ITC

Br and s
ITC
 FOCUS

Computat
ion of
Cost of
Capital
of ITC
Ltd.
 Data Analysts

Divanshu Kapoor ( 91017 )

Radhika Gupta ( 91041 )

Madhusudhan Partani ( 91029 )

AnikaGupta ( 91005 )
Manish TN Singh ( 91053 )
 GLIMPSE

market capitalization of nearly USEmploys

$ 19 billion
over 26,000 people

Ranks among India's `10 Most Valuable (Company) Brands'

corporate positioning statement
more than 3, 41,000 shareholders
turnover of over US $ 5 billion
"Enduring Value. For the nation. For the Shareholder."
Asia's 50 best performing companies -Business Week.

Asia's 'Fab 50' 60 locations across India

 Financial Position
Debt / Equity
 
The debt-to-equity ratio has been hovering around 0 . 02 : 1 since the past 7
years. This shows that investment is not risky in this firm as the
company is not depends on debt financing. But is also implies that the
firm has not leveraged at all.
 
Equity in the form of
 
The firm has Equity in form of Retained Earnings. The Shares comprise of
Equity shares of Re 1 each. Total No. of shares as on 31st of March 2009
were Approx 377.44 Crores. And the Retained earnings comprises of Rs.
13650.72 Crs. Also the Company issues ESOPs (Employee Stock Option Plans)
Regularly.
 
 Financial Position

Cash flows
 
The net turn-over grew by 10 . 3 % , driven by a robust 20 % growth in the
non-cigarette FMCG business. The Company’s relentless efforts to create
value through international quality products, significant investments in
technology and product development and a strong portfolio of brands have
enabled it to maintain its leadership position in terms of market
standing and share.
Segment revenues in FMCG (Others) grew by 20 % over last year and
Education & Stationery Products business registered an impressive sales
growth of 60% over the previous year.
 Financial Position
su mmar ize d
2001 2002 fina
2003 nci2005
2004 als2006 2007 2008 2009

Equity 245 248 248 248 249 376 376 377 377

Net Worth 3535 4414 5366 6410 7896 9061 10437 12058 13735

Avg. Capital 3923 4614 5190 6082 7568 9012 10308 11964 13798
Employed
Net Turnover 4208 5059 5866 6470 7639 9791 12164 13948 15388
EBITDA 1836 2046 2323 2585 3028 3613 4293 5015 5393

EBIT 1696 1847 2086 2344 2716 3281 3930 4576 4844

PAT 1006 1190 1371 1593 1837 2280 2700 3120 3264
 Financial Position
key rat ios
2001 2002 2003 2004 2005 2006 2007 2008 2009

Net Worth Per 9.60 11.99 14.45 17.15 21.10 24.13 27.74 32.00 36.39
Share(Rs.)
Debt Equity Ratio 0.24:1 0.06:1 0.02:1 0.02:1 0.03:1 0.01:1 0.02:1 0.02:1 0.01:1

Return on Equity 31.77 29.94 28.05 27.05 25.68 26.90 27.69 27.74 25.31
(%)

EV/EBITDA 11.33 8.51 6.26 9.16 10.12 19.30 12.53 15.05 12.44

PE Ratio 19.86 14.49 11.36 16.19 18.22 32.06 20.92 24.89 21.34

EPS (Rs.) 2.73 3.20 3.69 4.29 4.91 6.08 7.19 8.29 8.66

Cash Earnings per 3.11 3.96 4.14 5.00 5.83 6.82 8.54 9.63 10.96
Share (Rs.)
Cost of Debt

Long Term Debt = 46.365

Cost of Debt

Ignored
 Cost of Debt

INTEREST : the interest paid on Term Loans is as on 31st March,

2009 is 9.47 Crores.

TAX RATE : Tax rates taken for computation of cost of debt are
32.60% for the year 2009. In the previous year, tax
rate was 32.02% 1

ASSUMPTION : the assumption has been made that the loan has
been raised at middle of the year. Thus
Interest is calculated on the average of Opening and
closing balance of loans.
 Cost of Debt

Computation of Cost of Debt

K = Long Term Interest / Long Term
  d

Debt
Kd = 9.47/46.365 = 20.42%

20.42 X (1 – t)
= 20.42 X (1 – 0.32)
= 13 . 89 %
 
 Cost of Equity
BSE Sensex
Alpha 0.000349752
Beta 0 . 652006636
R Square 0.296757148
Adjusted R Square 0.296440515

Regression Equation

Y= 0.000349752 + 0.652006636X
 Cost of Equity

The value of the intercept (α=0.000349752)

shows that the security provides a return of
0.000349752% when there is no movement in the
market i.e. x=0. Also, The value of the slope
(β=0.652006636) reflects the sensitivity of
stock returns as 0.652006636 times the market
returns.
 Pure Play Approach

Why Use It ???

