Corporate Finance End Term

Assignment
Companies Chosen: HUL, ITC Ltd., Nestle India
Submitted to: Prof. Shalini Kalra Sahi

Sahil Nanda - 211128

Siddharth Sharma - 211140

Utsav Sharma - 211153

Aanchal Mahajan - 211160

Vysakh Nair - 211167

Abhas Agarwal - 211181

Vysakh Nair

Vysakh Nair

Contents
Risk and Return Analysis............................................................................................................................................................................................... 4
Find Beta estimates using the latest 1-year daily returns. Compare the estimated Beta of all the three companies in your sample. Which company
is more risky and why? .............................................................................................................................................................................................. 4
Using the historical risk free rate and the market risk premium, calculate the expected return for your set of companies ....................................... 5
Estimate the cost of capital, cost of debt and the weighted average cost of capital of the companies. State relevant assumptions. ......................... 6
Provide a few examples of systematic and unsystematic risk for each company. ..................................................................................................... 7
Measuring Investment Returns ..................................................................................................................................................................................... 9
What is the return on equity and return on capital for the companies? How have these changed historically? Based upon these returns can you
comment upon the type of investments that the company is doing? State relevant assumptions. ............................................................................. 9
Investment Decisions ..................................................................................................................................................................................................... 9
What is Return on Equity and Return on Capital Employed? ....................................................................................................................................... 9
OUTLOOK .................................................................................................................................................................................................................. 10
MEASURING INVESTMENT RETURNS ................................................................................................................................................................ 11
ITC ............................................................................................................................................................................................................................... 11
COMMENTS ........................................................................................................................................................................................................... 11
HUL ............................................................................................................................................................................................................................. 13
COMMENTS ........................................................................................................................................................................................................... 13
NESTLE....................................................................................................................................................................................................................... 16
COMMENTS ........................................................................................................................................................................................................... 16
Capital Structure Choices ............................................................................................................................................................................................ 18
Analyze the existing capital structure of the companies and based on the same, comment on the benefits and the costs of debt to that company,
and whether the firm has too much or too little debt, as compared to its peers. State relevant assumptions. Is the capital structure influence by
the industry or not? Analyse and comment on the results that you have generated. ............................................................................................... 18

Analyzing Dividends ................................................................................................................................................................................................... 32

What is the dividend policy of the companies? Are they paying too much dividend or too little dividend, relative to their peers?....................... 32
ITC ............................................................................................................................................................................................................................... 32
HUL ......................................................................................................................................................................................................................... 35
NESTLE................................................................................................................................................................................................................... 38
VALUATION .............................................................................................................................................................................................................. 41
What is the value of these companies, based upon a discounted cash flow model? State relevant assumptions. Can you also work out the stock
valuation using the dividend growth model? (Assume an expected rate of return of 15%). Compare the arrived share price with the current
market price of the company. Give your comments on the comparison. ................................................................................................................. 41

Risk and Return Analysis

Find Beta estimates using the latest 1-year daily returns. Compare the estimated Beta of all the three companies in your
sample. Which company is more risky and why?
Beta
HUL
Nestle
ITC
0.36458041 0.2564783 0.465814

Beta for Nestle is minimum and it is maximum for ITC.

Following are the reasons for this variation:

Nestle is a Food-processing company and they have their main products like Maggi & Cerelac, where Nestle is Marketleader.
They have very high sales & very good terms with their suppliers and an organized processing with their distributors.
Also the prices of agro-commodities are less volatile in the exchange market and thus the risk involve is lower.
ITC is mainly a tobacco company, as their 73% of revenue is dependent on tobacco business. This industry is always in target
by government, as imposing excise duties is easier here. Also since tobacco plantation is discouraged in India gradually, thus
the price of raw material is increasing and so is their risk of doing business.
HUL is more of a Household Segment and the nature of business is a blend of two and so is the risk involved in between the
two.

