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Objective
The primary objective of equity research is to analyze the earnings persistence. Some key aspects that affect the earnings persistence can be summarized as follows: y y y The stability of the equity under consideration The predictability of the value of the given equity under the given circumstances The variability of the given equity, given the various variance factors
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INTRODUCTION TO EQUITY
What is Equity?
In accounting and finance, equity is the residual claim or interest of the most junior class of investors in assets, after all liabilities are paid.. In an accounting context, Shareholders' equity (or stockholders' equity, shareholders' funds, shareholders' capital or similar terms) represents the interest in assets of a company, spread among individual shareholders of common or preferred stock. At the start of a business, owners put some funding into the business to finance assets. This creates liability on the business in the shape of capital as the business is a separate entity from its owners. Businesses can be considered to be, for accounting purposes, sums of liabilities and assets; this is the accounting equation. This definition is helpful to understand the liquidation process in case of bankruptcy. At first, all the secured creditors are paid against proceeds from assets. Afterward, a series of creditors, ranked in priority sequence, have the next claim/right on the residual proceeds. Ownership equity is the last or residual claim against assets, paid only after all other creditors are paid. In such cases where even creditors could not get enough money to pay their bills, nothing is left over to reimburse owners' equity. Thus owners' equity is reduced to zero. Ownership equity is also known as risk capital.
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Jewellery exports in the financial year 2010-11 surged to US$ 43,139.2 million as against US$ 29,358.5 million in the previous year, according to the Gem and Jewellery Export Promotion Council (GJEPC).
Passengers carried by domestic airlines during January-March 2011 were 14.3 million registering a growth of 20.9 per cent, according to the Ministry of Civil Aviation.
The HSBC Market Business Activity Index, which measures business activity among Indian services companies, based on a survey of 400 firms, stood at 58.1 in March 2011.
Agriculture The growth of Indian agriculture and allied sector was a top agenda in Budget 2011-12 presented by Finance Minister Pranab Mukherjee. He has estimated that the agriculture and allied sector would grow by 6 per cent this fiscal, a projection which should ease government's worries on food inflation of over 18 per cent. In the Union Budget 2011-12, Finance Minister Pranab Mukherjee made the following announcements for the agriculture sector:
y
Credit flow to farmers has been increased to US$ 105.81 billion and banks have been asked to step up direct lending to farmers
y y
Allocation under Rashtirya Krishi Vikasyojna (RKVY) increased to US$ 1.75 billion. Banks have been consistently meeting the targets set for agricultural credit flow in the past few years. For the year 2010-11, the target has been set at US$ 81.47 billion
US$ 66.83 million each allocated for vegetable initiative to achieve competitive prices, to promote higher production of nutri-cereals, to promote animal based protein and for Accelerated Fodder Development Programme to benefit farmers in 25,000 villages
y y
15 more mega food parks during 2011-12 National food security bill to be introduced this year.
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The data centre services market in the country is estimated to grow at a compound annual growth rate (CAGR) of 22.7 per cent between 2009 and 2011, to touch close to US$ 2.2 billion by the end of 2011, according to research firm IDC Indias report.
As per the Nasscom Strategic Review 2011, the Domestic BPO segment is expected to grow by 16.9 per cent in 2010-11, to reach US$ 2.8 billion, driven by demand from voice based services, in addition to adoption from emerging verticals, new customer segments, and value based transformational outsourcing platforms.
The Q211 BMI India Retail Report forecasts that total retail sales will grow from US$ 395.96 billion in 2011 to US$ 785.12 billion by 2015. According to a McKinsey Global Institute (MGI) study titled 'Bird of Gold': The Rise of India's Consumer Market, the total consumption in India is likely to quadruple making India the fifth largest consumer market by 2025. Urban India will account for nearly 68 per cent of consumption growth while rural consumption will grow by 32 per cent by 2025.
