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STRATEGIC FINANCIAL ANALYSIS OF DIVERSIFIED AND UNDIVERSIFIED COMPANY

INTRODUCTION:

I have chosen two companies of which one is highly diversified and another

which is undiversified. Undiversified company which follows only one kind of business

which is BRITANNIA and another company which started their business by selling

tobacco and now they are in various business which is ITC. I have taken Itc sunfeast

to compare between diversified and undiversified company.

I have analyzed ratios of both the company and projected their cash flow and initial

investment and found out net present value and commented on these parameters toshow the difference between diversified and undiversified company.

Due to unavailability of separate annual report for ITC Sunfeast, I have taken whole Itc

annual report.

COMPANYS PROFILE:

ITC This company at first started their business by producing tobacco and now

they are one of the highly diversified company with many product lines like Hotels,Papers, Agri-business, Stationery, Fmcg etc. This company increased their net profit

from 2673.07 crores in 2005 to 4825.74 crores in 2009. It always shows an increasing

trend. Because this company is highly diversified they can reduce their risks by reducing

the loss of one component by increasing the profit of the other components.

BRITANNIA It is an biscuit company was started in year 1892 in a nondescript

house in Calcutta with an initial investment of Rs.295. Now the net profit of the company

stands up to 232.52 crores. Its average sales growth rate is 18.25% were as industry

growth rate of Fmcg is 15%. It has a high market value per share of 1650 rupees. Even

though they do not diversify their business they are doing very huge business In biscuit.Its a very old company and has created a huge brand loyalty.


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Financial ratio analysis:

TABLE No.1

Current Ratio ITC Current Ratio - Britannia

Year

CurrentAsset Rs.In Crores

CurrentLiabilityRs. InCrores Current Ratio Year

CurrentAsset Rs.In Crores

CurrentLiabilityRs. InCrores Current Ratio

2009 8161.11 4705.01 1.73 2009 553.65 437.54 1.27

2008 7019.27 4432.3 1.58 2008 577.49 370.31 1.56

2007 6289.72 3857.59 1.63 2007 382.61 323.03 1.18

INFERENCE:

From the analysis made in table#1, its clear that both diversified and undiversified company is strongenough to meet its obligation. Both the companies have enough resources to pay its bill over the next

12 months. 1.5:1 is said to be strong and good current ratio. Undiversified company Britannia were

unable to meet more than 1.5:1 for the year 2009 and 2007 as Itc dose for all the three years.

TABLE No.2

Quick Ratio - ITC Quick Ratio - Britannia

Quick Ratio = C.A - stock-Prepaid/ C.L Quick ass = C.A - stock-Prepaid/ C.L

Year

LiquidAssetRs. InCrores

CurrentLiabilityRs. InCrores Liquid Ratio Year

LiquidAssetRs. InCrores

CurrentLiabilityRs. InCrores Liquid Ratio

2009 3561.39 4705.01 0.76 2009 300.02 437.54 0.69

2008 2968.75 4432.3 0.67 2008 275.96 370.31 0.75

2007 1719.89 3857.59 0.45 2007 167.67 323.03 0.52

INFERENCE:

From table#2 we can find that both the companies will not be able to make the immediately. Both the

companies will not be in position to make any urgent payment immediately. It cannot honor it

commitment instantly, so the company has to depend upon help from the financial situation in the way

of overdraft etc quiet frequently. Since strong quick ratio is said to have a ratio of 1:1 both the

companies is not in a good position in term of quick ratio.


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Table No.3

Asset turnover ratio - ITC Asset turnover ratio - Britannia

Year

Net salesRs. InCrores

Fixed assetRs. InCrores

Ass turnoverRatio Year

Net salesRs. InCrores

Fixedasset Rs.In Crores

Ass turnoverRatio

2009 14985.51 10558.65 1.42 2009 3112.38 511.5 6.08

2008 14032.3 8959.7 1.57 2008 2587.86 453.18 5.71

2007 12313.83 7134.31 1.73 2007 2199.32 392.12 5.61

INFERENCE:

From table#3 we can find that britannia an undiversified company has outplayed Itc an diversified

company in term of asset turnover ratio. Britannia has utilized their fixed asset maximum to generatesales than Itc dose.