Using the historical risk free rate and the market risk premium, calculate the expected return for your set of companies

Beta
HUL
Nestle
ITC
0.364580415
0.256478253
0.465813683
Risk Free
Market
Market
Rate(Rf)
Return
Premium(Rm)
7.92%
12.79%
20.71%
Expected Return, Re = Rf + *(Rm-Rf)
Re
HUL

Nestle
12.58%

ITC
11.20%

13.88%

As already calculated, beta for the three company, The risk free return is inquired from the government website.
Market premium is calculated with respect to NIFTY-50, and accordingly expected return is calculated.

Estimate the cost of capital, cost of debt and the weighted average cost of capital of the companies. State relevant assumptions.
Cost Of Debt, Kd = Total Interest(1-Corporate Tax)/Total Debt
Corporate Tax rate = 35%

Companies

Total
Debt (in
Rs. Cr.)

HUL
Nestle
ITC

0
476.44
79.09

Total
Interest Rate
Interest (in (Total Interest/
Rs. Cr.)
Total Debt)
0
0
0.019016036
9.06
1.10026552
87.02

Cost of
Debt
(%)
0%
1.24%
71.52%

WACC= Wd*(1-T)*rd + We*re+ WP*rP

Share Holder's Equity
Long Term Debt
Preference Share Capital
wd = Debt portion of value of corporation
T = Tax rate
rd = Cost of debt (rate)
we = Equity portion of value of corporation
re = Cost of internal equity (rate)
wP = Preference share portion of value of
corporation
rp = Cost of preference capital (rate)

HUL
Nestle
ITC
216.15
96.42
781.84
0
476.44
79.09
0
0
0
0
0.83168663 0.091865773
35%
35%
35%
1.24%
71.52%
0%
1
0.16831337 0.908134227
12.58%
11.20%
13.88%
0
0

0
0

0
0

Companies
WACC

HUL
12.58%

Nestle
2.55%

ITC
16.87%

All the relevant data is picked from the balance sheet of the company, as by simply applying formula, incides have been found.

Provide a few examples of systematic and unsystematic risk for each company.

ITC
Systematic Risk
Tobacco Regulations

Unsystematic Risk
Inflation
Monsoon,which leads
to lower production of
agro-commodities.

Regulations on plastic
bags
Increasing Taxes
HUL
Systematic Risk
Unsystematic Risk
Environmental Issues
related to their raw
materials used

Monsoon,which leads to
lower production of
agro-commodities.
Inflation
FDI in retail

Systematic Risk

NESTLE
Unsystematic Risk

Environmental Issues
related to their raw
materials used
Ban on advertisement of
baby products

Monsoon,which leads to
lower production of
agro-commodities.
Inflation
Economic Fluctutation

Measuring Investment Returns

What is the return on equity and return on capital for the companies? How have these changed historically? Based upon these returns
can you comment upon the type of investments that the company is doing? State relevant assumptions.
Investment Decisions

Investment Decisions, take time to mature, have to be based on the returns which that investment will make. Investment is the
purchase or creation of assets with the objective of making gains in the future. Typically investment involves using financial resources
to purchase a machine/ building or other asset, which will then yield returns to an organization over a period of time. Unless the
project is for social reasons only, if the investment is unprofitable in the long run, it is unwise to invest in it now.
Often, it would be good to know what the present value of the future investment is, or how long it will take to mature (give returns). It
could be much more profitable putting the planned investment money in the bank and earning interest, or investing in an alternative
project.
Typical investment decisions include the decision to build another grain silo, cotton gin or cold store or invest in a new distribution
depot. At a lower level, marketers may wish to evaluate whether to spend more on advertising or increase the sales force, although it is
difficult to measure the sales to advertising ratio.
What is Return on Equity and Return on Capital Employed?
Return on Equity (ROE)

The amount of net income returned as a percentage of shareholders equity. Return on equity measures a corporation's profitability by
revealing how much profit a company generates with the money shareholders have invested.
ROE is expressed as a percentage and calculated as:
Return on Equity = Net Income/Shareholder's Equity