India ranks first in the Nielsen Global Consumer Confidence survey released in January 2011. India is one of the fastest growing markets in the world and the current consumer belief that recession would soon be a thing of the past has filled Indians with confidence, said PiyushMathur, Managing Director, South Asia, The Nielsen Co. With 131 index points, India ranked number one in the recent round of the survey, followed by Philippines (120) and Norway (119).
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Mission To help people mitigate risks of life, accident, health, and money at all stages and under all circumstances Enhance the financial future of our customers including enterprises.
Values Integrity Commitment Passion Seamlessness Speed About Aditya Birla Group A US $30 billion corporation, the Aditya Birla Group is in the
league of Fortune 500 worldwide. It is anchored by an extraordinary force of 130,000 employees, belonging to 40 different nationalities. The group operates in 27 countries across six continents truly India's first multinational corporation. Aditya Birla Group through Aditya Birla Financial Services Group (ABFSG), has a strong presence across various financial services verticals that include life insurance, fund management, distribution & wealth management, security based lending, insurance broking, private equity and retail broking The seven companies representing Aditya Birla Financial Services Group are Birla Sun Life Insurance Company Ltd., Birla Sun Life Asset Management Company Ltd., Aditya Birla Finance Ltd., Aditya Birla Capital Advisors Pvt. Ltd., Aditya Birla Money Ltd., Aditya Birla Money Mart Ltd, and Aditya Birla Insurance Brokers Ltd. In FY 2009-10, ABFSG reported consolidated revenue from these businesses at Rs. 5871 Cr., registering a growth of 43%.
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organization providing a diverse range of protection and wealth accumulation products and services to individuals and corporate customers. Chartered in 1865, Sun Life Financial and its partners today have operations in key markets worldwide, including Canada, the United States, the United Kingdom, Ireland, Hong Kong, the Philippines, Japan, Indonesia, India, China and Bermuda. As of March 31, 2011, the Sun Life Financial group of companies had total assets under management of $469 billion.
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Reckitt & Benckiser 13.3% 2.7% There are others, like Nestle, which have till date catered mostly to urban India but have still seen good growth in the last decade. The companys focus in the last decade has largely been on value added products for the upper strata of society. However, in the last couple of years, even these companies have looked to reach consumers at the slightly lower end. One of the biggest changes to hit the FMCG industry was the sachet bug. In the last 3 years, detergent companies, shampoo companies, hair oil companies, biscuit companies, chocolate companies and a host of others, have introduced products in smaller package sizes, at lower price points. This is the single big innovation to reach new users and expand market share for value added products in urban India, and for general FMCG products like detergents, soaps and oral care in rural India. Another interesting phenomenon to have hit the FMCG industry is the mushrooming of regional companies, which are posing a threat to bigger FMCG companies like HLL. For example, the rise of Jyothi Laboratories, which has given sleepless nights to Reckitt Benckiser, the Ghari detergent, that has slowly but surely built itself to take on Nirma and HLL in detergents, and finally, the rise of Anchor in oral care, which has become synonymous with cat, which walks
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In the first 10 months of 2007, there were 251 product launches, including 28 new brands, compared with 191 for the same period of 2006. Snacks and foodstuffs remain the category leaders, with recent launches of several health and beauty products, particularly in urban markets.
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Over the years companies like HUL, ITC and Dabur have improved performance with innovation and strong distribution channels. Their key categories have strengthened their presence and outperformed peers in the FMCG sector. On the contrary, Colgate Palmolive and Britannia Industries are strong in single product category i.e. tooth pastes and Biscuits. In addition companies have been successful in reviving their presence in the semi-urban and rural markets.
This report examines the growing market for FMCG market in India. This starts with an overview of the Industry in India and goes on to explain how product and demographic categories across the nation have added value to the Industry. The report examines the recent development within the industry and tries to gauge the impact in shaping the landscape of the FMCG market. It also contains a summary of the key players, including their product portfolio, business operations, and strategies. The report concludes with an industry outlook section. Finally the report mandates with the outlook for the year 2013, considering the current events
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WEAKNESSES
y Lower scope of investing in technology and achieving economies of scale, especially in small sectors y y Low exports levels "Me-too" products, which illegally mimic the labels of the established brands, narrow the scope of FMCG products in rural and semi-urban market.
