5514,362.0515,433.18 16,020.35  
Tax3,412.074,060.934,596.425,371.96 5,549.09  
PAT (before Minority Interest and share of Associates)7,693.588,990.629,765.6310,061.22 10,471.26  
Profit/ (loss) attributable to Minority Interest96.38109.81115.35157.84 – 
Share of profit / (loss) of Associates(10.87)(10.57)(12.89)(8.23) (5.97) 
Consolidated Profit / (Loss) for the year7,608.078,891.389,663.179,911.61 10,477.23  

Profitability Analysis

ParticularsFY 2013FY 2014FY 2015FY 2016FY 2017
Operating Profit Margin Ratio35.3336.9636.5738.19 26.28 
Net Profit Margin Ratio24.3325.4625.1525.52 17.83 

Operating profit margin is a measurement of the proportion of a company’s revenue that is left over after paying for production costs such as raw materials, salaries and administrative costs. Net profit margin is arrived at by deducting non operating expenses such as depreciation, finance costs and taxes out of operating profit and shows what is left for the shareholders as a percentage of net sales. Together these ratios help in understanding the cost and profit structure of the firm and analysing business inefficiencies. 

Key Balance Sheet Figures

Sources of Funds / Liabilities(Rs. Cr)
ParticularsFY 2012FY 2013FY 2014FY 2015FY 2016
Share Capital781.84790.18795.32801.55804.72
Reserves & Surplus18,676.7422,367.7226,441.6430,933.9433,159.69
Net worth (shareholders funds)19,458.5823,157.9027,236.9631,735.4933,964.41
Minority Interest157.09179.89203.03225.11262.33
Long term borrowings105.3890.8076.4060.6842.81
Current liabilities9,304.0010,525.9811,886.0612,159.9114,945.09
Other long term liabilities and provisions1,054.72185.22174.49166.83186.93
Deferred Tax Liabilities1,213.591,306.991,642.771,862.21
Total Liabilities30,079.7735,353.3840,883.9345,990.7951,263.78


Application of Funds / Assets(Rs. Cr)
ParticularsFY 2012FY 2013FY 2014FY 2015FY 2016
Fixed Assets12,089.7513,885.3515,741.5317,771.5118,285.35
Noncurrent Investments765.02814.17798.52807.684,556.45
Current Asset15,801.4519,065.7022,581.0625,574.3525,811.20
Long term advances and other noncurrent assets1,109.421,271.651,430.161,566.712,342.52
Goodwill on consolidation (net)314.13316.51297.14231.97226.51
Total Asset30,079.7735,353.3840,883.9345,990.7951,263.78

Efficiency Analysis

ParticularsFY 2012FY 2013FY 2014FY 2015FY 2016

Return on Capital Employed (ROCE) measures a company’s profitability from its overall operations by calculating the return generated on the total capital invested in the business (i.e. equity + debt). Return on Equity (ROE) or Return on Net Worth (RONW) measures the amount of profit which the company generates on money invested by the equity shareholders. In short, ROE draws attention to the return generated by the shareholders on their investment in the business. Together these ratios can be used in comparing the profitability of the company with other companies in the same industry. 

Valuation Analysis

ParticularsFY 2013FY 2014FY 2015FY 2016FY 2017
Total Income from Operations (Rs. Cr.)31,627.5435,317.0838,834.8139,427.02 58,731.52 
Growth (%)19.12 %11.67 %9.96 %1.52 % 48.96 % 
PAT (Rs. Cr.)7,693.588,990.629,765.6310,061.22 10,471.26  
Growth (%)21.69 %16.86 %8.62 %3.03 % 4.08 % 
Earning Per Share – Basic (Rs. )9.6911.2212.1112.35 8.50 
Earning Per Share – Diluted (Rs. )9.5611.0912.0012.28 8.45 
Price to Earnings32.3331.0626.4826.71 36.36 

Dividend History

The Company has maintained an average dividend yield of 1.96 % over the last 5 financial years.

Liquidity and Credit Analysis

Current Ratio

Higher current ratio implies healthier short term liquidity comfort level. A current ratio below 1 indicates that the company may not be able to meet its obligations in the short run. However, it is not always a matter of worry if this ratio temporarily falls below 1 as many times companies squeeze out short term cash sources to achieve a capital intensive plan with a longer term outlook. ITC’s average current ratio over the last 5 financial years has been 1.82 times which indicates that the company is comfortably placed to pay for its short term obligations.

Long term Debt to Equity Ratio

Companies operating with high long term debt to equity on their balance sheets are vulnerable to economic cycles. In times of slowdown in economy, companies with high levels of debt find it increasingly difficult to service the interest on their borrowings as profit margins decline. We believe that long term debt to equity ratio higher than 0.6 – 0.8 could affect the business of a company and its results of operations.

ITC’s average long term debt equity ratio over the 5 financial years has been 0.00 times which indicates that the company operates with negligible level of debt and accordingly is placed well to withstand economic slowdowns.

Interest Coverage ratio

Interest coverage ratio indicates the comfort with which the company may be able to service the interest expense (i.e. finance charges) on its outstanding debt. Higher interest coverage ratio indicates that the company can easily meet the interest expense pertaining to its debt obligations. In our view, interest coverage ratio of below 1.5 should raise doubts about the company’s ability to meet the expenses on its borrowings. Interest coverage ratio below 1 indicates that the company is just not generating enough to service its debt obligations.

ITC’s average interest coverage ratio over the last 5 financial years has been 521.63 times which indicates that the company can meet its debt obligations without any difficulty.

Ownership pattern

ITC is one of India’s biggest professionally managed companies with no clear promoter group. Many large financial institutions hold varying amounts of stakes in ITC but no one in particular exercises significant influence in decision making. This gives the management enormous freedom and autonomy in diversification.

In its latest stock exchange filing dated 31 March 2017, institutional holding in the company stood at 55.81% (FII+DII). Large institutional holding indicates the confidence of seasoned investors. At the same time, it can also lead to high volatility in the stock price as institutions buy and sell larger stakes than retail participants.  

About the Author

Rajat Sharma pictureRajat Sharma is a well known stock market analyst and commentator. He has covered Indian markets for over a decade and is regarded for consistently identifying early stage investment opportunities. Attorney by qualification, Rajat has done extensive work for improving corporate governance and disclosure standards.