Corporate Finance Valuation

[Year]

Corporate Finance End Term

Assignment Companies Chosen: HUL, ITC Ltd., Nestle India

Sahil Nanda - 211128

Utsav Sharma - 211153

Vysakh Nair - 211167

Vysakh Nair

Siddharth Sharma - 211140

Aanchal Mahajan - 211160

Abhas Agarwal - 211181

Vysakh Nair

Submitted to: Prof. Shalini Kalra Sahi

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 Market-

leader.

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

Rate(Rf)

Market

Return

Market

Premium(Rm)

7.92% 12.79% 20.71%

Expected Return, Re = Rf + β*(Rm-Rf)

Re

HUL Nestle ITC

12.58% 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.)

Total

Interest (in

Rs. Cr.)

Interest Rate

(Total Interest/

Total Debt)

Cost of

Debt

(%)

HUL 0 0 0 0%

Nestle 476.44 9.06 0.019016036 1.24%

ITC 79.09 87.02 1.10026552 71.52%

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

HUL Nestle ITC

Share Holder's Equity 216.15 96.42 781.84

Long Term Debt 0 476.44 79.09

Preference Share Capital 0 0 0

wd = Debt portion of value of corporation 0 0.83168663 0.091865773

T = Tax rate 35% 35% 35%

rd = Cost of debt (rate) 0% 1.24% 71.52%

we = Equity portion of value of corporation 1 0.16831337 0.908134227

re = Cost of internal equity (rate) 12.58% 11.20% 13.88%

wP = Preference share portion of value of

corporation 0 0 0

rp = Cost of preference capital (rate) 0 0 0

Companies HUL Nestle ITC

WACC 12.58% 2.55% 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 Unsystematic Risk

Tobacco Regulations Inflation

Regulations on plastic

bags

Monsoon,which leads

to lower production of

agro-commodities.

Increasing Taxes HUL


Environmental Issues

related to their raw

materials used

Monsoon,which leads to

lower production of

agro-commodities.

Inflation

FDI in retail

NESTLE


Environmental Issues

related to their raw

materials used

Monsoon,which leads to

lower production of

agro-commodities.

Ban on advertisement of

baby products 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

Mar

'11

Mar

'10

Mar

'09

Mar

'08

Mar

'07

Mar

'06

Mar

'05

Mar

'04

Mar

'03

ROE(%) 32.88 31.36 28.98 23.85 25.99 26.01 24.83 27.97 25.09 25.96

ROCE(%) 46.95 44.94 42.64 34.60 36.60 37.24 36.26 33.09 36.17 38.03

COMMENTS

There was an increase in net worth due to increase in reserves and in equity share capital which led to increase in shareholder‟s equity.

There had been slight increase in net profit margin.

0

5

10

15

20

25

30

35

40

45

50

Mar '12

Mar '11

Mar '10

Mar '09

Mar '08

Mar '07

Mar '06

Mar '05

Mar '04

Mar '03

ROE(%)

ROCE(%)

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 significant 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

Mar

'11

Mar

'10

Mar

'09

Dec

'07

Dec

'06

Dec

'05

Dec

'04

Dec

'03

Dec

'02

ROE 76.62 87.57 85.25 121.34 122.97 68.14 61.09 57.23 82.87 48.38

ROCE 93.08 102.47 106.78 118.59 138.72 65.89 67.66 45.08 59.13 58.05

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.

0

20

40

60

80

100

120

140

160

'07 '06 '05 '04 '03 '02

Mar '12

Mar '11

Mar '10

Mar '09

Dec Dec Dec Dec Dec Dec

ROE

ROCE

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

Dec

'10

Dec

'09

Dec

'08

Dec

'07

Dec

'06

Dec

'05

Dec

'04

Dec

'03

Dec

'02

ROE 75.47 95.70 112.68 112.83 98.90 81.03 87.42 78.87 78.53 71.52

ROCE 63.73 135.06 160.29 163.97 150.33 120.01 127.18 119.20 118.02 98.54

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.

