Analysis Report: ITC (Buy, Estimated Price: Rs. 840.36)

About the Company

ITC was incorporated on 24 August 1910 under the name Imperial Tobacco Company of India Limited later on in 1970 company’s ownership was taken to and the name changed to India Tobacco Company Limited and finally in 1974 ITC Limited. ITC has presence in various Industries mainly includes FMCG, Hotel, Agriculture, Tobacco, IT and Retail. However, they took a long journey and also went into backward integration by setting up their packaging business in 1925 also they took their first step to move out of national boundaries by setting a Surya tobacco company in Nepal.
ITC is the largest exporter of India in Agri Products and they are still at a growth stage in Agri Business. In 2010 they launched hand rolled cigar in Indian market which gave a huge market share to ITC.

Shareholding Pattern - 

Cat Code	Category of Shareholder	Demat	Physical	Total	Total shareholding as a percentage of total number of shares
A	Shareholding of Promoter
1.	INDIAN	0	0	0	-
2.	Foreign	0	0	0	-
B	Public Shareholding
1.	INSTITUTIONS
(i)	Mutual funds	213521919	90724	213612643	2.66
(ii)	Banks/FI	902400460	969178	903869638	11.23
(iii)	Insurance Companies	1713396534	63485	1713460019	21.29
(iv)	FIIs	1025124243	258910	1025383153	12.74
(v)	Others (Foreign Portfolio Investor)	619884972	0	619884972	7.70
	Sub-total	4474328128	1382297	4475710425	55.62
2.	Non- Institutions
(i)	Corporate Bodies (Indian)	285404341	2414008640	2699412981	33.54
(ii)	Individual shareholders holding Nominal share Capital up to Rs.1 lakh	542828573	110345683	653174256	8.12
(iii)	Individual shareholders holding Nominal share Capital above Rs.1 lakh	114958969	13945590	128904559	1.60
(iv)	Any other	62072042	9845140	71917182	.9
	Sub-total	1005263925	2548145053	3553408978	44.16
	Total Public Share Holding (B)	5479592053	2549527350	8029119403	99.78
C	Shares held by custodian for GDRs & ADRs	18060588	27000	18087588	.22
	TOTAL(A+B+C)	5497652641	2549554350	8047206991	100

Business Description -

The company has a portfolio of 13 business and the performance of company’s cigarettes business remained subdued during the year due to unprecedented pressure on the legal cigarette industry in India on account of the cumulative impact of steep increase in taxation and intense regulatory pressures. Over the last 4 years, the incidence of Excise Duty and VAT on cigarettes, at a per unit level, has gone up cumulatively by 118% and 142% respectively thereby exerting severe pressure on legal industry volumes even as illegal trade grows unabated. ITC in FMCG Businesses Segment Revenue of 9731.17 crores during the year, representing a growth of 7.7% over the previous year. ITC is having one of the fastest growing FMCG businesses in the country. Segment Results for the year improved to 71 crores from 34 crores in 2014-15, after absorbing the gestation costs of new categories viz., Juices, Gums and Dairy etc. In the Notebooks category, the Business enriched its product portfolio with the launch of several differentiated offerings under the ‘Classmate’, ‘Classmate Pulse’, ‘Paperkraft’ and ‘Saathi’ brands. The retail footprint of the Wills Lifestyle brand spans over 100 exclusive stores in 50 cities and 350 outletsin leading departmental stores and multi-brand outlets. 6 exclusive boutiques across ITC Hotels continue to build the brands connect with high-end business and leisure travelers. Mangaldeep continues to be the fastest growing Agarbatti brand in the country aided by a well-crafted portfolio of offerings born out of deep consumer insight and increasing brand salience.

Industry Analysis - 

     

1) Food Industry

The food industry, which is currently valued at US$ 39.71 billion is expected to grow at a Compounded Annual Growth Rate (CAGR) of 11 per cent to US$65.4 billion by 2018. Food and grocery account for around 31 per cent of India’s consumption basket.

2) Agriculture Industry

As per the Central Statistics Office (CSO), the share of agriculture and allied sectors is expected to be 17 per cent of the Gross Value Added (GVA) during 2016-17 at 2011-12 prices.India is the largest producer, consumer and exporter of spices and spice products. India's fruit production has grown faster than vegetables, making it the second largest fruit producer in the world. India's horticulture output, is estimated to be 287.3 million tonnes (MT) in 2016-17 after the first advance estimate.Agricultural export constitutes 10 per cent of the country’s exports and is the fourth-largest exported principal commodity.

3) Information Technology

India, accounts for approximately 67 per cent of the US$ 124-130 billion market. The industry employs about 10 million workforces. India is cost competitive in providing IT services, which is approximately 3-4 times cheaper than the US, continues to be the mainstay of its Unique Selling Proposition (USP) in the global sourcing market.

4) Tobacco Industry

Total Exports for manufactured and raw tobacco in India stood at US$ 883.26 million for FY 2015. India is the third largest producer and exporter in the world after Brazil and the US, with annual production of about 800 million kgs. Exports of Indian tobacco products rose at a CAGR of 9% to US$ 918.9 million in 2015 from Us$ 502.2 million in 2007-2008. In 2015 India exported 246 million Kgs of tobacco and tobacco products.

