STRATEGIC FINANCIAL ANALYSIS OF DIVERSIFIED AND UNDIVERSIFIED COMPANY

INTRODUCTION:

I have chosen two companies of which one is highly diversified and another
which is undiversified. Undiversified company which follows only one kind of business
which is “BRITANNIA” and another company which started their business by selling
tobacco and now they are in various business which is “ITC”. I have taken Itc sunfeast
to compare between diversified and undiversified company.

I have analyzed ratios of both the company and projected their cash flow and initial
investment and found out net present value and commented on these parameters to
show the difference between diversified and undiversified company.

Due to unavailability of separate annual report for ITC Sunfeast, I have taken whole Itc
annual report.

COMPANY’S PROFILE:

ITC – This company at first started their business by producing tobacco and now
they are one of the highly diversified company with many product lines like Hotels,
Papers, Agri-business, Stationery, Fmcg etc. This company increased their net profit
from 2673.07 crores in 2005 to 4825.74 crores in 2009. It always shows an increasing
trend. Because this company is highly diversified they can reduce their risks by reducing
the loss of one component by increasing the profit of the other components.

BRITANNIA – It is an biscuit company was started in year 1892 in a nondescript

house in Calcutta with an initial investment of Rs.295. Now the net profit of the company
stands up to 232.52 crores. Its average sales growth rate is 18.25% were as industry
growth rate of Fmcg is 15%. It has a high market value per share of 1650 rupees. Even
though they do not diversify their business they are doing very huge business In biscuit.
It’s a very old company and has created a huge brand loyalty.

1
Financial ratio analysis:

TABLE No.1
Current Ratio – ITC Current Ratio - Britannia
Current Current
Current Liability Current Liability
Yea Asset Rs. Rs. In Yea Asset Rs. Rs. In
r In Crores Crores Current Ratio r In Crores Crores Current Ratio
200 200
9 8161.11 4705.01 1.73 9 553.65 437.54 1.27
200 200
8 7019.27 4432.3 1.58 8 577.49 370.31 1.56
200 200
7 6289.72 3857.59 1.63 7 382.61 323.03 1.18

INFERENCE:

From the analysis made in table#1, it’s clear that both diversified and undiversified company is strong
enough to meet its obligation. Both the companies have enough resources to pay its bill over the next
12 months. 1.5:1 is said to be strong and good current ratio. Undiversified company Britannia were
unable to meet more than 1.5:1 for the year 2009 and 2007 as Itc dose for all the three years.

TABLE No.2
Quick Ratio - ITC Quick Ratio - Britannia
Quick Ratio = C.A - stock-Prepaid/ C.L Quick ass = C.A - stock-Prepaid/ C.L
Liquid Current Liquid Current
Asset Liability Asset Liability
Rs. In Rs. In Rs. In Rs. In
Year Crores Crores Liquid Ratio Year Crores Crores Liquid Ratio
2009 3561.39 4705.01 0.76 2009 300.02 437.54 0.69
2008 2968.75 4432.3 0.67 2008 275.96 370.31 0.75
2007 1719.89 3857.59 0.45 2007 167.67 323.03 0.52

INFERENCE:

From table#2 we can find that both the companies will not be able to make the immediately. Both the
companies will not be in position to make any urgent payment immediately. It cannot honor it
commitment instantly, so the company has to depend upon help from the financial situation in the way
of overdraft etc… quiet frequently. Since strong quick ratio is said to have a ratio of 1:1 both the
companies is not in a good position in term of quick ratio.

2
 Table No.3
Asset turnover ratio - ITC Asset turnover ratio - Britannia
Net sales Fixed asset Net sales Fixed
Rs. In Rs. In Ass turnover Rs. In asset Rs. Ass turnover
Year Crores Crores Ratio Year Crores In Crores Ratio
2009 14985.51 10558.65 1.42 2009 3112.38 511.5 6.08
2008 14032.3 8959.7 1.57 2008 2587.86 453.18 5.71
2007 12313.83 7134.31 1.73 2007 2199.32 392.12 5.61

INFERENCE:

From table#3 we can find that britannia an undiversified company has outplayed Itc an diversified
company in term of asset turnover ratio. Britannia has utilized their fixed asset maximum to generate
sales than Itc dose.