OPPORTUNITIES
y y y y Untapped rural market Rising income levels i.e. increase in purchasing power of consumers Large domestic market - a population of over one billion Export potential 5. High consumer goods spending
THREATS
y y y Removal of import restrictions resulting in replacing of domestic brands Slowdown in rural demand. Tax and regulatory structure
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1. 2. 3. 4. 5. 6. 7. 8. 9.
Hindustan Unilever Ltd. ITC (Indian Tobacco Company) Nestl India GCMMF (AMUL) Dabur India Asian Paints (India) Cadbury India Britannia Industries Procter & Gamble Hygiene and Health Care Industries
10. Marico
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ITC Profile
ITC is one of India's foremost private sector companies with a market capitalization of over US $ 33 billion and a turnover of US $ 7 billion. ITC is rated among the World's Best Big Companies, Asia's 'Fab 50' and the World's Most Reputable Companies by Forbes magazine, among India's Most Respected Companies by Business World and among India's Most Valuable Companies by Business Today. ITC ranks among India's `10 Most Valuable (Company) Brands', in a study conducted by Brand Finance and published by the Economic Times. ITC also ranks among Asia's 50 best performing companies compiled by Business Week. ITC has a diversified presence in Cigarettes, Hotels, Paperboards & Specialty Papers, Packaging, Agri-Business, Packaged Foods & Confectionery, Information Technology, Branded Apparel, Personal Care, Stationery, Safety Matches and other FMCG products. While ITC is an outstanding market leader in its traditional businesses of Cigarettes, Hotels, Paperboards, Packaging and Agri-Exports, it is rapidly gaining market share even in its nascent businesses of Packaged Foods & Confectionery, Branded Apparel, Personal Care and Stationery. As one of India's most valuable and respected corporations, ITC is widely perceived to be dedicatedly nation-oriented. Chairman Y C Deveshwar calls this source of inspiration "a commitment beyond the market". In his own words: "ITC believes that its aspiration to create enduring value for the nation provides the motive force to sustain growing shareholder value. ITC practices this philosophy by not only driving each of its businesses towards international competitiveness but by also consciously contributing to enhancing the competitiveness of the larger value chain of which it is a part."
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Create multiple drivers of growth by developing a portfolio of world class businesses that best matches organizational capability with opportunities in domestic and export markets.
Continue to focus on the chosen portfolio of FMCG, Hotels, Paper, Paperboards & Packaging, Agri Business and Information Technology.
Benchmark the health of each business comprehensively across the criteria of Market Standing, Profitability and Internal Vitality.
y y
Ensure that each of its businesses is world class and internationally competitive. Enhance the competitive power of the portfolio through synergies derived by blending the diverse skills and capabilities residing in ITCs various businesses.
Create distributed leadership within the organization by nurturing talented and focused top management teams for each of the businesses.
Continuously strengthen and refine Corporate Governance processes and systems to catalyse the entrepreneurial energies of management by striking the golden balance between executive freedom and the need for effective control and accountability.
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Mission To enhance the wealth generating capability of the enterprise in a globalizing environment, delivering superior and sustainable stakeholder value. Core Values: ITC's Core Values are aimed at developing a customer-focused, high-performance organisation which creates value for all its stakeholders: Trusteeship As professional managers, we are conscious that ITC has been given to us in "trust" by all our stakeholders. We will actualize stakeholder value and interest on a long term sustainable basis. Customer Focus We are always customer focused and will deliver what the customer needs in terms of value, quality and satisfaction. Respect For People We are result oriented, setting high performance standards for ourselves as individuals and teams. We will simultaneously respect and value people and uphold humanness and human dignity.
