Establishment of ITC as a baby plant to full grown tree:

ITC was established on 24th of august 1910 as a private ltd company under the name of

Imperial tobacco co. Of India Ltd. Since it began its operation it has been actively involved

in ceasing the opportunity of expanding itself into different sectors and creating wealth for

the company and for all the stakeholders involved. As we move down the years looking at its

financial health, from being a baby plant to growing into a mature tree, ITC has been

consistently increasing its shareholder’s wealth. Initially when ITC was established it was

into selling and distribution of tobacco products. Its first move into expansion was with the

acquisition of tobacco manufacturing unit of “Tobacco manufacturing (India) Ltd.” Along

with the complementary lithographic printing business of “Printers (India) Ltd.” in the year

1953. Soon after that company went public and converted it into a “ public ltd.” Company in

the year 1954.(1) This marked the beginning of the spreading of roots deep into the ground.

The Evidence of ITC strengthening the position in the Capital market is provided in the

Table(1).

Capital Structure Of ITC Ltd. :

Capital Structure is the combination of equity, debt, or hybrid securities. It is the way a

corporation finances its assets. A firm’s capital structure is then the composition or structure

of its liabilities. Scrutinising the capital structure of ITC we find that despite of having a very

strong market position both in terms of company as a brand and company as a wealth creator,

ITC has restricted itself from leveraging its strong position. One of the important factor

Being the nature of business it carries out. ITC is majorly into FMCG product like tobacco

Healthcare product etc. A major trend can be observed with respect to FMCG company

being Less dependent on debt financing and more towards equity financing. Long term

debts form a very insignificant portion of their total financing. As a result, FMCG companies

are low geared companies.

1- Source : Religare Technova.

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The capital Structure of ITC ltd can be analyzed using the following 2 important aspects:

1. Capital Gearing

2. Debt-to-Equity Ratio

Capital Gearing

Capital gearing ratio is mainly used to analyze the capital structure of a company.

Capital Gearing Ratio = Equity Share Capital / Fixed Interest Bearing Funds

Low Geared-------High Equity Share Capital (as in the case of FMCG companies)

Capital gearing ratio is important to the company and the prospective investors. It must be

carefully planned as it affects the company’s capacity to maintain a uniform dividend policy

during difficult trading periods. It reveals the sustainability of the company’s capital .(1)

The Capital Gearing trend of ITC ltd can be understood with the help of the table (2):

Owners’ fund as a percentage of total sources:

Owners’ fund comprises of equity capital as the major portion. Rather, it can be assumed to

be the only source of owners’ capital.(2) The outsiders’ fund has been very insignificant over

the considered length of time, thereby showing that ITC ltd. is a low geared company.

With respect to the current economic and financial scenario, companies which are dependent

for expansion on borrowed capital are going to be some kind of a trouble for the next 1 year

or so. Highly geared companies are unattractive for inventors because the company may have

difficulty in paying the interest due on its borrowings if their operations fail to generate

enough cash. “Low geared” companies are attractive for the opposite reasons. Thus ITC’s

capital structure is attractive and strong both for the company and its owner.

1&2 : Definations from Investopedia, Wikipedia,

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DEBT-to-EQUITY RATIO :

Debt-to-Equity ratio indicates the relationship between the external equities or outsiders’

funds and the internal equities or shareholders’ funds. It is also known as external-internal

equity ratio. It is determined to ascertain the long term financial policies of the company.

Debt Equity Ratio = Internal Equities / External Equities

= Outsiders’ Funds / Shareholders’ Funds

= Total Long-term Debts / Total Long-term Funds (1)

ITC’s debt-to-equity ratio ( Long term debt / equity ) for the Year 2008 2007 2006 2005

2004 has been consistently .01, .01, .01, .01, .01 .(2)

The ratio indicates the proportionate claims of owners and the outsiders against the firm’s

assets. The purpose is to get an idea about the cushion available to outsiders on the

liquidation of the firm. However, the interpretation of the ratio depends upon the financial

and business policy of the company. The owners want to do business with maximum of

outsiders’ funds in order to take lesser risk of their investment and to increase their earnings

(per share) by paying a lower fixed rate of interest to outsiders. The outsiders (creditors) on

the other hand, want that shareholders should invest and risk their share of proportionate

investments.