0

20

40

60

80

100

120

140

160

180

'11 '10 '09 '08 '07 '06 '05 '04 '03 '02

Dec Dec Dec Dec Dec Dec Dec Dec Dec Dec

ROE

ROCE

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 director‟s 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 Mar '11 Mar '10 Mar '09 Mar '08

Total Share

Capital

781.84

773.81

381.82

377.44

376.86

Equity share

capital

781.84

773.81

381.82

377.44

376.86

Share

Application

Money

0 0 0 0 0

Preference

Share

Capital

0 0 0 0 0

Reserves

and Surplus

18,676.74

15,567.04

13,99.37 13,569.61 11,822.52

Revaluation

Reserves 0 102.51 59.22 60 61.13

Net Worth 19,458.58 16,443.36 14,440.41 14,007.05 12,260.51

Total Debt 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

Preference

Dividend -- -- -- -- --

Long Term

Debt 1.89 25.09 0.95 18.85 14.99

Calculated Ratios


Debt Equity Ratio -- 0.01 0.01 0.01 0.02

Long Term Debt

Equity Ratio

-- 0.01 0.01 0.01 0.01

Interest Coverage

Ratio

114.89 -- 84.74 165.93 238.39

Dividend Coverage

Ratio

-- -- -- -- --

Capital Gearing Ratio 10,295.54 651.29 15,138.09 739.90 813.83

Debt-Equity as of March‟12


Debt Equity Ratio -- 0.01 0.01 0.01 0.02

Debt - Equity

Debt

Equity

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 owner‟s fund forms a significant portion of Equity

share capital.

0

0.005

0.01

0.015

0.02

0.025

March'12 March'11 March'10 March'09 March'08

Debt-Equity Ratio

Series 1

HUL


Total Share

Capital

216.15 215.95 218.17 217.99 217.75

Equity share

capital

216.15 215.95 218.17 217.99 217.75

Share

Application

Money

0 0 0 0 0

Preference

Share

Capital

0 0 0 0 0

Reserves

and Surplus

3,296.11 2,417.30 2,364.68 1,842.85 1,220.82

Revaluation

Reserves

0.67 0.67 0.67 0.67 0.67

Net Worth 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

2,800.14 2,306.63 2,164.61 2,509.93 1,918.87

Preference

Dividend

-- -- -- -- --

Long Term 0.00 0.00 0.00 144.6 25.52

Debt

Ratios


Debt Equity Ratio -- -- -- 0.20 0.06

Long Term Debt

Equity Ratio

-- -- -- -- --

Interest Coverage

Ratio

2,636.53 11,243.63 395.13 116.28 83.09

Dividend Coverage

Ratio

-- -- -- -- --

Capital Gearing

Ratio

-- -- -- 14.25 56.37

Debt Equity March‟2012


Debt Equity Ratio -- -- -- 0.20 0.06

Debt - Equity

Debt

Equity

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.

0

0.05

0.1

0.15

0.2

0.25


Debt-Equity Ratio

Series 1

NESTLE

Dec '11 Dec '10 Dec '09 Dec '08 Dec '07

Total Share

Capital

96.42 96.42 96.42 96.42 96.42

Equity share

capital

96.42 96.42 96.42 96.42 96.42

Share

Application

Money

0 0 0 0 0

Preference

Share

Capital

0 0 0 0 0

Reserves

and Surplus

1,177.54 759.00 484.85 376.93 322.01

Revaluation

Reserves

0.67 0.67 0.67 0.67 0.67

Net Worth 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

1,067.93 961.55 818.66 655.00 534.08

Preference

Dividend

-- -- -- -- --

Long Term

Debt

0.84 0.00 0.00 .82 2.87

Ratios


Debt Equity Ratio 0.76 -- -- -- 0.01

Long Term Debt

Equity Ratio

-- -- -- -- --

Interest Coverage

Ratio

157.92 1,075.28 666.25 473.22 741.20

Dividend Coverage

Ratio

-- -- -- -- --

Capital Gearing

Ratio

1516.61 -- -- 577.25 144.28

Debt-Equity on Dec‟11

Debt - Equity

Debt

Equity


Debt Equity Ratio 0.76 -- -- -- 0.01

NESTLE Analysis

Observations from the ratios

0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

Dec'11 Dec'10 Dec'09 Dec'08 Dec'07

Debt-Equity Ratio

Series 1

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 owner‟s fund forms a significant portion of