Market Analysis - 

1) Food Market

ITC Limited plans to invest Rs 800 crore (US$ 117.4 million) to set up a world-class food processing facility in Medak, a district located in Telangana. The company has also formulated plans to enter the dairy market.

2) Agriculture Market

ITC’s Agri Business Division is the country’s second largest exporter of soya meal, Wheat & wheat Flour, Rice, Pulses, Barley & Maize, Coffee, Shrimps and prawns. ITC has a unique rural digital infrastructure network and a deep understanding of agricultural practices. Kothari Products Ltd. is the major competitor of ITC in Agri Business.

3) Information Technology

India’s technology and BPM sector (including hardware) is likely to generate revenues of US$ 160 billion during FY16 compared to US$ 146.5 billion in FY15, implying a growth rate of 9.2 per cent. The contribution of the IT sector to India’s GDP rose to approximately 9.5 per cent in FY15 from 1.2 per cent in FY98. TCS is the market leader, accounting for about 10.4 per cent of India’s total IT & ITeS sector revenue in FY16.

4) Cigarette Market

Competitors of ITC in Indian cigarette market are Godfrey Phillip, VST, Golden Tobacco, RTCL, NTC Industry and following is the chart depicting sales of different companies but ITC is the leader in the market with a market share of 72%.




Porters Five forces analysis -

Financial Analysis - 

Balance sheet of last 5 Years

(Rupee in crores)	2011-12	2012-13	2013-14	2014-15	2015-16
EQUITY AND LIABILITIES
Share capital	781.84	790.18	795.32	801.55	804.72
Reserves and surplus	18010.05	21497.67	25466.70	29934.14	32124.28
Non-current liabilities	1072.68	1398.85	1463.05	1778.06	2001.57
Trade payables	1424.84	1668.98	1987.59	1904.62	2265.59
Other current liabilities	7676.99	8661.75	9516.73	9777.29	12322.27
TOTAL	28966.40	34017.43	39229.39	44195.66	49518.43
ASSETS
Fixed assets	9099.19	11209.34	12012.74	14178.49	14204.53
Other non-current assets	5423.64	5216.62	6287.92	6062.14	11179.16
Inventories	5637.83	6600.20	7359.54	7836.76	8519.82
Trade receivables	986.02	1163.34	2165.36	1722.40	1686.35
Cash and cash equivalents	2818.93	3615.00	3289.37	7588.61	6563.95
Other current assets	5000.79	6212.93	8114.46	6807.26	7364.62
TOTAL	28966.40	34017.43	39229.39	44195.66	49518.43

ITC limited had made a tremendous growth in past 5 years which can be measured through its investment in fixed asset which showed a growth of 56% along with company’s reserves and surplus which has increased by 78% as compared to 2011-12. Cigarette business of ITC is cash cow which generates around 60% of its revenue and contribute to reserve. Quick ratio was 0.96 in 2011-12 which has increased to 1.07 in 2015-16 which indicates company’s growing financial health and now they are strongly able to meet its short term financial liability. Return on shareholder’s fund has decreased from 32.79% in 2011-12 to 29.89% in 2015-16 which means that company failed to utilized its resources. Company is having low risk in terms of repaying debt as it has debt equity ratio of .06 in year 2015-16.

Profit and Loss of last 5 years

(Rupee in crores)	2011-12	2012-13	2013-14	2014-15	2015-16
INCOME
Total Operating Revenue	25173.82	29901.27	33238.60	36507.40	36837.39
Other income	825.34	938.70	1107.14	1543.13	1803.74
Total Revenue	25999.16	30839.97	34345.74	38050.53	38641.13
EXPENSES
Operating Expense	16325.20	19273.76	20783.76	23033.85	22599.16
Depreciation and amortization expense	698.51	795.56	899.92	961.74	1034.45
Other Expenses	77.92	86.47	2.95	57.42	49.13
Tax Expenses	2735.16	3265.79	3873.90	4389.79	5113.68
Total Expenses	19836.79	23421.58	25560.53	28442.8	28796.42
Profit for the year	6162.37	7418.39	8785.21	9607.73	9844.71

In FMCG out of 81% around 60% is contributed by cigarette business and 13.75% by packaged foods which tends to be major business of ITC limited. Companies profit margin is 26.72% for 2016 which is increased by 2.24% when compared to year 2011-12.Earnings Per Share for year 2016 is Rs 36.46

