Management and Cost Accounting

Economic-Industry-Company
Analysis

Submitted By:
Rajan Baa
Department of Financial Studies, University of Delhi
Enrolment No.: 3257

1
Content Page No.
1. Introduction 3
2. EIC Analysis 4
3. Industry Analysis 5
4. Economic Analysis 6
5. Financial Summary of Last 5 years 8
6. Financial ratios 10
7. References

2
Introduction
The following report is an economic, Industry, Company analysis (EIC Analysis) of ITC Ltd.

Company Profile
ITC is an Indian cigarette company which is headquartered in Kolkata. Its five diversified businesses
are Fast-Moving Consumer Goods (comprising Foods, Personal Care, Cigarettes and Cigars, Apparel,
Education and Stationery Products, Incense Sticks and Safety Matches), Hotels, Paperboards & Specialty
Papers, Packaging, Agri-Business and Information Technology.

Established in 1910 as the 'Imperial Tobacco Company of India Limited', the company was renamed as
the 'India Tobacco Company Limited' in 1970 and later to 'I.T.C. Limited' in 1974.

Revenue Segments: Out of all the businesses ITC owns, some of the major contributors to the top line
of the company are, Cigarettes (40%), FMCG-Non Cigarettes (21%), Agri business (19%), Stationery,
paperboard and packaging (11.5%) Others (8.5%).

Useful Information
1925: Packaging and Printing: Backward Integration
1975: Entry into the Hospitality Sector - A 'Welcom' Move
1979: Paperboards & Specialty Papers - Development of a Backward Area
1985: Nepal Subsidiary - First Steps beyond National Borders
1990: Paperboards & Specialty Papers - Consolidation and Expansion
1990: Agri Business - Strengthening Farmer Linkages
2002: Education & Stationery Products - Offering the Greenest products
2000: Lifestyle Retailing - Premium Offerings
2000: Information Technology - Business Friendly Solutions
2001: Branded Packaged Foods - Delighting Millions of Households
2002: Agarbattis & Safety Matches - Supporting the Small and Cottage Sector
2005: Personal Care Products - Expert Solutions for Discerning Consumers
2010: Expanding the Tobacco Portfolio

3
EIC Analysis:
There are three parts to EIC Analysis.

1) Economic Analysis
2) Industry Analysis
3) Company Analysis

Economic analysis addresses the effects of macroeconomic factors such as GDP, inflation,
unemployment rate, interest rates on the stock prices and output of the company.

Industry analysis takes into account of the trends and movements in the industry of a specific company
and relates it with the financial and non-financial performance of that company.

Company analysis is a study of the company’s business interests, historical data, market share,
revenues, profitability and other company specific factors.

4
Industry Analysis
 Legal cigarettes account for only 10% of tobacco consumed in India due to a punitive and
discriminatory taxation and regulatory regime
 India is the 4th largest illegal cigarette market in the World; resulting in Revenue loss of over
Rs.13,000 cr. p.a. to the Exchequer
 42% of adult Indian males consume tobacco. Only 7% of adult Indian males smoke cigarettes as
compared to 14% who smoke bidis and 30% who use smokeless tobacco
 Annual per capita adult cigarette consumption in India is approx. one‐ninth of world average

Legal Cigarettes contribute 87% of Tax Revenue, despite constituting only 10% of Tobacco
consumption

Consumption Share Tax Revenue Share

Cigarette taxes remain, effectively, about 50 times higher than on other tobacco products (on a per Kg
basis of tobacco consumption)

5
Economy Analysis
India has emerged as the fastest growing major economy in the world and is expected to be one of the
top three economic powers of the world over the next 10-15 years, backed by its strong democracy and
partnerships.

Market size
India’s GDP is estimated to have increased 7.2 per cent in 2017-18 and 7 per cent in 2018-19. India has
retained its position as the third largest startup base in the world with over 4,750 technology start-ups.
India's labour force is expected to touch 160-170 million by 2020, based on rate of population growth,
increased labour force participation, and higher education enrolment, among other factors, according to
a study by ASSOCHAM and Thought Arbitrage Research Institute.
India's foreign exchange reserves were US$ 405.64 billion in the week up to March 15, 2019, according
to data from the RBI.

