Advanced Financial Accounting

CIA - I

BUYBACK OFFER

FOR

INDIAN TOBACCO COMPANY LIMITED

Presented by:

1910106 Joseph Bijoy 1910129 Mohammed Touseef

1910114 Jenny Rahel Mathew 1910136 Ashwini S

1910117 Sahana A 1910175 Varsha

1910123 Priya Mathew 1910181 Faaiza Bushra

1910128 Josebin Salin 1910182 Nikitha P

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 INDEX

SL. CONTENTS PAGE

NO. NO.

1 Introduction of the Company 3

2 Justification for Choosing the Company 4

3 Calculation of Shares Available for Buyback 5

4 Journal Entries in the books of ITC Ltd 7

5 Balance Sheet after Buyback 8

6 Working Notes 10

7 Summary of Calculations 12

9 References 13

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INTRODUCTION
ITC is a private sector company which is headquartered in Kolkata and specializes in the
manufacturing and selling of consumer goods. It is not limited to one category of product and
instead focuses more on satisfying the needs of the customers through various products. The Fast
Moving Consumer Goods Sector being the bulls-eye for ITC is from where the company
generates a major portion of its revenue. ITC’s intent is to ensure long-term growth in the
company by exploiting the various opportunities that are emerging in the FMCG sector. Though
this might seem like the only focus of the company yet this is just a part of the ITC business. ITC
over the years has expanded its vision and goals and now it also has hotels, paperboards and
packaging, information technology, and agricultural business under its umbrella of businesses.
Around 25 brands, popular in the FMCG business belong to ITC and have helped the company
to increase its already existing brand value.ITC has proved to be a strong competitor in various
fields of consumer goods and services because of its commitment to serve its customer needs by
keeping track of consumer feedback, high investment in research and development, highly
efficient manufacturing infrastructure, and committed employees.

Even though ITC is an established company it is not devoid of flaws. The image of ITC has
mainly been that of a cigarette company. Even though cigarette sales are a part of the business of
the company, it is not the only business for the company and just the image of being a cigarette
company affects other businesses of ITC negatively.

The investors of the company have in the past raised complaints about the share prices
remaining stagnant when other companies in the same market are having share price variations
and a boost in their share value. Even though ITC has given RS. 50000 crore as dividend in the
last 5 years, this is not reflected in the share price of the company and the reason for that could
be the effect of the pandemic on its business. The ITC scrip is also on a constant low and is a
cause of concern for the investors. Even after all these drawbacks, the one thing constantly
attracting all the investors towards the company is the fact that the company is free of debts and
is committed to delivering its best performance by constantly working on its defects.

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JUSTIFICATION FOR CHOOSING ITC

With a gross sales value of 74,979 crores and a net profit of 13,032 crores, ITC is recognized as
one of India's most valuable business corporations.

Despite the outstanding financial performance, the share price of the company was a cause of
concern for its management. When we look at FY17 to FY20, we see that their EPS has gone up
by 47 per cent, return on capital employed has gone up from 61 to 72 per cent and their margins
on FMCG have improved by 640 bps. Even in the background of this good performance the
share price of the company is not appreciating and the market is not reflecting the company’s
performance.

Over the last one year, ITC has gained only 3%, underperforming the benchmark NIFTY FMCG.
ITC is a debt free company and has a transparent dividend policy with huge cash reserves. Over
the past 5 years they have been paying out more than Rs.50,000 crore as dividend, this might
also have affected the share price negatively.

The under performance of the shares and the inability of the company to rightly point out why
the company’s superior financial performance has not been reflected in the market, leaves the
shareholders apprehensive. ITC was Rs 200 when many other stocks were half their current
prices. However, ITC still remains in the 200 range. There is dissatisfaction among shareholders
as they are expecting at least some progress.

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Considering all the above factors a buyback will be the best option for them. Other ways like a
demerger to increase their value may not be feasible right now as their hotel business won’t be
able to support itself on its own. However, they have huge cash reserves which makes it easy for
them to go ahead with a buyback plan.

A buyback now will surely help ITC in raising the value of their underperforming share. They
can achieve a fairer valuation and can improve the market perception. Also, as one of the most
developed and superior FMCG companies, ITC has covered almost all the major areas in the
sector and hence the idle cash reserves which they have is a boon for the buyback plan.

CALCULATION OF SHARES AVAILABLE FOR BUYBACK

SHARES O/S TEST

1230.88 × 25% = 307.72 crore shares

RESOURCE TEST

Paid-up capital 1230.88

Securities Premium 9611.64

General Reserve 17585.31

Retained Earnings 28210.59

56638.42

Resources available for buyback = 56638.42 × 25% = Rs.14159.605 crores

No. of shares available for buyback = 14159.605/250 = 56.63842 crore shares

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DEBT-EQUITY RATIO

Debt after buyback = Rs.5936.05 crores

Equity after buyback = 59004.58 – x

59004.58/59004.58 – x = 2/1

5936.05 = 118009.16 – 2x

2x = 112073.11

x = 56036.55

Amount of buyback = Rs. 56036.55 crores

No. of shares = 56036.55/250 = 224.014 crore shares

No. of shares to be bought back = 56.63842 crore shares at Rs. 250 per share.

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 Journal Entries in the books of ITC Limited

SL.NO PARTICULARS NOTE.