Net income is for the full fiscal year (before dividends paid to common stock holders but after dividends to preferred stock.)
Shareholder's equity does not include preferred shares.
Return on Capital Employed (ROCE) A ratio that indicates the efficiency and profitability of a company's capital investments.
ROCE should always be higher than the rate at which the company borrows; otherwise any increase in borrowing will reduce
shareholders' earnings.
It is calculated as:

Where, NOPAT is Net Operating Profit after Tax. Capital Employed is in general it is the capital investment necessary for a business
to function.
Net Operating Profit After Tax (NOPAT) is equal to EBIT * (1 - tax).
Capital employed is commonly represented as total assets less current liabilities.
OUTLOOK
The fiscal year 2011-12 witnessed slowdown of economic activities particularly industrial output. Inflation also remained at elevated
level throughout the fiscal year. Private investment has declined in its pace of growth considerably affecting the growth rate of the
economy. Higher spending on subsidies on account of oil and fertilisers widened the fiscal deficit of the centre more than the budget
estimates.

MEASURING INVESTMENT RETURNS

ITC

Mar
'12
32.88

Mar
'11
31.36

Mar
'10
28.98

Mar
'09
23.85

Mar
'08
25.99

Mar
'07
26.01

Mar
'06
24.83

Mar
'05
27.97

Mar
'04
25.09

Mar
'03
25.96

ROCE(%) 46.95

44.94

42.64

34.60

36.60

37.24

36.26

33.09

36.17

38.03

ROE(%)

50
45
40
35
30
25

ROE(%)

20

ROCE(%)

15
10
5
0
Mar Mar Mar Mar Mar Mar Mar Mar Mar Mar
'12 '11 '10 '09 '08 '07 '06 '05 '04 '03

COMMENTS
There was an increase in net worth due to increase in reserves and in equity share capital which led to increase in shareholders equity.
There had been slight increase in net profit margin.

Though there has been increase in capital employed but there has been greater percentage of increase in NOPAT which led to the
increment in ROCE for the current year.
The company increased the value of both non-current and current investments.
Investment were made in state of art technology and signicant investments had been made in brand building
All investment decisions in deployment of temporary surplus liquidity continued to be guided by the tenets of Safety, Liquidity and
Return. The portfolio mix during the year was constantly rebalanced in line with changing interest rate scenario which helped enhance
yields. Investments were preferred in shorter duration assets like Debt Mutual Funds and Bank Fixed Deposits.
Additional investments in the area of energy were taken up by the company. Some of them are:- Renewable energy sources such as
wind turbines and micro hydel projects, Process improvements across different factories and installation of more energy efficient
technology, Solar pre-heating arrangement for boiler feed water and furnace oil at different factories.

HUL

Mar
'12
ROE
76.62
ROCE 93.08

Mar
'11
87.57
102.47

Mar
'10
85.25
106.78

Mar
'09
121.34
118.59

Dec
'07
122.97
138.72

Dec
'06
68.14
65.89

Dec
'05
61.09
67.66

Dec
'04
57.23
45.08

Dec
'03
82.87
59.13

Dec
'02
48.38
58.05

160
140
120
100
80
60

ROE

40

ROCE

20
0
'07

'06

'05

'04

'03

'02

Mar Mar Mar Mar Dec

'12 '11 '10 '09

Dec

Dec

Dec

Dec

Dec

COMMENTS
ROCE of the current year decreased in comparison to the previous year because there has been increase in total assets in the area of
current investments, therefore increasing the capital employed. It was more than the increase in profit thus causing the decline of the
ratio.
Though there was increase in profit by14.32% but there was decrease in ROE in comparison to the last year which was majorly due to
high increase in reserves and there was a slight increase in equity share capital also.

It is evident from the balance sheet that the current and non-current investments this year has increased. From the financial statement
of the current year (note 14 in balance sheet) it is seen that the company has increased its investment in its subsidiaries whereas
decreased it in the joint ventures.
Non-current investments increased due to increase in investments in mutual funds. There was investments in equity shares on
demerger which was the transfer of the FMCG Exports Business Division (the demerged business undertaking) of the Company into
its wholly owned subsidiary Unilever India Exports Limited.