Table No.4
ROI - ITC ROI – Britannia
Cap Cap
Operating employed Operating employed
Profit Rs. In Rs. In Profit Rs. In Rs. In
Year Crores Crores ROI Year Crores Crores ROI
2009 4825.74 15433.02 31.27 2009 224.16 855.3 26.21
2008 4571.77 13188.7 34.66 2008 232.32 845.21 27.49
2007 3926.7 11034.9 35.58 2007 128.69 684.2 18.81

Inference:

From table#4 we can find that an highly diversified company Itc has better Roi than undiversified
Britannia, this is because they have more product since they are diversified so it is possible for them to
create more roi from different investment were as even though Britannia engaged in producing one
product line even they are able to show a better performance in term of Return on investment.

3
 Table No.5
Debt equity - ITC Debt equity - Britannia
Share Share
Long term holders Long term holders
debt Rs. fund Rs. In Debt equity debt Rs. fund Rs. In Debt equity
Year In Crores Crores Ratio Year In Crores Crores Ratio
2009 177.55 13735.08 0.01 2009 25.17 824.54 0.03
2008 214.43 12057.67 0.02 2008 106.1 755.81 0.14
2007 200.88 10437.08 0.02 2007 4.78 614.82 0.01

INFERENCE:

From table#5 we can find that both the companies have very less leverage, so they would have very less
tax benefits of debt capital for Itc the debt ratio remains more or less same for the past three years
while for Britannia in the year 2008 there was a jump on debt component from 1% to 14% but in again
in 2009 it has come down to 3%.

Projection of sales growth:

Sales growth rate - Itc - Table # 6

Current year sales - Previous year sales/ Previous year
sales
Year Sale (Crores) Growth rate
2006 16236.42 21.52
2007 19519.99 20.22
2008 21467.38 9.97
2009 23247.84 8.29

Average sales
  growth rate 15%

In table#6 Average sales growth of diversified company Itc is found out by finding the sales growth of all
the years from 2006-2009 and divided by total no. of years which is 4 to compute average sales growth
which is 15%. This average sales growth is found to project sales growth for next five years.

4
 Sales growth rate - Britannia - Table # 7
Current year sales - Previous year sales/ Previous year sales
Year Sale (Crores) Growth rate
2006 1817.92 12.53
2007 2317.11 27.45
2008 2617.66 12.97
2009 3142.89 20.06

Average sales growth

  rate 18.25%

In table#7 Average sales growth rate of undiversified company Britannia is found out by finding the
sales growth from 2006-2009 and divided by four to find the average sales growth which is 18.25% to

Sales projection for next five years:

BRITANNIA - Average sales growth rate =

ITC - Average sales growth rate = 15% 18.25%
Sales Projection Table#8 Sales Projection Table# 9
   (In Crores)    (In Crores)
2010 26735.01 2010 3716.46
2011 30745.26 2011 4394.71
2012 35357.05 2012 5196.74
2013 40660.6 2013 5976.25
2014 46759.69 2014 6872.68
       

In table# 8 itc companies sales growth is projected with the help of average sales growth which was
found out in table#6 which is 15%, same way for Britannia company sales growth is projected for next
five years in Table# 9 with the help of average sales growth which is found out in table#7 which is
18.25%.

Estimation of cash flow:

5
 ITC - TABLE# 10
Estimation of cash flow growth rate (In Crores)
Yea Depreciatio Pat+De Growth
r PAT n p Rate
200 2504.2
5 2191.4 312.87 7  
200 2235.3 2567.6
6 5 332.34 9 2.53
200 2699.9 3062.8
7 7 362.92 9 19.28
200 3558.5
8 3120.1 438.46 6 16.18
200 3807.1
9 9 549.41 4356.6 22.42
         
Average cash flow growth rate 15.10%

In table#10 average cash flow is found by finding out the cash flow growth rate from the year 2006-2009
and average cash flow is found out by dividing the total cash flow growth rate by total number of years
which is 15.10% this average cash flow growth rate is found to project cash flow for next five years and
for each year cash inflow is calculated by adding depreciation to the PAT.

ITC - TABLE# 11
Cash flow of previous Cash
Year year(In Crores) Inflow
     
201
0 4356.6+15.10% 5014.45
201
1 5014.45+15.10% 5771.63
201
2 5771.63+15.10% 6643.15
201
3 6643.15+15.10% 7646.26
201
4 7646.26+15.10% 8800.84
     

In table# 11 cash flow is projected for next five years with the help of average cash flow growth rate
which was found in table# 10 which is 15.10%. For 2010 cash flow is projected by adding the average
cash flow growth to the previous year cash flow which is 4356.6 for 2009 and computed 2010 cash
inflow which is 5014.45. In the same way the cash flow is projected till 2014.