Recent Developments
With the improvement in the economic scenario, there have been various investments in various sectors
of the economy. The M&A activity in India reached record US$ 129.4 billion in 2018 while private equity
(PE) and venture capital (VC) investments reached US$ 20.5 billion. Some of the important recent
developments in Indian economy are as follows:

 During 2018-19 (up to February 2019), merchandise exports from India have increased 8.85 per
cent year-on-year to US$ 298.47 billion, while services exports have grown 8.54 per cent year-
on-year to US$ 185.51 billion.
 Nikkei India Manufacturing Purchasing Managers’ Index (PMI) reached a 14-month high in
February 2019 and stood at 54.3.
 Net direct tax collection for 2018-19 had crossed Rs 10 trillion (US$ 144.57 billion) by March 16,
2019, while goods and services tax (GST) collection stood at Rs 10.70 trillion (US$ 154.69 billion)
as of February 2019.
 Proceeds through Initial Public Offers (IPO) in India reached US$ 5.5 billion in 2018 and US$ 0.9
billion in Q1 2018-19.
 India's Foreign Direct Investment (FDI) equity inflows reached US$ 409.15 billion between April
2000 and December 2018, with maximum contribution from services, computer software and
hardware, telecommunications, construction, trading and automobiles.
 India's Index of Industrial Production (IIP) rose 4.4 per cent year-on-year in 2018-19 (up to
January 2019).
 Consumer Price Index (CPI) inflation stood at 2.57 per cent in February 2019.
 Net employment generation in the country reached a 17-month high in January 2019.

Government Initiatives
The interim Union Budget for 2019-20 was announced by Mr Piyush Goyal, Union Minister for Finance,
Corporate Affairs, Railways and Coal, Government of India, in Parliament on February 01, 2019. It
focuses on supporting the needy farmers, economically less privileged, workers in the unorganised
sector and salaried employees, while continuing the Government of India’s push towards better physical
and social infrastructure.

6
Total expenditure for 2019-20 is budgeted at Rs 2,784,200 crore (US$ 391.53 billion), an increase of
13.30 per cent from 2018-19 (revised estimates).
Numerous foreign companies are setting up their facilities in India on account of various government
initiatives like Make in India and Digital India. Mr. Narendra Modi, Prime Minister of India, has launched
the Make in India initiative with an aim to boost the manufacturing sector of Indian economy, to
increase the purchasing power of an average Indian consumer, which would further boost demand, and
hence spur development, in addition to benefiting investors. The Government of India, under the Make
in India initiative, is trying to give boost to the contribution made by the manufacturing sector and aims
to take it up to 25 per cent of the GDP from the current 17 per cent. Besides, the Government has also
come up with Digital India initiative, which focuses on three core components: creation of digital
infrastructure, delivering services digitally and to increase the digital literacy.
Some of the recent initiatives and developments undertaken by the government are listed below:

 In February 2019, the Government of India approved the National Policy on Software Products –
2019, to develop the country as a software hub.
 The National Mineral Policy 2019, National Electronics Policy 2019 and Faster Adoption and
Manufacturing of (Hybrid) and Electric Vehicles (FAME II) have also been approved by the
Government of India in 2019.
 Village electrification in India was completed in April 2018. Universal household electrification is
expected to be achieved by March 2019 end.
 The Government of India released the maiden Agriculture Export Policy, 2018 which seeks to
double agricultural exports from the country to US$ 60 billion by 2022.
 Around 1.29 million houses have been constructed up to December 24, 2018, under
Government of India’s housing scheme named Pradhan Mantri Awas Yojana (Urban).
 Prime Minister's Employment Generation Programme (PMEGP) will be continued with an outlay
of Rs 5,500 crore (US$ 755.36 million) for three years from 2017-18 to 2019-20, according to the
Cabinet Committee on Economic Affairs (CCEA).

Road Ahead
India's gross domestic product (GDP) is expected to reach US$ 6 trillion by FY27 and achieve upper-
middle income status on the back of digitisation, globalisation, favourable demographics, and reforms.
India's revenue receipts are estimated to touch Rs 28-30 trillion (US$ 385-412 billion) by 2019, owing to
Government of India's measures to strengthen infrastructure and reforms like demonetisation and
Goods and Services Tax (GST).
India is also focusing on renewable sources to generate energy. It is planning to achieve 40 per cent of
its energy from non-fossil sources by 2030 which is currently 30 per cent and also have plans to increase
its renewable energy capacity from to 175 GW by 2022.
India is expected to be the third largest consumer economy as its consumption may triple to US$ 4
trillion by 2025, owing to shift in consumer behaviour and expenditure pattern

7
Financial Summary of 5 years

Sales Revenue(in Crores ₹)

58704.52
60000 55061.08
47688.55
50000
36507.4
40000 33238.6
30000
20000
10000
0
2013-14 2014-15 2015-16 2016-17 2017-18

Profit After Tax(in Crores ₹)

