BUSINESS FINANCE

ASSIGNMENT
SECTIO
NC
COMPANY
NAME:ITC
CHAPTER 1:Company profile (history,evolution,organization structure,key
people,products manufactured/services rendered)

NAME:HIRITESH RAMESH
REGISTRATION
NUMBER:20BBAR0900
SECTION:4THC
Introduction to the Company
ITC Limited is a firm based in Kolkata, West Bengal, India. ITC is a part of various industries
which including cigarettes, fast moving consumer goods (FMCG), packaging, hotels,
agribusiness, and paperboards and specialty papers. ITC has 13 businesses in total which are
divided into five categories, in the corporation. ITC also exports its products to 90 different
nations. Its products are sold in over 6 million retail places worldwide.

It was founded in 1910 and was named The Imperial Tobacco Company of India Limited
originally. It was then renamed as the India Tobacco Company Limited in 1970, then I.T.C.
Limited in 1974. Sanjiv Puri is the current CEO of ITC.

As pf 2019-20 it had a market capitalization of US$35 billion and an annual turnover of

US$10.74 billion. It is a Forbes 2000 company that employs over 36,500 employees in over 60
sites across India. ITC has established 25 mother brands in a relatively short period of time,
many of which are market leaders in their respective areas.

With a Gross Sales Value of 74,979 crores and a Net Profit of 13,032 crores, ITC is one of
India's leading private sector corporations (as on 31.03.2021).

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Capital Structure of ITC

Note: All figures above are in Rs. crores

From the above table we can observe that ITC Ltd has a capital structure which consists of a
large proportion of equity as compared to debt. This indicated that ITC will be able to meet
any financial obligations that arises from its borrowings with ease as the company carries little
or no financial risk with respect to its payment obligations. However, having an extremely low
amount of debt compared to the shareholders’ funds can mean that the company is financing
its business in a costly and inefficient way. The other problem would carrying too little debt is
that shareholders/ other parties can form the idea that the management is too conservative and
unwilling to take risks.

From the table we can see that from the year 2017 to the year 2021, ITC Ltd has steadily
increased its borrowings from 280 crores to 674 crores, and on the other hand the funds
through equity have remained steady around the 1200 crore mark indicating that the company
has reached its threshold in raising funds through equity and is actively looking to raise funds
through other sources in order to reach a more optimum capital structure.

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The graphical representation above indicates the amount of debt the company has as on
September 2020 which stands at Rs 283.4m, however the company has Rs 206.4b in cash to
offset the liability amount indicating that ITC has Rs 206.1b in net cash. This indicated that ITC
boasts short term liquidity and could pay off its debts with ease.

The debt-to-equity ratio of ITC is on the lower side as compared to the industry average, this is
due to the same reason touched upon in the previous paragraph that ITC finances its operations
using more equity than debt. We can see from the above table that a debt-to-equity ratio of 0.23
in 2017 has been increased to a debt-to-equity ratio of 0.54 in 2021 indicating a change in
proportion. A low debt to equity ratio comes with risks such as too much control with the
shareholders however it can also mean the company is safer in view of paying back its financial
obligations.
The debt-to-equity ratio of 0.54 in the year 2021 means that for every 0.54 Rs of debt. ITC has
1 Rs of equity.

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Calculation of Cost of Capital of ITC

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5
Calculation of WACC of ITC

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 ITC’s Dividend Distribution Policy
Pursuant to Regulation 43A of the Securities and Exchange Board of India (Listing
Obligations and Disclosure Requirements) Regulations, 2015, the Company is required to
formulate a Dividend Distribution Policy which shall be disclosed in its Annual Report and
on its Website.

Financial parameters and Internal & External factors which influence the dividend policy of
the company are listed below:

• Current year’s profits after tax of the Company

• Accumulated reserves
• Operating cash flows and treasury position keeping in view total debt to equity ratio
• Providing for unforeseen events and contingencies with financial implications
• Overall macro-economic scenario / regulatory environment
• Future business prospects and industry outlook

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• Past dividend trends etc.

The company has a good dividend track report and has consistently declared dividends for
the last 5 years. Dividend distribution is based on the Company's financial performance,
cash flow, and liquidity position, as well as the distributable surplus available under law. It
also considers the need to retain earnings to meet the Company's businesses' foreseeable
funding requirements, including their growth plans (organic and inorganic), current
economic and market conditions etc. that needs to be conserved to address any
contingencies that may arise. The table below shows information related to when and how
much ITC has declared its dividends

(Source: Moneycontrol)

• The Board of Directors may declare interim dividends as they see fit and
recommend final dividends to shareholders for approval at the Company's annual
meeting. In addition, in exceptional circumstances, the Board of Directors may
pay or recommend a special dividend.
• Since July 3, 2001, ITC Ltd. has declared 22 dividends. ITC NSE 0.92 percent had
revised its dividend policy just before the lockdown, increasing it pay out to 80-
85 percent of earnings for FY20 from 56 percent in FY19. The announcement was
successful in halting any further decline in the company's

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 stock price. The stock of ITC is now 40% higher than its 52-week low of Rs
135 set in mid-March.
• ITC Ltd. has declared an equity dividend of Rs 10.75 per share in the last 12
months. This resulted in a dividend yield of 4.66 percent at the current share
price of Rs 230.85.