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Weakness
y y y Dependency on the tobacco business Not present in many important sectors Local Company
Opportunities
y y y y Leveraging its brand equity Right size at the right time Synergies across businesses and leveraging domain expertise for growth in other sectors The unique reach and distribution network of E-choupal
Threats
y y y Competition Pressure groups and Government Policy Wide income disparities
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Financials Analysis
Profit & loss A/C of ITC LTD
in Rs. Cr. Income Sales Turnover Excise Duty Net Sales y-o-y growth
516.5 32.46
426.21 630.3
14,581.16 16,042.32
Expenditure Raw Materials Power & Fuel Cost Employee Cost Other Manufacturing Expenses Selling and Admin Expenses Miscellaneous Expenses Preoperative Exp Capitalised 5807.48 253 630.15 65.32 1,299.17 601.28 -42.52 6307.79 309.9 745.00 73.52 1,609.33 682.72 -112.75 6864.96 394.12 903.37 402.88 1,684.41 516.9 -72.55 7140.69 387.34 1,014.87 413.79 2,093.87 1,008.91 -71.88 8601.13 421.68 1,178.46 560.57 2,408.03 1,120.89 -60.54
Total Expenses
8,613.88 3,699.95
Operating Profit
4,022.91 4,299.13
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2,699.97
3,120.10
3,263.59
4,061.00
4,987.61
Total Value Addition Preference Dividend Equity Dividend Corporate Dividend Tax Per share data (annualised) Shares in issue (lakhs) Earning Per Share (Rs) Equity Dividend (%) Book Value (Rs)
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In Rs Cr.
9-Mar 12 mths
Sources Of Funds Total Share Capital Equity Share Capital Share Application Money Preference Share Capital Reserves Revaluation Reserves Networth Secured Loans Unsecured Loans Total Debt Total Liabilities 376.22 376.22 0 0 10,003.78 57.08 10,437.08 60.78 140.10 200.88 10,637.96 376.86 376.86 0 0 11,624.69 56.12 12,057.67 5.57 208.86 214.43 12,272.10 377.44 377.44 0 0 13,302.55 55.09 13,735.08 11.63 165.92 177.55 13,912.63 381.82 381.82 0 0 13,628.17 54.39 14,064.38 0 107.71 107.71 14,172.09 773.81 773.81 0 0 15,126.12 53.34 15,953.27 1.94 97.26 99.20 16,052.47
Application Of Funds Gross Block Less: Accum. Depreciation Net Block Capital Work in Progress Investments Inventories Sundry Debtors Cash and Bank Balance Total Current Assets Loans and Advances 7,134.31 2,389.54 4,744.77 1,130.20 3067.77 3354.03 636.69 103.54 4,094.26 1,390.19 8,959.70 2,790.87 6,168.83 1,126.82 2934.55 4050.52 736.93 153.34 4,940.79 1,949.29 10,558.65 3,286.74 7,271.91 1,214.06 2,837.75 4599.72 668.67 68.73 5,337.12 2,150.21 11,967.86 3,825.46 8,142.40 1,008.99 5,726.87 4549.07 858.80 120.16 5,528.03 1,929.16 12,765.82 4,420.75 8,345.07 1,333.40 5,554.66 5267.53 907.62 98.77 6,273.92 2,173.89
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129.56 27.59
308.08 31.85
261.36 36.24
258.73 36.69
251.78 20.55
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Valuation
For Valuation purpose DCF valuation method has been used since it is easier to use for the firms whose 1. Cash Flows are currently positive 2. Can be estimated with some reliability for future periods 3. Where a proxy risk that can be used to obtain the discount rates is available.