Profit & Loss Statement of last Eight Quarters

(Rs in Crores)	Jun-14	Sep-14	Dec-14	Mar-15	Jun-15	Sep-15	Dec-15	Mar-16
REVENUE
Net Sales (Net of excise duty)	9164.42	8930.32	8800.22	9188.25	8505.53	8804.7	9102.66	10062.38
Other Operating Income	83.87	93.42	142.37	104.53	82.17	99.53	74.07	106.35
Total Income from Operations (Net) (1)	9248.29	9023.74	8942.59	9292.78	8587.7	8904.23	9176.73	10168.73
Other Income (2)	234.55	356.22	581.99	370.37	315.01	399.2	677.93	411.6
Total Revenue (1) + (2)	9482.84	9379.96	9524.58	9663.15	8902.71	9303.43	9854.66	10580.33
EXPENSES
Costs of Materials Consumed	2660.62	2792.72	2731.05	2803.44	2569.08	2691.47	2760.36	3033.84
Purchase of Stock in trade	1920.8	638.99	579.5	759.37	629.03	438	703.23	819.82
Changes in inventories of finished goods, WIP	-603.86	123.45	167.01	98.87	-29.13	89.34	-128.02	125.98
Employee Benefit Expenses	508.66	397.87	419.12	454.39	517.42	450.93	449.81	465.35
Other Expenses	1484.48	1582.06	1581.71	1933.6	1515.43	1674.4	1786.16	2036.66
Operating Expense (3)	5970.7	5535.09	5478.39	6049.67	5201.83	5344.14	5571.54	6481.65
Depreciation & Amortization (4)	231.32	243.22	237.63	249.57	258.19	258.83	262.54	254.89
Other Expenses (5)	15.15	18.39	8.37	15.51	10.46	10.31	16.09	12.27
Total Expenses (3) + (4) + (5)	6217.17	5796.7	5724.39	634.75	5470.66	5613.28	5850.17	6748.81
Profit Before Tax	3265.67	3583.26	3800.19	3348.4	3432.23	3690.15	4004.49	3831.52
Tax Expenses	1079.28	1158.1	1165.19	987.22	1166.79	1258.9	1351.67	1336.32
Profit After Tax	2186.39	2425.16	2635	2361.18	2265.44	2431.25	2652.82	2495.2

We expect that ITC will grow ahead of the industry estimates in the nearby future mainly because of diversification and constant growth in FMCG segment. Our estimated value is coming out to be around INR 840.36

Projected Balance Sheet of next 5 years

(Rupee in crores)	2017	2018	2019	2020	2021
EQUITY AND LIABILITIES
Share capital	804.72	804.72	804.72	804.72	804.72
Reserves and surplus	41882.47	52609.64	64400.16	77357.60	91595.69
Non-current liabilities	1975.74	1975.74	1975.74	1975.74	1975.74
Trade payables	3390.78	2831.23	4012.98	3515.65	4765.85
Other current liabilities	12318.67	12318.67	12318.67	12318.67	12318.67
TOTAL	60372.38	70540.00	83512.27	95972.38	111460.67
ASSETS
Fixed assets	15714.71	17424.17	19356.17	21536.86	23995.67
Other non-current assets	11179.16	11179.16	11179.16	11179.16	11179.16
Inventories	13665.86	17942.90	20383.33	23067.79	26020.71
Trade receivables	2100.50	2065.04	2517.05	2523.24	3021.08
Cash and cash equivalents	10347.53	14564.11	22711.94	30300.70	39879.42
Other current assets	7364.62	7364.62	7364.62	7364.62	7364.62
TOTAL	60372.38	70540.00	83512.27	95972.38	111460.67

Projected Profit & Loss of next 5 years

(Rupee in crores)	2017	2018	2019	2020	2021
INCOME
Total Operating Revenue	40521.13	44573.24	49030.57	53933.62	59326.98
Other income	0	0	0	0	0
Total Revenue	40521.13	44573.24	49030.57	53933.62	59326.98
EXPENSES
Operating Expense	24859.08	27344.98	30079.48	33087.43	36396.17
Depreciation and amortization expense	1155.80	1281.52	1423.62	1584.01	1764.85
Other Expenses	0	0	0	0	0
Tax Expense	4748.07	5219.56	5736.95	6304.74	6927.87
Total Expenses	30762.95	33846.06	37240.05	40976.18	45088.89
Profit for the Year	9758.19	10727.18	11790.52	12957.44	14238.09

Price Performance -

Future Prospects of ITC Ltd. -

The board of directors has recommended entering health sector by setting up state of the art world class multi-speciality hospital.These include the business of multi-speciality hospitals, medical and health care centres, mobile health centres, nursing homes, diagnostic centres, dispensaries, pharmacies, clinics, laboratories, polyclinics, drug and medical accessories stores, nutrition and dietetic counselling centres, medical colleges, nursing colleges, medical research centres, facilities for training, development and skilling of related manpower, and to engage in and support medical tourism and all other related medical, surgical, curative and health services and allied activities.

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About the Author -

This report has been prepared by Vivek Agrawal, pursuing MBA (Batch 2016-2018) from Institute of Management, Nirma University located in Ahmedabad, India.


Disclaimer - 

This document is solely for the personal information of the recipient, and must not be singularly used as the basis of any investment decision. Nothing in this document should be construed as investment or financial advice. Each recipient of this document should make such investigations as they deem necessary to arrive at an independent evaluation of an investment in the securities of the companies referred to in this document (including the merits and risks involved), and should consult their own advisors to determine the merits and risks of such an investment. The information in this document has been printed on the basis of publicly available information, internal data and other reliable sources believed to be true, but we do not represent that it is accurate or complete and it should not be relied on as such, as this document is for general guidelines only.