• Companies with consistently growing earnings per share make the best
dividend stocks because it is easier for them to grow dividends per share. If
earnings fall sufficiently, the company may be forced to reduce its dividend.
Same has happened with ITC, over the last five years, ITC earnings per
share have increased by 6.7 percent per year. Earnings per share have been
steadily increasing.
• ITC has increased its dividend by approximately 20% per year on average over
the last ten years. It's encouraging to see the company increasing dividends
while earnings are increasing, implying that the company is interested in
rewarding shareholders in some way.

Profitability of ITC

Comparison with 5 models

Model Acceptable Rate/ Industry Rate ITC

WACC 10-15% 12.21%

Debt to Equity 1.46 0.10

Dividend Payout Ratio 90.66% 92.7%

Borrowing Capacity Mid- High High

price to earnings ratio 16.6% 20.10%

The business's profitability is defined as its net earnings and how successfully it can
utilize those profits to pay its debt commitments. Cigarette-to-hotel conglomerate ITC
Ltd on Saturday posted a 28.6% year-on-year (y-o-y) jump in standalone profit for the
three months ended 30 June—coming below street expectations.

According to the company disclosure, ITC LTD has a Debt to Equity of 0.10%. This

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means that the company has more of equity which in turn dilutes the control consideration of
the company and increases the overall cost of capital. This also means that the company has
now a higher chance to gain funds from various sources. As of today, ITC's weighted average
cost of capital is 12.21%. ITC generates higher returns on investment than it costs the
company to raise the capital needed for that investment. It is earning excess returns. A firm
that expects to continue generating positive excess returns on new investments in the future
will see its value increase as growth increases.
ITC is poor value based on its PE Ratio (20.3%) as compared to the Asian Tobacco Industry
average (16.6%) which means that the company is spending more to earn more. This in turn
affects the overall profitability of the company.

The profitability in comparison to the weighted average cost of capital (WACC), capital
structure and dividend policy indicated the reason for the growth rate being high. The WACC
and capital structure focus more light on the fact that the company has more equity than debt
which means that the YoY operations of the company have resulted in more dividend payout
and less of interest payment obligation.

Relation Between Capital Structure, Cost of Capital and Dividend

Decisions
Cost of Capital helps to find the proportion of debt and equity and in which way it affects the
shareholders wealth. The cost of capital is needed to identify the particular project that will
yield a minimum return to them. If there is high risk, it indicates the management, that the
cost of capital will be high for that particular project. For that the ITC Management need to
identify a particular source of financing that is best suited to the company. So that, the risk
burden on the shareholders can be reduced. The company calculate break-even point to
determine the amount of remaining capacity after the breakeven point is reached, which tells
the maximum amount of profit that can be generated. Thus, the study mainly focuses on the
Cost of Capital and Break-even point of ITC Limited.

The optimal capital structure is estimated by calculating the mix of debt and equity that
minimizes the weighted average cost of capital (WACC) of a company while maximizing its
market value. The lower the cost of capital, the greater the present value of the firm’s future
cash flows, discounted by the WACC. Thus, the chief goal of any corporate finance
department should be to find the optimal capital structure that will result in the lowest WACC
and the maximum value of the company (shareholder wealth).

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 The cost of debt is less expensive than equity because it is less risky. The required return
needed to compensate debt investors is less than the required return needed to compensate
equity investors, because interest payments have priority over dividends, and debt holders
receive priority in the event of a liquidation. Debt is also cheaper than equity because
companies get tax relief on interest, while dividend payments are paid out of after-tax
income.
However, there is a limit to the amount of debt a company should have because an
excessive amount of debt increases interest payments, the volatility of earnings, and the
risk of bankruptcy. This increase in the financial risk to shareholders means that they will
require a greater return to compensate them, which increases the WACC and lowers the
market value of a business. The optimal structure involves using enough equity to mitigate
the risk of being unable to pay back the debt taking into account the variability of the
business’s cash flow.

References
1. Wikipedia contributors. (2021, October 29). ITC Limited.

Wikipedia. https://en.wikipedia.org/wiki/ITC_Limited

2. About ITC Limited - one of India’s foremost private sector companies. (n.d.).

ITC. https://www.itcportal.com/about-itc/index.aspx
3. Microsoft word- Final DDP. (2017). ITC. https://www.itcportal.com/about-

itc/policies/dividend-distribution-policy.pdf

4. ITC Dividends. (n.d.). The Economic Times. Retrieved November 11, 2021,

from https://economictimes.indiatimes.com/itc-

ltd/infocompanydividends/companyid- 13554.cms

5. Money Control. (2021). ITC Share Price, ITC Stock Price, ITC Ltd. Stock

Price, Share Price, Live BSE/NSE, ITC Ltd. Bids Offers. Buy/Sell ITC Ltd. news &

tips, & F&O Quotes, NSE/BSE Forecast News and Live Quotes. Retrieved 2021,

from https://www.moneycontrol.com/india/stockpricequote/cigarettes/itc/ITC

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1. ITC. (2019). Balance Sheet ITC. ITC portal.
https://www.itcportal.com/about-
itc/shareholder-value/annual-reports/itc-annual-report-2019/pdf/ITC-Balance-

Sheet.pdf

2. Investopedia. (2021, April 8). Debt-to-Equity (D/E) Ratio. Retrieved 2021,

from https://www.investopedia.com/terms/d/debtequityratio.asp

3. Yahoo Finance. (2021). Yahoo is part of the Yahoo family of brands.

Retrieved 2021, from https://finance.yahoo.com/

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