NESTLE

Dec
'11
ROE
75.47
ROCE 63.73

Dec
'10
95.70
135.06

Dec
'09
112.68
160.29

Dec
'08
112.83
163.97

Dec
'07
98.90
150.33

Dec
'06
81.03
120.01

Dec
'05
87.42
127.18

Dec
'04
78.87
119.20

Dec
'03
78.53
118.02

Dec
'02
71.52
98.54

180
160
140
120
100
80

ROE

60

ROCE

40
20
0
'11

'10

'09

'08

'07

'06

'05

'04

'03

'02

Dec

Dec

Dec

Dec

Dec

Dec

Dec

Dec

Dec

Dec

COMMENTS
There was decrease in investment about 11% in comparison to the previous year. Huge increase in capital employed was observed
which tantamount to decrease in ROCE. It declined as there was huge dip in asset turnover ratio, a slight dip in net profit margin and
there was dip in financial leverage(equity multiplier) due to unsecured loans taken up by the company.
There was increase in net worth due to increase in reserves. Net sales grew by about 26% and net profit by about 17%. ROE decreased
by about 21% in comparison to the previous year.

Additional Investment that was initiated for implementation during 2011 was water treatment system for recovery of water during
milk powder spray drying process.(annexure 2 directors report).this is a long term investment and its effect on the financials could
only be observed gradually.
RECENT ACTIVITY: It has acquired a 26 percent minority stake in privately held Indocon Agro and Allied Activities. This business
investment will contribute to creating shared value with farmers engaged in milk.

Capital Structure Choices

Analyze the existing capital structure of the companies and based on the same, comment on the benefits and the costs of debt
to that company, and whether the firm has too much or too little debt, as compared to its peers. State relevant assumptions. Is
the capital structure influence by the industry or not? Analyse and comment on the results that you have generated.

Capital Structure Analysis

Capital Structure is defined as the mix of debt and equity which a company uses to finance its long term operations.

For Analysis of Capital Structure, different ratios are observed:1. Debt Equity Ratio
Outsiders Funds
External Equities
Debt Equity Ratio = --------------------------- or ---------------------------Insiders Funds
Internal Equities
2. Interest Coverage Ratio:
Net Profit before Interest & Tax
Interest Coverage Ratio = ------------------------------------------Fixed Interest Charges
3. Dividend Coverage Ratio:
Earning after Tax
Dividend Coverage Ratio: = ---------------------------Preference Dividend

4. Capital Gearing Ratio :

Equity Share Capital + Reserves & Surplus
Capital Gearing Ratio = ------------------------------------------------------Pref. Share Capital + Long Term Debt

Analysing the Capital Structure of FMCG Sector by observing the capital structure of three companies listed in India :1. ITC Ltd
2. HUL
3. NESTLE

ITC Ltd
ITC Ltd has a diversified business and thus for calculation purpose all values taken are the consolidated figures of different
ITC businesses.

Mar '12
781.84

Mar '11
773.81

Mar '10
381.82

Mar '09
377.44

Mar '08
376.86

781.84

773.81

381.82

377.44

376.86

18,676.74

15,567.04

13,99.37

13,569.61

11,822.52

102.51

59.22

60

61.13

19,458.58

16,443.36

14,440.41

14,007.05

12,260.51

79.09

99.20

107.71

177.55

214.43

Total
Liabilities

18,870.98

16,052.47

14,172.09

13,912.63

12,272.10

Profit after
Tax

6,322.39

5,069.42

4,210.78

3,359.38

3,178.17

Total Share
Capital
Equity share
capital
Share
Application
Money
Preference
Share
Capital
Reserves
and Surplus
Revaluation
Reserves
Net Worth
Total Debt

Preference
Dividend
Long Term
Debt

--

--

--

--

--

1.89

25.09

0.95

18.85

14.99

Mar '12
---

Mar '11
0.01
0.01

Mar '10
0.01
0.01

Mar '09
0.01
0.01

Mar '08
0.02
0.01

114.89

--

84.74

165.93

238.39

--

--

--

--

--

10,295.54

651.29

15,138.09

739.90

Calculated Ratios
Debt Equity Ratio
Long Term Debt
Equity Ratio
Interest Coverage
Ratio
Dividend Coverage
Ratio
Capital Gearing Ratio