DEBIT (₹) CREDIT (₹)
NO

1. Equity share capital a/c Dr. 56.63

Premium on buyback a/c Dr. 14102.96
To Equity shareholders a/c 14159.60
(Being buyback of shares declared)

2. Bank a/c Dr. 12103.46

To current investments a/c 6103
To non-current investments a/c 6000.46
(Being investments sold)

3. Free Reserve a/c Dr. 56.63

To Capital Redemption Reserve a/c 56.63
(Being capital redemption reserve a/c created)

4. Securities Premium Reserve a/c Dr. 14102.96

To Premium on Buyback a/c 14102.96
(Being transfer of premium amount)

5. Equity shareholders a/c Dr. 14159.60

To Bank a/c 14159.60
(Being buyback amount paid to equity
shareholders)

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 BALANCE SHEET after buyback

PARTICULARS NOTE As of 31st March

2021
(₹ in Crores)

ASSETS

Non- Current Assets

A] Property, Plant and Equipment 18489.91

B] Capital work-in-progress 3329.97
C] Investment Property 376.56
D] Goodwill 577.20
E] Other Intangible assets 2004.32
F] Other tangible assets under development 4.01
G] Right of use assets 726.84
H] Financial Assets
(i) Investments 1 6949.42
(ii) Loans 2.37
(iii) Others 72.45 7024.24
I] Other non-current assets 1231.62

Current Assets

A] Inventories 9470.87
B] Financial Assets
(i) Investments 2 7943.71
(ii) Trade receivables 2090.35
(iii) Cash and cash equivalents 231.25
(iv) Other Bank balances 3 1714.11
(v) Loans 2.77
(vi) Others 1197.15 13179.34
C] Other Current Assets 1006.07

TOTAL ASSETS 57420.95

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EQUITY AND LIABILITIES

Equity

A] Equity Share Capital 4 1174.25

B] Other Equity 5 43670.74

Liabilities

Non - Current Liabilities

A] Financial Liabilities
(i) Borrowings 5.28
(ii) Lease Liabilities 272.36
(iii) Other Financial Liabilities 239.35 516.99
B] Provisions 157.07
C] Deferred Tax Liabilities (Net) 1727.73

Current Liabilities

A] Financial Liabilities
(i) Trade Payables
Total outstanding dues of micro-enterprises 59.34
And small enterprises.
Total outstanding dues of creditors other than 4060.19
micro-enterprises and small enterprises.
(ii) Lease liabilities 51.36
(iii) Other financial liabilities 1248.17 5419.06
B] Other Current Liabilities 4369.00
C] Provisions 169.05
D] Current Tax Liabilities (Net) 217.06

TOTAL EQUITY AND LIABILITIES 57420.95

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WORKING NOTES
1. Non - current assets
Financial Assets - Investments
Investments worth 6000.46 were sold at book value
Total investments = 12950.38 - 6000.46
= 6949.42
2. Current assets
Financial assets - Investments
Investments worth 6103 were sold at book value
Total investments = 14046.71 - 6103
= 7943.71
3. Current assets
Other bank balance
Sale of investments = 12103.46
Total balance - 12103.46 +3770.25
= 15873.71
Buyback amount paid to equity shareholders = 15873.71- 14159.60
= 1714.11

4. Equity share capital = 1230.88

Less: Buyback of shares = [56.63]
Total equity after buyback = 1174.25

5. Other equity
A] Reserve and surplus
Free reserves -17585.31 [56.63]

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 = 17528.68
Other equity = 57717.07
B] Reserve and surplus
Capital redemption reserve = 0.30 + 56.63
= 56.93
Other equity - 57773.7
C] Free reserves = 17528.68 - 14102.96
= 3425.72
Other equity = 43670.74

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SUMMARY OF THE CALCULATIONS

ITC currently has Rs. 1230.88 crore worth of equity shares with a face value of Rs. 1 per share.

As the initial step towards the buyback plan, the share o/s test, resource test and the debt-equity
ratio test were done to find out the number of shares available for buyback. As the resource test
gave the least figure, the number of shares to be issued for buyback was finalized as 56.63 crore
shares.

ITC share is currently trading in the market at Rs. 208, therefore our buyback price per share was
decided as Rs. 250 per share in order to attract the investors to sell their shares back.

The total buyback amount came up to Rs. 14159.6 crore. The cash reserve of the company stood
at Rs. 4001.5 crore and the additional cash required was generated from selling a part of the wide
range of investments the company had.

ITC is not currently planning on any big investments in projects, so using the cash reserve and
generating more cash inflow by selling a part of the investments seemed feasible to us.

The journal entries show all the transactions that took place during the buyback process
including declaration of buyback, selling investments, generating CRR, paying the shareholders,
etc. The balance sheet of the company after buyback is drawn and the total of cash and bank
balance after the buyback stood at Rs. 2002 crore.

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REFERENCES
1. https://www.itcportal.com/about-itc/shareholder-value/report-and-accounts.a
spx
2. https://taxguru.in/company-law/buyback-shares-practical-approach.html
3. https://www.itcportal.com/about-itc/shareholder-value/key-financials/key-rat
ios.aspx
4. https://in.investing.com/analysis/the-curious-case-of-itc-200484955
5. https://www.itcportal.com/about-itc/profile/index.aspx
6. https://breakoutinvestor.com/2021/08/12/itc-is-concerned-about-share-price-
not-rising-sanjiv-puri/
7. https://economictimes.indiatimes.com/markets/stocks/news/whats-got-itcs-c
hairman-worried-despite-good-performance/articleshow/85260657.cms
8. https://www.itcportal.com/businesses/fmcg/index.aspx

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