BRITANNIA - TABLE# 12
Estimation of cash flow growth rate (In Crores)
Year PAT Depreciation Pat+Dep Growth Rate
2005 148.77 18.97 167.74  
2006 146.43 21.72 168.15 0.24

6
 2007 107.65 25.27 132.92 -20.95
2008 191 29.08 220.08 65.5
2009 180.4 33.46 213.86 -2.82
         
Average cash flow growth rate 10.50%

In table#12 average cash flow growth rate is found out for the year 2006-2009 which is found out to be
10.50%. Cash flow is computed by adding depreciation to pat as it does for Itc Company which was
calculated in table #10. Using average cash flow growth rate cash flow is projected for next five years as
shown in table#13.

BRITANNIA - TABLE# 13
Yea Cash flow of previous Cash
r year (In Crores) Inflow
     
201
0 213.86+10.50% 236.32
201
1 236.32+10.50% 261.13
201
2 261.13+10.50% 288.54
201
3 288.54+10.50% 318.83
201
4 318.83+10.50% 352.3
     
In table# 13 cash flow is projected for next five years using the average cash inflow growth rate which
was found to be 10.50% and there by estimated cash flow till 2014.

Calculation of Net initial investment:

Calculation of Net investment for Table # 14 – ITC

2010 (in crores)
   
For 2009 it is 1.42  
  For 2010
Projected sales/fixed
Fixed ass ratio of 2009 = asset
   
Net investment = 18827.48
   

In table#14 net investment of a diversified company Itc is found out by using the fixed asset ratio of
2009 which is 1.42 and by using the projected sales for 2010 which is 26735.01 these figures are
calculated by using the formulae Fixed asset ratio of 2009 = projected sales of asset for 2010 divided by
fixed asset and it has been fount that net initial investment for the project has 18827.48 crores.

7
 Calculation of Net investment for Table # 15 Britannia (in
2010 crores)
   
For 2009 it is 6.08 For 2010
   
Fixed ass ratio of 2009 = Projected sales/fixed asset
   
Net investment = 611.25
   

In table#15 net initial investments for Britannia for the year 2010 is found in the same way as we found
out for Itc in table#14 and it was calculated that the net initial investment is 611.25 crores.

Calculation of Coc (Cost of capital):

Formulae used - Kd(1-t)*D/V+Ke*S/V

Calculation Kd (Cost of debt) = Total interest paid / Total debt

For calculating Kd value, year 2008 is taken in to account for both the companies, since 2009
gives very abnormal value and also average of Kd for the year 2005-2009 gives very high value, because
if we take average value or 2009 value Kd will be high than Ke and also for 2009 interest is to high
compared to the debt. Hence 2008 value is considered as shown in table# 16.

Kd Table # 16
   
ITC 2005 2006 2007 2008 2009
           
Interest 50.8 21.1 16.04 24.61 47.65
Total
debt 245.63 119.73 200.88 214.43 177.55
0.20681 0.07984 0.11476 0.26837
  5 0.17623 9 9 5
           
Britanni
a 2005 2006 2007 2008 2009
           
Interest 2.1 5.09 8.9 9.73 16.01

8
 Total
debt 6.14 9.36 4.78 106.1 25.17
0.54380 1.86192 0.09170 0.63607
  0.34202 3 5 6 5

Calculation of Ke (Cost of equity) formulae used = D0(1+G)/P0)+G. Dps / Mps formulae is not used since
it gives very less value for both the companies which is shown in table#17.

Table # 17
Ke Dps/Mps  
  Itc Britannia
  2009 2009
     
Dps 3.7 40
Mp
s 250.85 1680.6
  0.01475 0.023801
     

For calculating Coc formulae used is Kd(1-t)*D/V+Ke*S/V. were Kd is cost of debt. T is tax which is taken
as 30% which is .3. “D” is the total debt and “S” is the net worth and Total value (V) = D+S and for
calculating Ke “G” is calculated which is the growth rate, “D0” which is dividend at the end of the year
“P0” which is current market price of the share.