FCFF Calculations
FCFF = EBIT (1 Tax Rate) +Depreciation Capital Expenditure Increase In Non Cash Working Capital
In Rs Cr. Mar '07 12 mths Profit Before Tax Interest EBIT Tax rate Depriciation CAPEX Woriking Capital (C.A. - C.L.) Change in Working Capital 3,920.2 16.0 3,936.2 32% 362.9 794.6 1,695.2 2,256.0 0.49 25.9% 12.6% Mar '08 12 mths 4,502.6 24.6 4,527.2 32% 438.5 886.7 2,041.9 346.7 2,281.1 0.48 25.9% 12.4% Mar '09 12 mths 4,751.2 47.7 4,798.8 32% 549.4 754.13 2,588.9 547.0 2,492.9 0.49 23.8% 11.6% Mar '10 12 mths 5,978.4 90.3 6,068.7 33% 608.7 1,247.9 -706.2 -3,295.1 6,745.5 -0.12 28.9% -3.5% Mar '11 12 mths 7,240.7 78.1 7,318.8 31% 656.0 1,087.8 819.3 1,525.5 3,060.3 0.17 31.3% 5.3%
FCFF
Retention Ratio (b) ROE (NI/Equity) Growth (b*ROE)
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FCFF Forecasting
Looking at the historical growth rate we assume cash flows to grow
at 10%.
Mar '14 12 mths 3.0 Mar '15 12 mths 4.0
FCFF
Discounted Cashflows
3,060.3
3,366.3
2,953.1
3,702.9
2,849.7 Mar '18 12 mths 7.0
4,073.2
2,750.0 Mar '19 12 mths 8.0
4,480.5
2,653.7 Mar '20 12 mths 9.0
FCFF
Discounted Cashflows PV
4,928.6
2,560.8 23,144.7
5,421.4
2,471.1
5,963.6
2,384.6
6,559.9
2,301.1
7,215.9
2,220.6
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Calculations
In Rs Cr. Total debt Interest paid Interest rate (I) Total Equity Wd We Mar '07 12 mths 200.88 16.04 7.98% 10,437.08 1.89% 98.11% 5.59% 8% 6% 0.99 13.94% 13.78% 13.99% Mar '08 12 mths 214.43 24.61 11.85% 12,057.67 1.75% 98.25% 8.30% 8% 6% 0.99 13.94% 13.84% Mar '09 12 mths 177.55 47.65 24.31% 13,735.08 1.28% 98.72% 17.02% 8% 6% 0.99 13.94% 13.98% Mar '10 12 mths 107.71 90.28 63.30% 14,064.38 0.76% 99.24% 44.31% 8% 6% 0.99 13.94% 14.17% Mar '11 12 mths 99.20 78.11 75.50% 15,953.27 0.62% 99.38% 52.85% 8% 6% 0.99 13.94% 14.18%
Kd = I (1-t)
Risk free rate (Rf) Market Risk Premium ( Rm - Rf ) Beta
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PV of the firm = PV of Cash flows (FY12 to FY20) + PV of Terminal Value = 23,144.7+ 23,115.0 = 46,259.7 crore.
Comment
Using the DCF methodology, we value of the core business of ITC LTD. at Rs.59.5 per share, assuming 10% growth in FCFF over FY12 to FY20, terminal growth rate of 4% and WACC of 13.99%. The stock is currently trading at Rs.200.2 which indicates that the stock is overvalued and recommendation for investors is to SELL the share.
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Conclusion
The method used in this valuation is Discounted cash flow analysis (DCF) as this method is easier to use for the firms whose: Cash flows are currently positive
Where a proxy for risk that can be used to obtain discount rates is available.
As per the DCF analysis of equity valuation of ITC LTD, the intrinsic value of the firm is 59.5 whereas the market price as on 3nd AUGUST 2011 is 200.2 .Hence the share is OVERVALUED.
RECOMENDATION:
THE SHARE OF THE COMPANY IS OVERVALUED AS IT IS NOT GIVING THE SAME RETURN AS EXPECTED.SO, IT IS RECOMENDED TO SELL THE SHARES & INVEST IN SOME OTHER SHARES.
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Bibliography
TEXTBOOKS:
FINANCIAL MANAGEMENT BY KHAN & JAIN -EDITION 5- SECTION 9.28- PAGE 35-DCF VALUATION
REFERENCES:
y y y y y y y
http://www.adityabirlamoney.com/
http://www.ibef.org/artdisplay.aspx?cat_id=444&art_id=7933 http://www.itcportal.com/
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