Equity share capital, and it‟s 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% 1 4.5

5/20/2011 6/10/2011 Final 445% 1 4.45

8/3/2010 Bonus

1:1 1

5/21/2010 6/9/2010 Final 1000% 1 10

5/22/2009 7/13/2009 Final 370% 1 3.7

5/23/2008 7/16/2008 Final 350% 1 3.5

5/25/2007 7/16/2007 Final 310% 1 3.1

350 370

1000

445 450

49.45 50.06109.63 80.24 66.35


ITC

Dividend ratio Dividend payout

ITC (Including Interim dividends)


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

Dividend Payout Ratio 49.45 50.06 109.63 80.24 66.35

7.878.43

10.38

6.24

7.69

3.5 3.7

10

4.45 4.5


ITC

EPS DPS

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

Date

Effective

Date

Dividend

Type

Dividend

(%)

Face

Value

Dividend

Amount

10/18/2012 11/1/2012 Interim 1250% 1 12.5

5/1/2012 7/4/2012 Final 400% 1 4

10/17/2011 11/4/2011 Interim 350% 1 3.5

5/9/2011 7/8/2011 Final 350% 1 3.5

10/14/2010 11/1/2010 Interim 300% 1 3

5/25/2010 7/8/2010 Final 350% 1 3.5

10/15/2009 11/6/2009 Interim 300% 1 3

5/11/2009 6/12/2009 Final 400% 1 4

7/15/2008 8/4/2008 Interim 350% 1 3.5

2/13/2008 3/17/2008 Final 300% 1 3

10/23/2007 11/7/2007 Interim 300% 1 3

7/23/2007 8/7/2007 Interim 300% 1 3

2/20/2007 4/20/2007 Final 300% 1 3

HUL(Including Interim dividends)


EPS 8.12 11.47 10.09 10.68 12.45

DPS 9 7.5 6.5 6.5 7.5

Dividend ratio 650 700 650 700 1650


8.12

11.4710.09 10.68

12.45

9

7.56.5 6.5

7.5


HUL

EPS DPS

650 700 650 700

1650

131.8 76.47 75.2 71.2 69.99


HUL

Dividend ratio Dividend Payout Ratio

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

Nestle

Announcement

Date

Effective

Date

Dividend

Type

Dividend

(%)

Face

Value

Dividend

Amount

15-02-2013

25-02-

2013 Interim 125% 10 12.5

07-12-2012

12-12-

2012 Interim 180% 10 18

17-07-2012

01-08-

2012 Interim 180% 10 18

14-02-2012

21-03-

2012 Final 125% 10 12.5

24-11-2011

12-12-

2011 Interim 270% 10 27

18-02-2011

21-04-

2011 Final 215% 10 21.5

19-10-2010

03-11-

2010 Interim 270% 10 27

19-02-2010

23-04-

2010 Final 215% 10 21.5

15-10-2009

04-11-

2009 Interim 270% 10 27

09-03-2009 29-04- Final 210% 10 21

2009

31-10-2008

14-11-

2008 Interim 220% 10 22

04-03-2008

23-04-

2008 Final 110% 10 11

26-11-2007

13-12-

2007 Interim 240% 10 24

05-03-2007

20-03-

2007 Interim 80% 10 8

Nestle(Including Interim dividends)


EPS 42.92 55.39 67.94 84.91 99.73

DPS 33 42.5 48.5 48.5 48.5

Dividend ratio 320 330 480 485 485


42.9255.39

67.94

84.91

99.73

3342.5

48.5 48.5 48.5


Nestle

EPS DPS

320 330

480 485 485

89.5 89.76 83.52 66.54 56.47


Nestle

Dividend ratio Dividend Payout Ratio

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 Rs.(in Crores)

2012.00

Operating Revenue 8897.53

Operating Expenses 558.85

Other income 112.34

EBIT 8451.02 (Operating Revenue-Operating Expenses+Other

Income)