Debt-Equity as of March12

813.83

Debt - Equity

Debt
Equity

Debt Equity Ratio

Mar '12
--

Mar '11
0.01

Mar '10
0.01

Mar '09
0.01

Mar '08
0.02

Debt-Equity Ratio
0.025

0.02

0.015
Series 1

0.01

0.005

0
March'12

March'11

March'10

March'09

March'08

ITC Analysis
ITC has very low debt component in its funding, as can be observed from the D/E ratio across the years.
D/E ratio is low and has remained constant from past 3-4 years
Capital Gearing Ratio shows that ITC is Low Geared which means the owners fund forms a significant portion of Equity
share capital.

HUL
Mar '12
216.15

Mar '11
215.95

Mar '10
218.17

Mar '09
217.99

Mar '08
217.75

216.15

215.95

218.17

217.99

217.75

3,296.11

2,417.30

2,364.68

1,842.85

1,220.82

0.67

0.67

0.67

0.67

0.67

3,681.08

2709.35

2,668.93

2,137.48

1,508.17

Total Debt

0.00

2.66

10.84

434.14

102.15

Total
Liabilities

3,752.08

2,791.76

2,741.95

2,624.43

1,658.33

Profit after
Tax
Preference
Dividend
Long Term

2,800.14

2,306.63

2,164.61

2,509.93

1,918.87

--

--

--

--

--

0.00

0.00

0.00

144.6

25.52

Total Share
Capital
Equity share
capital
Share
Application
Money
Preference
Share
Capital
Reserves
and Surplus
Revaluation
Reserves
Net Worth

Debt

Ratios
Debt Equity Ratio
Long Term Debt
Equity Ratio
Interest Coverage
Ratio
Dividend Coverage
Ratio
Capital Gearing
Ratio

Debt Equity March2012

Mar '12
---

Mar '11
---

Mar '10
---

Mar '09
0.20
--

Mar '08
0.06
--

2,636.53

11,243.63

395.13

116.28

83.09

--

--

--

--

--

--

--

--

14.25

56.37

Debt - Equity

Debt
Equity

Debt Equity Ratio

Mar '12
--

Mar '11
--

Mar '10
--

Mar '09
0.20

Mar '08
0.06

Debt-Equity Ratio
0.25

0.2

0.15
Series 1

0.1

0.05

0
March'12

March'11

March'10

March'09

March'08

HUL Analysis
HUL has no debt in the recent years and only equity is funding its growth, which is beneficial for it being in FMCG sector.
Capital Gearing Ratio does not exist as HUL has not borrowed any funds in past 3 years, which also shows its financial
strength but may also show that growth prospects are not good as HUL is not borrowing to fund the growth.

NESTLE
Dec '11
96.42

Dec '10
96.42

Dec '09
96.42

Dec '08
96.42

Dec '07
96.42

96.42

96.42

96.42

96.42

96.42

1,177.54

759.00

484.85

376.93

0.67

0.67

0.67

0.67

0.67

1273.96

855.42

581.27

473.35

418.43

Total Debt

970.87

0.00

0.00

0.82

2.87

Total
Liabilities

2,244.83

855.42

581.27

474.17

421.30

Profit after
Tax
Preference
Dividend
Long Term
Debt

1,067.93

961.55

818.66

655.00

534.08

--

--

--

--

--

0.84

0.00

0.00

.82

2.87

Total Share
Capital
Equity share
capital
Share
Application
Money
Preference
Share
Capital
Reserves
and Surplus
Revaluation
Reserves
Net Worth

322.01

Ratios
Debt Equity Ratio
Long Term Debt
Equity Ratio
Interest Coverage
Ratio
Dividend Coverage
Ratio
Capital Gearing
Ratio