A ratio of 1:1 is usually considered to be a satisfactory ratio. Theoretically, if the owners’

interests are greater than that of creditors, the financial position is highly solvent. In analysis

of the long-term financial position, it enjoys the same position as the current ratio in the

analysis of short-term financing.

ITC has maintained a constant debt-to-equity ratio of .01 over the past 5 years. This is a clear

indication of ITC’s heavy reliance on equity capital as a source of finance. In the present

financial scenario, companies with a high debt-equity ratio are likely to witness a period of

high interest costs. Therefore, it makes more sense for investors to look for companies with

low debt-equity ratio.

1&2 : Defination from Investopedia & Wikipedia.

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 ITC ltd is highly solvent and with a very strong capital structure in the present financial

situation. Though debt capital financing is preferred by companies since it involves less risk

and comes with the bonus of a tax shield, the present scenario dictates that companies with

low debt financing are definitely at the summit.

Other soucers:

Other source of finance for ITC was when it issued a global depository receipts (GDR’s) and

warrants. The Company, in 1993, made an offer of 45,00,000 Global Depository Receipts

(GDRs) with 15,00,000 warrants (in the ratio of 1 warrant for every three GDRs held) to

subscribe for the GDRs. As on March 31,2010, 1,47,00,984 GDRs, representing

1,47,00,984 underlying Ordinary shares of the Company, were outstanding. The Company's

GDRs are listed on the Luxembourg Stock Exchange (Code: 004660919), at Societe de la

Bourse de Luxembourg.

Shareholder’s pattern of ITC :

ITC’s shareholding pattern reveals the diversity of its stake amongst the institutional investor,

foreign investors and general public of India at large. About 50.25%, of its total share, is held

by the institutional investor. These institutional investor consist some of the big names. The

list is given in table (3).

Apart from institutional buyers Individual shareholding and and foreign institution consist of

about 49.39%. Rest 0.36% of share is held by custodians against which depository receipts

have been issued. Since 2000 till date, ITC’s share prices have risen by 7 times. Currently its

share is trading around Rs. 175.(1) The 10 years data of its share price is provided in the

table (4).

1-Capitaline and in.finance.yahoo.

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 The diversified investor gives ITC the much needed stability and freedom for managing the

company. Unlike other big conglomerate, where majority of shareholding is with one person

or family, ITC is free from such biases. Management is free to make its own decision with

consensus from other board members without having to fear of being overruled. It has been

one of the success stories behind ITC’s diversified operations. ITC which has presence in

Cigarettes & Tobacco, Hotels, Information Technology, Packaging, Paperboards & Specialty

Papers, Agri-business, Foods, Lifestyle Retailing, Education & Stationery and Personal Care,

has managed to keep all segments profitable and growing with times. This vast portfolio from

ITC is managed by very proficient management. One of the fastest growing sector in Indian

market is FMCG, which ITC has been able to capitalize upon. But still around 70% of its

total revenue generated is from tobacco product. It is one of the worrying factor for ITC, as

being dependent on tobacco will make ITC financial future uncertain. Since early

2000 ITC has initiated investing in various green projects and has established its name in the

environmental friendly companies. ITC is aiming at creating multiple drivers of growth,

helped by strong cashflows from its cigarette business. It plans to diversify its business

portfolio and become less dependent on the tobacco business. However, the cigarette business

remains the key value creator for its shareholders. ITC’s current turnover is more than Rs.

60,000 crore with a market capitalization of Rs. 100,000 crore. Its profit after tax is about Rs.

4000 crore and returns on capital employed is at 40%.

References from:

http://money.rediff.com/money/jsp/ratio.jsp?companyCode=12630003

http://money.rediff.com/money/jsp/ratio.jsp?companyCode=12520002

http://www.moneycontrol.com/stocks/company_info/capital_structure.php?sc_did=ITC

http://www.itcportal.com

http://www.accountingformanagement.com

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