Profit on sale of fixed assets 511.01

Adjusted EBIT 7940.01

Tax rate

0.32445

Reinvestment Need

Capital Expenditure 2012 2011 2010 2009 2008 Normalised

capital

expenditure

Capital assets 18870.98 16052.47 14172.09 13912.63 12272.1

Tangible 18870.98 16052.47 14172.09 13912.63 12272.10

Intangible 0 0 0 0 0

Depreciation and

Amortization

698.51 655.99 608.71 549.41 438.46

Tangible 698.51 655.99 608.71 549.41 438.46

Intangible 0 0 0 0 0

work in progress 875.65 819.34 -706.17 2588.91 2041.90

Net Capital expenditure 2832.30 3358.61 -3094.92 2076.59 1293.15

Non cash Working capital(as

% of revenue)(Average)

2012 2011 2010 2009 2008 Average

Current assets(except cash) 15340.74 14993.26 13953.82 13793.83 6736.65

Inventories 5637.83 5637.83 5637.83 5637.83 4050.52

Sundry debtors 986.02 907.62 858.8 668.67 736.93

Other current assets 6764.35 6273.92 5528.03 5337.12 4940.79

Loans and advances 1952.54 2173.89 1929.16 2150.21 1949.2

Current Liabilities 11395.32 10592.28 8463.31 8450.99 7306.99

Non cash working capital 3945.42 4400.98 5490.51 5342.84 -570.34 19179.75

Change in non cash working

capital

-455.56 -1089.53 147.67 5913.18 1128.94

Revenue 9009.87 22420.91 18135.38 14385.79 63951.95

Weight 0.140884993 0.350589935 0.283578218 0.22494685

Weighted Average -64.18156721 -381.978252 41.87599541 1330.15124 925.8674181

Total Liabilities 18870.98 16052.47 14172.09 13912.63 12272.10

A) Free Cash Flow ((EBIT(1-tax rate)-(Capital expenditure - Depreciation)-

Change in non cash working capital))

EBIT(1-t) 5363.873756

Net Capital Expenditure 1293.15 0.06852559

Non cash working capital 925.8674181

Free Cash Flow 3144.861337

Calculation of Expected

Growth Rate

2012.00

Return on Capital 6.85%

Reinvestment Rate 45.16% Capital expenditure - Depreciation + change in non

cash working capital/EBIT(1-tax rate)

Growth rate 3.09% Reinvestment rate * Return on Capital

Industry

Average

we are assuming that with the current scenario in the

next 5 years company will get a stable growth rate

Return on Capital 15.00%

Reinvestment Rate 43.33%

Growth rate 6.50%

Year 2 to 5

Return on Capital(calculated) 0.13

Reinvestment Rate 65.00% We are assuming that the with the increasing capital

expenditure a growth rate of 9% is targetted keeping

the reinvestment rate constant

Growth rate as per S&P 8.32%

C) Cost Of Capital

Loans 79.09

Secured loan 1.77

Unsecured loan 77.32

Financial charges 0.33

Risk free rate 7.92% As obtained from the source

BETA 0.465814

Expected Return 20.71% As obtained from the source

Cost of Debt 71.52%

Cost of Equity 13.88% *Cost Of Equity=Rf+b(ER(M)-Rf)

Total share holder'sfund 781.84

Total debt 79.09

Total fund 860.93

Weightage of Equity 0.908134227

Weightage of Debt 0.091865773

Weighted Average Cost of capital 16.87% wacc= wightage of debt*cost of debt(1-t) + weightage

of equity*cost of equity

D) Asset Life

Year EBIT(1-t) Reinvestment FCF PV

0 5363.873756 2219.012418 3144.861337

1 5529.8486 2497.031781 3032.816773 2,594.96

2 5989.931954 3893.45577 2096.476184 2,096.48

3 6488.294293 4217.39129 2270.903002 2,270.90

4 7028.120378 4568.278245 2459.842132 2,459.84

5 7612.859993 4948.358995 2664.500998 2,664.50

6 8107.695893 5270.00233 2837.693562

Terminal Value 33384.63015 15309.6703

Firm Value 27,396.35

Add: Cash 247957.00

Less: Debt 79.09

Equity 2,75,274.26

Value of Equity 2,75,274.26

No. of shares ( 8,47,07,710 Equity

shares of Rs 10 each)

781.84243

Value per share 352.0840623

Current Market Price 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.

Corporate Finance Valuation

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