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Financial Analysis & BCG Matrix

Of

By

Varun Bathula

FK - 2189

Batch 19 (Finance)
Financial analysis of ITC Limited

ITC was incorporated on August 24, 1910 under the name Imperial Tobacco Company of
India Limited. As the Company's ownership progressively Indianised, the name of the
Company was changed to India Tobacco Company Limited in 1970 and then to I.T.C.
Limited in 1974. In recognition of the Company's multi-business portfolio - Cigarettes &
Tobacco, Hotels, Information Technology, Packaging, Paperboards & Specialty Papers,
Agri-business, Foods, Lifestyle Retailing, Education & Stationery and Personal Care - the
full stops in the Company's name were removed effective September 18, 2001. The
Company now stands rechristened 'ITC Limited'.

Capital structure:

Period Instrument Authorized Issued Shares Face Capital


capital capital (nos) value
(Rs. Cr)
(Rs. Cr)

2010-2011 Equity 1000 773.81 7738144280 1 773.81

2009-2010 Equity 500 381.82 3818176790 1 381.82

2008-2009 Equity 500 377.44 3774399560 1 377.44

2007-2008 Equity 500 376.86 3768610050 1 376.86

2006-2007 Equity 500 376.22 3762222780 1 376.22

Interpretation:

From the above table, it can be inferred that over the 5 years the capital raised is through
equity shares only. Which implies that ITC is following differential strategy as it is
having good brand value. It is also having fast moving as a strategy which is helped by
huge internal source of finance.

Ratio analysis

Profit Margin Ratio:

Profit after tax


Profit Margin Ratio = X 100
Net Sales

Year Percentage
2007 21.40
2008 21.50
2009 21.18
2010 21.30
2011 22.91

Interpretation:

From the above table it can be inferred that this ratio is maintained at same level till 2010.
The ratio helps in finding out efficiency in capturing the amount of surplus generated per
unit of the product or service sold. In 2011 it has increased 1.61% shows ITC generated a
sizeable profit margin, and the company is efficiently enough to recover not only the
costs of the product or service sold, operating expenses, and the costs of debt, but also to
provide compensation for its owners in exchange for their acceptance of risk.

Earnings per Share:


Net Profit after Tax
Earnings per Share = -----------------------------------------------
No. of Equity Shares outstanding
Year Earnings Per Share (Amount in
Rs)
2007 7.18
2008 8.28
2009 8.65
2010 10.64
2011 6.45

Interpretation:

The above table shows the very important ratio of a company which tells the share price
also price to earnings. As it has increased in the consecutive years till 2010 ITC is
efficient at using its capital to generate income and it shows great performance. But, a
sudden drop to a lowest value in 2011 is a concern which needs to be improved.

Fixed Assets Turnover Ratio:

Sales
Fixed Assets Turnover Ratio =
Net Fixed Asset

Year Ratio (times)


2007 2.42
2008 1.59
2009 1.44
2010 1.58
2011 1.69
Interpretation:

From the above table, it can be inferred that even though there was a huge drop in
2008and 2009, it improved over last three years. It is especially important for a
manufacturing firm that uses a lot of plant and equipment in its operations to calculate its
fixed asset turnover ratio.

Current Ratio:

Current assets
Current ratio=
Current liabilities

Year Ratio (times)


2007 1.33
2008 1.36
2009 1.42
2010 0.92
2011 1.08

Interpretation:

From the above table, for three consecutive years from 2007-2011 ITC shows a negative
note with bad financial health as it is advisable to be near 2. But in 2010, it has gone
worst to a decrease of 0.5% which is not advisable as current liabilities are more. Even
the increase in 2011 is very minimal which shows the company is in bad financial health.
Quick Ratio:

Quick Assets
Quick Ratio =
Current Liabilities

Year Ratio (times)


2007 0.58
2008 0.56
2009 0.61
2010 0.39
2011 0.50

Interpretation:

From the above table for the last 5 years from 2007-2011 the financial strength of the
company is not accepted. As the current inventory and prepaid expenses are deducted the
quick ratios are usually low. In general, a quick ratio of 1 or more is accepted by most
creditors. The above figures, especially in last 2 years are a concern for the company.
However, quick ratios vary greatly from industry to industry.