ITC is engaged in multiple businesses (ITC has 4+SBU)

Each business has different risks and operates in different environments

A Firm has:

•Business Risk ( Due to market conditions\External

environments )
•Financial Risks ( Due to its capital structure )

So we neutralize the financial risk and only take the

business risk of the Proxy firm into consideration
 • β Calculations
•
ITC -SBU Proxy Companies Market Levered Unlevered β Relevered β
Index β
•
Cigarettes Godfrey Philips BSE Midcap 0.56 0.5051 0.51

Others Dabur BSE FMCG 0.64 0.5693 0.574

(FMCG)
Hotels Indian Hotels BSE 100 0.75 0.539 0.544

Agri Ruchi Soya BSE Smallcap 1.02 0.518 0.522

Business Industries Ltd
Papers and Andhra Pradesh BSE Smallcap 0.67 0.353 0.356 (avg.
Packaging Paper Mills Ltd 0.358)

West Coast BSE Smallcap 0.85 0.357 0.361 (avg.

Paper Mills Ltd 0.358)
 Capital Employed in business segments of ITC Ltd
Business Segment Capital Employed Proportion/Weigh
(in Rs. crores) t
Cigarette 3278.95 .26
Others (FMCG) 2211.8 .176
Hotels 2263.95 .18
Agri business 1052.93 .084
Paperboards 3764.5 .30
Beta of ITC
( βITC ) = (0.51*0.26) + (0.574*0.176) + (0.544*0.18) + (0.522*0.084) +
(0.358*0.3)
= 0 . 49
• Cost of Equity
•

•
Risk Free Rate of Return Rf 7.4% Return on Treasury Bills issued by
• Indian Government for 10 years
•
Market Rate of Return Rm 21.25% Average market returns of Sensex on
• Daily basis * 250
•

• Cost of equity = Rf + (Rm - Rf)*βL

•
•
Pure play Approach CAPM

•
7.4 + (21.25 – 7.4) * 0.483 = 7.4 + (21.25 – 7.4) * 0.652 =
•
Cost of equity (Ke ) 14.09% 16.43%

•
• Dividend Capitalization Model
•

• Year Dividend Per Share

(DPS)
Cost of Equity (Re) = D1 + g
2004-05 3.15
P0 2005-06 4.05
P0 = Market Price per share as 2006-07 4.75
on 31 March 2009 2007-08 5.37
2008-09 5.69
Re = 5.69( 1 + 0.1255 ) + 0.1255
208.65 CAGR 12.55%
= 15.6%
 Computation of WAAC
Cost

Weights CAPM Pure Play Dividend

Capitalizatio
Share Capital 0.026817 16.43% 14.09% n
15.6%
Retained 0.969889 16.43% 14.09% 15.6%
Earnings
Debt 0.003294 13.89% 13.89% 13.89%
WAAC (Book 16.42% 14.09% 15.58%
Value)
Share Capital .99934 16.43% 14.09% 15.6%
Debt .00066 13.89% 13.89% 13.89%
WAAC (Mkt. 16.42% 14.08% 15.59%
Value)
 Analysis and Conclusions

ØITC is very less levered with debt equity of .02

Ø
ØThe cost of equity is almost similar to overall Cost of
Capital.
Ø
ØThe Beta Using CAPM and Beta Using Pure Play are
almost similar; there
Øis a bit difference between both implying that the
risks of individual SBUs are not similar to the
overall risk assumed by the ITC.
Ø
ØThe “Cash EPS > Basic EPS” for all the ten
years; this implies that the company has been
able to generate the cash profits.
•
•
Ø Also the EPS has been consistently increasing
depicting the +ve performance of the firm over the
years.
Ø
ØThe Cost of Capital tends to be lower i.e...
In the range of 14% - 16%, this implies
that the companies have a very low cut off
point for any new and existing project.
Ø
ØLow cost also adds value to
the firm.
•
 •

• THANK
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