Dec '11
0.76
--

Dec '10
---

Dec '09
---

Dec '08
---

Dec '07
0.01
--

157.92

1,075.28

666.25

473.22

741.20

--

--

--

--

--

1516.61

--

--

577.25

144.28

Debt-Equity on Dec11

Debt - Equity

Debt
Equity

Debt Equity Ratio

Dec '11
0.76

Dec '10
--

Dec '09
--

Dec '08
--

Dec '07
0.01

Debt-Equity Ratio
0.8
0.7
0.6
0.5
0.4
Series 1
0.3
0.2
0.1
0

Dec'11

Dec'10

NESTLE Analysis

Observations from the ratios

Dec'09

Dec'08

Dec'07

 NESTLE has taken a huge debt in year 2011, which is contrary to its industry,
Till 2010 it was following the industry trend of having very low debt component in its funding.
Capital Gearing Ratio shows that NESTLE is Low Geared which means the owners fund forms a significant portion of
Equity share capital, and its in a strong financial position.

Analyzing Dividends
What is the dividend policy of the companies? Are they paying too much dividend or too little dividend, relative to their peers?
ITC
ITC has been consistent in giving dividends. The dividend percentage has remained fairly constant, taking only inflation into account.
In 2010, the 1000% dividend is attributed to the fact that ITC Ltd completed 100 years in 2010. In this year, it also gave a bonus share
in the ratio of 1:1.
In FY 2011-12, a dividend percentage of 450 resulted in a dividend amount of Rs. 4.50. The company has not given any interim
dividend.
High excise duty on cigarettes means increased taxes. When the profitability of these companies is compared, ITC has lower
profitability, primarily
ITC
Announcement
Date

Effective
Date

Dividend
Type

Dividend
(%)

Face
Value

Dividend
Amount

5/25/2012

6/11/2012 Final

450%

4.5

5/20/2011

6/10/2011 Final

445%

4.45

8/3/2010 Bonus

1:1

5/21/2010

6/9/2010 Final

1000%

10

5/22/2009

7/13/2009 Final

370%

3.7

5/23/2008

7/16/2008 Final

350%

3.5

5/25/2007

7/16/2007 Final

310%

3.1

ITC
Dividend ratio

Dividend payout

1000

350

370

49.45

50.06

March'08

March'09

109.63
March'10

445

450

80.24

66.35

March'11

March'12

ITC (Including Interim dividends)

March'08

March'09

March'10

March'11

March'12

EPS

7.87

8.43

10.38

6.24

7.69

DPS

3.5

3.7

10

4.45

4.5

Dividend ratio

350

370

1000

445

450

49.45

50.06

109.63

80.24

66.35

Dividend Payout Ratio

ITC
EPS

DPS

10.38
10
7.87

8.43

7.69

6.24
3.5

3.7

March'08

March'09

4.45

March'10

March'11

4.5

March'12

HUL

It operates in the household sector, hence, the demand does not fluctuate much
It has a strong supplier network
The DPS and EPS are fairly similar
This year it gave a dividend of 1250% because of good growth
The company has regularly paid dividend at least twice a year
HUL

Announcement
Effective
Date
Date
10/18/2012
11/1/2012
5/1/2012
7/4/2012
10/17/2011
11/4/2011
5/9/2011
7/8/2011
10/14/2010
11/1/2010
5/25/2010
7/8/2010
10/15/2009
11/6/2009
5/11/2009
6/12/2009
7/15/2008
8/4/2008
2/13/2008
3/17/2008
10/23/2007
11/7/2007
7/23/2007
8/7/2007
2/20/2007
4/20/2007

Dividend
Type
Interim
Final
Interim
Final
Interim
Final
Interim
Final
Interim
Final
Interim
Interim
Final

Dividend
Face
(%)
Value
1250%
400%
350%
350%
300%
350%
300%
400%
350%
300%
300%
300%
300%

1
1
1
1
1
1
1
1
1
1
1
1
1

Dividend
Amount
12.5
4
3.5
3.5
3
3.5
3
4
3.5
3
3
3
3

HUL(Including Interim dividends)