11,223.00
12,000.00 10,201.00
9,608.00 9,328.00
10,000.00 8,785.00

8,000.00
6,000.00
4,000.00
2,000.00
0.00
2013-14 2014-15 2015-16 2016-17 2017-18

8
 Net worth (in Crores ₹)

60000 51400
50000 45341
41656
40000 30736
26262
30000

20000

10000

0
2013-14 2014-15 2015-16 2016-17 2017-18

Market Cap. (Crores ₹)

₹ 340,491
₹ 350,000 ₹ 311,820
₹ 280,628
₹ 300,000 ₹ 261,186 ₹ 264,150
₹ 250,000
₹ 200,000
₹ 150,000
₹ 100,000
₹ 50,000
₹0
2013-14 2014-15 2015-16 2016-17 2017-18

9
 Share Holding pattern in %
8.30% 0.17%
17.03%
9.60%

29.73%
35.18%

ForeignInstitutions Others FinancialInstitutions

GeneralPublic NBanksMutualFunds GDR

Financial Ratios
Price To Earnings
₹ 40.00
₹ 35.00 ₹ 31.97 ₹ 33.40
₹ 30.00 ₹ 27.15 ₹ 28.30 ₹ 27.83
₹ 25.00
₹ 20.00
₹ 15.00
₹ 10.00
₹ 5.00
₹ 0.00
2013-14 2014-15 2015-16 2016-17 2017-18

10
 Earnings Per Share (In ₹)
₹ 10.00 ₹ 9.20
₹ 7.99 ₹ 8.40
₹ 7.36 ₹ 7.73
₹ 8.00

₹ 6.00

₹ 4.00

₹ 2.00

₹ 0.00
2013-14 2014-15 2015-16 2016-17 2017-18

Return on Shareholder's Equity (in %)

40 36.19
33.71
35
30
23.63 23.45 23.2
25
20
15
10
5
0
2013-14 2014-15 2015-16 2016-17 2017-18

11
 Return On Capital Employed (in %)
60
49.47 46.81
50

40 35.07 34.2 32.86

30

20

10

0
2013-14 2014-15 2015-16 2016-17 2017-18

Interest Coverage
Year ratio

2013-14 2055.519

2014-15 309.1049

2015-16 270.2052

2016-17 638.93

2017-18 183.7949

12
 DE Ratio
0.003
0.002
0.002

0.002
0.001 0.001
0.001
0.0004
0.001 0.0002

0.000
2013-14 2014-15 2015-16 2016-17 2017-18

EBITDA Margin(in % )
45.00% 40.80% 41.13%
40.00% 37%
35.00%
28.12% 28.22%
30.00%
25.00%
20.00%
15.00%
10.00%
5.00%
0.00%
2013-14 2014-15 2015-16 2016-17 2017-18

13
 Net Profit Margin(in %)
27 26.43
26.5
26 25.45
25.5 25.14
25 24.47
24.5 24.22
24
23.5
23
2013-14 2014-15 2015-16 2016-17 2017-18

14
What makes ITC a good investment:
 Company is more than 100 year old, started business by making and selling cigarettes.

 Company has been consistently performing well for the past many years.

 Company has High ROCE and zero debt, and strong free cash flows.
 Company is market leader in cigarette industry with 80% market share. Major part of
company’s revenue comes from cigarettes business.
 Company diversified in FMCG and foods segment, with a wide variety of products to offer
company has recently crossed 10,000 crore revenue milestone and targets 100,000 crore
revenue from FMCG segment by 2030.
 Company has also acquired two big brands from Johnson and Johnson that
is Savlon and Shower To Shower, by which company wishes to expand in healthcare and
hygiene niche.
 Company owns largest chain of Hotels in India, and aims to become market leader in the
segment.
 Company is expanding its business to multi speciality hospitals, taking advantage of medical
tourism and affordable health care provided by country.

The Company delivered a resilient performance during the year which was a particularly challenging one
due to a sharp slowdown in the economy, steep escalationin tax incidence on cigarettes under the GST
regime,subdued demand conditions in the FMCG industry and supply chain disruptions caused during
the transition to GST. Shortage of leaf tobacco in Andhra Pradesh due to lower crop output on account
of drought in 2016 and adverse crop quality, relative strength of the Indian Rupee vis-à-vis currencies of
competing origins and limited trading opportunities in other agri-commodities weighed on the
performance of the Agri Business.

References
1. ITC Limited, Reports and Accounts 2018
2. ITC Limited, Reports and Accounts 2017
3. ITC Limited, Reports and Accounts 2016
4. ITC Limited, Reports and Accounts 2015
5. ITC Limited, Reports and Accounts 2014
6. “ABOUT INDIAN ECONOMY GROWTH RATE & STATISTICS”-
https://www.ibef.org/economy/indian-economy-overview
7.
8.

15
16