Itc Coc - Table# 18

     
Calculating G    
     
Retention Ratio*Ret on
equity 1-Div pay out*ret on equity  
     
  (1-0.42)*.25 0.145
     
Calculating Ke (D0(1+G)/P0)+G  
  (3.7(1+0.145)/250.85)+0.145  
    0.1618
Ke    
     

9
      
Calculating Cost of debt Total int paid/tot debt  
     
2008 24.61/214.43  
Kd   0.11477
     
     
Calculating Coc Kd(1-t)*D/V+Ke*S/V  
     
  0.11(1-.3)*177.55/13912.63+0.16*13735.08/13912.63
     
    15.89%

Britannia Coc - Table# 19

     
Calculating G    
     
Retention Ratio*Ret on
equity 1-Div pay out*ret on equity  
     
  (1-0.52)*0.21 0.1008
     
Calculating Ke (D0(1+G)/P0)+G  
  (40(1+.1008)/1680.6)+.1008  
    0.127
Ke    
     
     
Calculating Cost of debt Total int paid/tot debt  
     
2008 9.73/106.1  
0.09170
    6
     
     
Calculating Coc Kd(1-t)*D/V+Ke*S/V  
     
0.09(1-.3)*25.17/849.71+.127*824.54/849.
  71  
     
    12.50%

In table# 18&19 Coc is computed by using walter’s model for both diversified and undiversified company.
To calculate Ke, G is found out which is the growth of the company and for calculating Kd (cost of debt)
value year 2008 is considered for both the companies since the year 2009 gives abnormal figure. And the
Coc is found out to be 15.89% for ITC which is rounded to 16% and for Britannia it is founded to be
12.50% which is rounded to 13% to compute Pv factor of both the companies.

Computation of Npv:

10
 ITC NPV - Table# 20
Pv Factor
Year Projected Cash Inflow(Cr) @16% Pv
       
201
0 5014.45 0.862068966 4322.801724
201
1 5771.63 0.743162901 4289.261296
201
2 6643.15 0.640657674 4255.985024
201
3 7646.26 0.552291098 4222.96133
201
4 8800.84 0.476113015 4190.194471
       
Total PV 21281.20384

In table # 20 total present values is found out to be 21281.20384 by using 16% Pv factor as we calculated
in Coc for Itc company.

Britannia NPV - Table# 21

Year ProjectedCash Inflow (Cr) Pv Factor @13% Pv

       
2010 236.32 0.88495575 209.1327434
2011 261.13 0.78314668 204.5030934
2012 288.54 0.69305016 199.9726938
2013 318.83 0.61331873 195.5444099
2014 352.3 0.54275994 191.2143255
       
Total PV 1000.367266

In table # 21 total present value is found to be 100.367266 by using 13% Pv factor as we calculated in
Coc for Britannia company.

Table # 22 Npv of Itc & Britannia (Crores)

Diversified   Un-Diversified
Total Pv 21281.2 Total Pv 1000.36
Minus Nco 18827.48 Minus Nco 611.25
NPV 2453.72 NPV 389.11

Table # 22 clearly shows that both the companies’ project will make a profitable growth in future since
both the companies show a positive figure. But when compared to the value of Npv we can see that
diversified company Itc have high figure compared to Britannia an undiversified company and also they
have many advantage compared to Britannia, because since it is diversified company they can reduce the
risk, and also if there are any loss in one particular sector they can offset with another sector thus how

11
 they minimize the risks. This shows that the diversified company is in better position as indicated by the
higher Npv.

Table # 23 - Pay back period method ( crores)

Amount Britanni Amount
ITC Cash Inflow recovered a Cash Inflow recovered
Nco -18827.48 0 Nco -1000.36 0
201
0 5014.45 5014.45 2010 236.32 236.32
201
1 5771.63 10786.08 2011 261.13 497.45
201
2 6643.15 17429.23 2012 288.54 785.99
201
3 7646.26 25075.49 2013 318.83 1104.82
201
4 8800.84 33876.33 2014 352.3 1457.12
             

In Table # 23 Npv is calculated by using pay back period method for both the companies with using
projected cash inflows to find out in how many years they are able to recover their initial investment and it
is found out that one of the company Itc were able to recover their initial investment between 3 rd and 4th
year and another company Britannia which can able to recover in between 2 nd and 3rd year. Which means
both the company itc and Britannia will recover their initial investment of 18827.48 and 611.25 in between
3rd - 4th year and 2nd – 3rd year respectively. To find the exact time of both the companies when they
recover their initial investment it is calculated as shown in Table#24.