March'08

March'09

March'10

March'11

March'12

EPS

8.12

11.47

10.09

10.68

12.45

DPS

7.5

6.5

6.5

7.5

650

700

650

700

1650

131.8

76.47

75.2

71.2

69.99

Dividend ratio
Dividend Payout Ratio

HUL
EPS

DPS

12.45

11.47
9
8.12

March'08

7.5

March'09

10.09

10.68

6.5

6.5

March'10

March'11

7.5

March'12

HUL
Dividend ratio

Dividend Payout Ratio

1650

650

700

650

700

131.8

76.47

75.2

71.2

March'08

March'09

March'10

March'11

69.99
March'12

NESTLE

It is in the food processing sector, which is most profitable among the FMCG companies
The current price is close to Rs 4700
The face value, unlike the other two is Rs 10
The dividend given is significantly higher than the other 2 companies
The profitability is attributed mainly to Cerelac and Maggi

Announcement
Date
15-02-2013
07-12-2012
17-07-2012
14-02-2012
24-11-2011
18-02-2011
19-10-2010
19-02-2010
15-10-2009
09-03-2009

Nestle
Effective Dividend Dividend Face
Dividend
Date
Type
(%)
Value
Amount
25-022013 Interim
125%
10
12-122012 Interim
180%
10
01-082012 Interim
180%
10
21-032012 Final
125%
10
12-122011 Interim
270%
10
21-042011 Final
215%
10
03-112010 Interim
270%
10
23-042010 Final
215%
10
04-112009 Interim
270%
10
29-04- Final
210%
10

12.5
18
18
12.5
27
21.5
27
21.5
27
21

31-10-2008
04-03-2008
26-11-2007
05-03-2007

2009
14-112008
23-042008
13-122007
20-032007

Interim

220%

10

22

Final

110%

10

11

Interim

240%

10

24

Interim

80%

10

Nestle(Including Interim dividends)

Dec'7 Dec'8 Dec'9 Dec'10 Dec'11
42.92 55.39 67.94
84.91
99.73
EPS
33
42.5
48.5
48.5
48.5
DPS
320
330
480
485
485
Dividend ratio
89.5 89.76 83.52
66.54
56.47
Dividend Payout Ratio

Nestle
EPS

DPS

99.73
84.91
67.94
42.92
33

Dec'7

55.39
42.5

48.5

Dec'8

Dec'9

48.5

Dec'10

48.5

Dec'11

Nestle
Dividend ratio

320

330

89.5

89.76

Dec'7

Dec'8

Dividend Payout Ratio

480

485

485

83.52

66.54

56.47

Dec'9

Dec'10

Dec'11

VALUATION

What is the value of these companies, based upon a discounted cash flow model? State relevant assumptions. Can you also
work out the stock valuation using the dividend growth model? (Assume an expected rate of return of 15%). Compare the
arrived share price with the current market price of the company. Give your comments on the comparison.

Valuation Of ITC
Calculation of free cash flow
Formulas & Assumptions
EBIT
Operating Revenue
Operating Expenses
Other income
EBIT
Profit on sale of fixed assets
Adjusted EBIT
Tax rate

Rs.(in Crores)
2012.00
8897.53
558.85
112.34
8451.02
(Operating Revenue-Operating Expenses+Other
Income)
511.01
7940.01
0.32445

Reinvestment Need

Capital Expenditure

2012

2011

2010

2009

2008

Capital assets

18870.98

16052.47

14172.09

13912.63

12272.1

Tangible
Intangible
Depreciation and
Amortization
Tangible
Intangible
work in progress
Net Capital expenditure
Non cash Working capital(as
% of revenue)(Average)
Current assets(except cash)
Inventories
Sundry debtors
Other current assets
Loans and advances
Current Liabilities
Non cash working capital
Change in non cash working
capital
Revenue
Weight
Weighted Average
Total Liabilities