Debtor Turnover Ratio:

Sales
Debtor Turnover Ratio =
Average Debtors
Year Ratio (times)
2007 20.79
2008 20.43
2009 21.32
2010 24.31
2011 23.91

Interpretation:

The higher the value of debtors turnover the more efficient is the management of debtors
or more liquid the debtors are. Similarly, low debtors turnover ratio implies inefficient
management of debtors or less liquid debtors. From the above table from the past it can
be inferred that in 2010 the ratio is higher (24.31).Higher turnover signifies speedy and
effective collection. A slight decrease is seen in the year 2011 but over the years we can
see a great efficiency of the management of debtors.

Inventory Turnover Ratio:


Cost of goods sold
Inventory Turnover Ratio =
Average Inventory
Year Ratio (times)
2007 3.76
2008 5.51
2009 5.26
2010 6.04
2011 6.05

Interpretation:

It is the largest component of a companys working capital, so if inventory is not being


used up by operations at a reasonable pace, then a company has invested a large part of
its cash in an asset that may be difficult to liquidate in short order. In this case the
increase over the years indicates great efficiency of management in inventory control and
effective working capital management.

Debt Equity Ratio:

External Equity
Debt Equity Ratio =
Shareholders Fund

Year Ratio (times)


2007 0.02
2008 0.02
2009 0.01
2010 0.01
2011 0.01
Interpretation:

This ratio is used to find the relative proportion of equity and debt to finance a companys
assets. The performance of the company is excellent as the ratios are almost negligible.it
can be also inferred that, the company is in strong position with huge amount of
shareholders fund.

Dividend Per Share:

Year Ratio
2007 3.10
2008 3.50
2009 3.70
2010 10.00
2011 4.45

Interpretation:

ITC used to pay low dividends at par with the industry standards. Even though they paid
high dividend in 2010, it again brought down to 4.45. It can also be inferred that they are
consistent in paying the dividends.

ITCs FMCG portfolio comprises:

Cigarettes & Cigars


Foods
Lifestyle Retailing
Personal care
Education & Stationery
Safety Matches
Agarbattis

B
CG Matrix

Weak market Share


Strong market Share

High Growth (stars) ? (question marks)

Sunfeast Colour crew


Fiama, Vivel Yippe (Noodles)
Kitchens of India
$ (cash cow) (dog)

Aashirvaad Essenza di wills


mint-o, Candyman Superia
Bingo Mangaldeep
Low Growth John players, Wills (Agarbattis)
Lifestyle Classic, Bristol
Classmate, Paperkraft
AIM (Safety matches)
W.D. & H.O. Wills, B&H,
555

Strategy recommendations for Star:


Investment:

Further growth aspects should be considered.


Maintaining market position is very important.

Cash flow:

Self-sustaining: Fund the respective products.


Requires funds from other strategic business units (cash-cows).

Strategy recommendations for Question mark (?):

Investment:

Increasing the market share through promotional activities.


Selective market development

Cash flow:

Effective utilization of seed capital.


Requires major funds from SBUs (Cash cows).

Strategy recommendations for Cash cows:


Investment:

Market development through diversification.


Some attempt in new product development.

Cash flow:

Positive cash flow.


Funding to support ?, Stars and Dogs.

Strategy recommendations for Dogs:

Investment:

Divestiture strategy.
Reducing capacity to free up resources.

Cash flow:

Goal of positive cash flow.


Negative cash flow = Divestment.

As the BCG Growth/Share Matrix generates options which require further analysis
and validation, this tool definitely enhances strategic decision making. As ITC is
having lot of its products as cash cows with good brand value, the surplus money
generated should be used to fund other strategic business units, especially ?
mark stage. At the same time these cash cows should be maintained by exploring
new avenues and diversification.

As it is also evident from the financial analysis that, company is in a very strong
position with good brand value, it should go for inorganic growth like Mergers &
Acquisitions, Vertical & Horizontal integrations etc. by taking into consideration
strategic financial parameters like business risk, financial risk etc.