Table# 24 - Pay back Period

ITC       BRITANNIA    
25075.49 - 17429.23 = 7646.26   785.99-497.45 = 288.54
     
76426.26/25075.49 = 0.3049   288.54/785.99 = 0.3671
     
0.3049*12 = 3.6591   0.3671*12 = 4.4052
     
3.6591 is rounded to = 4 months   4.4052 is rounded to = 4 months
     
3 year and 4 2 year and 4
Pay back period = months   Pay back period = months
             

In table# 24 exact pay back period is found out for both the companies. Since one of the company Itc
felled in between 3rd and 4th year to recover the initial investment, different between the cash flow of 4 th
year and 3rd year were taken and divided by the cash flow of 4th year and multiplied by 12 to find exact
payback period for both the companies and thus it gave a payback period of 3year and 4 months to a
diversified company Itc and 2 year and 4 months to a undiversified company Britannia. Comparing pay

12
back period of both the company Britannia is better than Itc since they recover their initial investment in 2
years and 4 months were as for Itc the recovery period is 3 years and 4 months.

Table # 25 - Discounted Pay back period method (crores)

Amount Britanni Amount
ITC Pv recovered a Pv recovered
Nco -18827.48 0 Nco -1000.36 0
201
0 4322.8017 4322.8017 2010 209.13274 209.1327
201
1 4289.2613 8612.063 2011 204.50309 413.6358
201
2 4255.985 12868.048 2012 199.97269 613.6085
201
3 4222.9613 17091.009 2013 195.54441 809.1529
201
4 4190.1945 21281.204 2014 191.21433 1000.367
             

Since calculation for pay back period did not give accurate information since it his calculated from cash
inflow, discounted pay back period method is used using Pv amount which is calculated @16% for Itc and
13% for Britannia as shown in the table 20 & 21 using that Pv discounted pay back perios is calculated as
shown in the table# 25 for which Itc resulted in recovering the initial investment in between 4 th and 5th year
and Britannia in between 2rd and 3rd year. To find the exact amount it is calculated as the same way it his
computed for payback period method as shown in the table #24. For computing the exact period it is
computed as shown in the below table# 26.

Table# 26 - Discounted Pay back Period

ITC       BRITANNIA    
21821.201-17091.009 = 4730.19   613.60-413.63 = 199.97
     
4730.19/21821.20 = 0.21677   199.97/613.60 = 0.3258
     
0.21677*12 = 2.6   0.3258*12 = 3.9096
     
2.6 is rounded to = 3 months   3.9096 is rounded to = 4 months
     
Discounted Pay back 4 year and Discounted Pay back 2 year and
period = 3 months   period = 4 months
             

13
From the above table# 26 we can find that Britannia is still better than Itc because their recovery period
under discounted pay back period method is only 2 years and 4 months were as Itc takes 4 years and 3
months to recover the initial investment.

Conclusion:

From the above computation of Initial investment, Npv and finding exact period to recover the
initial investment using pay back period method and discounted pay back period method we can infer that
Itc a diversified business plays a better performance than Britannia. Even though Britannia recover the
initial investment very soon in both the method than Itc does, but Itc’s initial investment is extremely
higher than the undiversified company Britannia. For Itc company the initial investment is about 18827.48
Crores were as Britannia had initial investment of just 611.25 crores. Since Britannia is a undiversified
company their initial investment is too less compared to Itc. Comparing by Npv method Itc’s Npv is very
high compared to Britannia, Itc’s Npv is 2453.72 Crores were as Britannia’s Npv is just 389.11 crores. Itc
have high figure compared to Britannia an undiversified company and also they have many advantage
compared to Britannia, because since it is diversified company they can reduce the risk, and also if there
are any loss in one particular sector they can offset with another sector thus how they minimize the risks.
This shows that the diversified company is in better position as indicated by the higher Npv.

REFERENCES:

http://www.itcportal.com/

http://www.britannia.co.in/

www.moneycontrol.com

www.bseindia.com

Pandey I M, (2007 Reprint) ‘Financial Management’ Vikas Publishing House

. Chandra Prasanna (2008) ‘Financial Management’ 7th Ed., Tata McGraw Hill.

14
15