18870.98
0
698.51

16052.47
0
655.99

14172.09
0
608.71

13912.63
0
549.41

12272.10
0
438.46

698.51
0
875.65
2832.30

655.99
0
819.34
3358.61

608.71
0
-706.17
-3094.92

549.41
0
2588.91
2076.59

438.46
0
2041.90

Normalised
capital
expenditure

1293.15

2012

2011

2010

2009

2008

15340.74

14993.26

13953.82

13793.83

6736.65

5637.83
986.02
6764.35
1952.54
11395.32
3945.42
-455.56

5637.83
907.62
6273.92
2173.89
10592.28
4400.98
-1089.53

5637.83
858.8
5528.03
1929.16
8463.31
5490.51
147.67

5637.83
668.67
5337.12
2150.21
8450.99
5342.84
5913.18

4050.52
736.93
4940.79
1949.2
7306.99
-570.34

9009.87
0.140884993
-64.18156721
18870.98

22420.91
0.350589935
-381.978252
16052.47

18135.38
0.283578218
41.87599541
14172.09

14385.79
0.22494685
1330.15124
13912.63

Average

19179.75
1128.94
63951.95
925.8674181

12272.10

A) Free Cash Flow

EBIT(1-t)
Net Capital Expenditure
Non cash working capital
Free Cash Flow
Calculation of Expected
Growth Rate
Return on Capital
Reinvestment Rate
Growth rate

((EBIT(1-tax rate)-(Capital expenditure - Depreciation)Change in non cash working capital))

5363.873756
1293.15
925.8674181
3144.861337

0.06852559

2012.00
6.85%
45.16%

Return on Capital
Reinvestment Rate
Growth rate

3.09%
Industry
Average
15.00%
43.33%
6.50%

Return on Capital(calculated)
Reinvestment Rate

Year 2 to 5
0.13
65.00%

Growth rate as per S&P

8.32%

C) Cost Of Capital
Loans
Secured loan
Unsecured loan
Financial charges

79.09
1.77
77.32
0.33

Capital expenditure - Depreciation + change in non

cash working capital/EBIT(1-tax rate)
Reinvestment rate * Return on Capital
we are assuming that with the current scenario in the
next 5 years company will get a stable growth rate

We are assuming that the with the increasing capital

expenditure a growth rate of 9% is targetted keeping
the reinvestment rate constant

Risk free rate

BETA
Expected Return
Cost of Debt
Cost of Equity
Total share holder'sfund
Total debt
Total fund
Weightage of Equity
Weightage of Debt
Weighted Average Cost of capital

D) Asset Life
Year
0
1
2
3
4
5
6

7.92%
As obtained from the source
0.465814
20.71%
As obtained from the source
71.52%
13.88%
*Cost Of Equity=Rf+b(ER(M)-Rf)
781.84
79.09
860.93
0.908134227
0.091865773
16.87%
wacc= wightage of debt*cost of debt(1-t) + weightage
of equity*cost of equity

EBIT(1-t)
5363.873756
5529.8486
5989.931954
6488.294293
7028.120378
7612.859993
8107.695893

Terminal Value

Firm Value
Add: Cash

Reinvestment
2219.012418
2497.031781
3893.45577
4217.39129
4568.278245
4948.358995
5270.00233

FCF
3144.861337
3032.816773
2096.476184
2270.903002
2459.842132
2664.500998
2837.693562

PV
2,594.96
2,096.48
2,270.90
2,459.84
2,664.50

33384.63015 15309.6703

27,396.35
247957.00

Less: Debt
Equity

79.09
2,75,274.26

Value of Equity
No. of shares ( 8,47,07,710 Equity
shares of Rs 10 each)

2,75,274.26
781.84243

Value per share

Current Market Price

352.0840623
298.85

As on March 12,2013 (Closing Price)

All the data is picked from the annual report of ITC-2012.

There is a significant difference in the calculated share price and the market share price.
Explanation for change in calculated share price and market price share price (As on March 12 2013, closing price)
Following are the possible reason for the same
After July 2012, 4 states have increased VAT on tobacco products, leading to the lower profitability for the company.
Many Australian Tobacco manufacturing firm have received criticism from WHO in Nov 2012, thus ITC also has a threat
of receiving the same.
In the Budget for 2013, the excise duty in cigarettes have increased.
As per technical analysis, the share price has resistance at 305 and a strong support at 275.