Table No.4

ROI - ITC ROI Britannia

Year

Operating

Profit Rs. InCrores

Capemployed

Rs. InCrores ROI Year

Operating

Profit Rs. InCrores

Capemployed

Rs. InCrores ROI

2009 4825.74 15433.02 31.27 2009 224.16 855.3 26.21

2008 4571.77 13188.7 34.66 2008 232.32 845.21 27.49

2007 3926.7 11034.9 35.58 2007 128.69 684.2 18.81

Inference:

From table#4 we can find that an highly diversified company Itc has better Roi than undiversified

Britannia, this is because they have more product since they are diversified so it is possible for them to

create more roi from different investment were as even though Britannia engaged in producing one

product line even they are able to show a better performance in term of Return on investment.


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Table No.5

Debt equity - ITC Debt equity - Britannia

Year

Long termdebt Rs. In

Crores

Shareholders

fund Rs. InCrores

Debt equityRatio Year

Long termdebt Rs. In

Crores

Shareholders

fund Rs. InCrores

Debt equityRatio

2009 177.55 13735.08 0.01 2009 25.17 824.54 0.03

2008 214.43 12057.67 0.02 2008 106.1 755.81 0.14

2007 200.88 10437.08 0.02 2007 4.78 614.82 0.01

INFERENCE:

From table#5 we can find that both the companies have very less leverage, so they would have very less

tax benefits of debt capital for Itc the debt ratio remains more or less same for the past three years

while for Britannia in the year 2008 there was a jump on debt component from 1% to 14% but in again

in 2009 it has come down to 3%.

Projection of sales growth:

Sales growth rate - Itc - Table # 6

Current year sales - Previous year sales/ Previous yearsales

Year Sale (Crores) Growth rate

2006 16236.42 21.52

2007 19519.99 20.22

2008 21467.38 9.97

2009 23247.84 8.29

Average salesgrowth rate 15%

In table#6 Average sales growth of diversified company Itc is found out by finding the sales growth of all

the years from 2006-2009 and divided by total no. of years which is 4 to compute average sales growth

which is 15%. This average sales growth is found to project sales growth for next five years.


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Sales growth rate - Britannia - Table # 7

Current year sales - Previous year sales/ Previous year sales

Year Sale (Crores) Growth rate

2006 1817.92 12.53

2007 2317.11 27.45

2008 2617.66 12.97

2009 3142.89 20.06

Average sales growthrate 18.25%

In table#7 Average sales growth rate of undiversified company Britannia is found out by finding the

sales growth from 2006-2009 and divided by four to find the average sales growth which is 18.25% to

Sales projection for next five years:

ITC - Average sales growth rate = 15%

BRITANNIA - Average sales growth rate =

18.25%

Sales Projection Table#8 Sales Projection Table# 9

(In Crores) (In Crores)

2010 26735.01 2010 3716.46

2011 30745.26 2011 4394.71

2012 35357.05 2012 5196.74

2013 40660.6 2013 5976.25

2014 46759.69 2014 6872.68

In table# 8 itc companies sales growth is projected with the help of average sales growth which was

found out in table#6 which is 15%, same way for Britannia company sales growth is projected for next

five years in Table# 9 with the help of average sales growth which is found out in table#7 which is

18.25%.


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Estimation of cash flow:

ITC - TABLE# 10

Estimation of cash flow growth rate (In Crores)

Year PAT Depreciation Pat+DepGrowthRate

2005 2191.4 312.87 2504.27

2006 2235.35 332.34 2567.69 2.53

2007 2699.97 362.92 3062.89 19.28

2008 3120.1 438.46 3558.56 16.18

2009 3807.19 549.41 4356.6 22.42

Average cash flow growth rate 15.10%

In table#10 average cash flow is found by finding out the cash flow growth rate from the year 2006-2009

and average cash flow is found out by dividing the total cash flow growth rate by total number of years

which is 15.10% this average cash flow growth rate is found to project cash flow for next five years and

for each year cash inflow is calculated by adding depreciation to the PAT.

ITC - TABLE# 11

Year

Cash flow of previous

year(In Crores)CashInflow

2010 4356.6+15.10% 5014.45

2011 5014.45+15.10% 5771.63

2012 5771.63+15.10% 6643.15

2013 6643.15+15.10% 7646.26

2014 7646.26+15.10% 8800.84

In table# 11 cash flow is projected for next five years with the help of average cash flow growth rate

which was found in table# 10 which is 15.10%. For 2010 cash flow is projected by adding the average

cash flow growth to the previous year cash flow which is 4356.6 for 2009 and computed 2010 cash

inflow which is 5014.45. In the same way the cash flow is projected till 2014.

BRITANNIA - TABLE# 12

Estimation of cash flow growth rate (In Crores)

Year PAT Depreciation Pat+Dep Growth Rate

2005 148.77 18.97 167.74

2006 146.43 21.72 168.15 0.24

2007 107.65 25.27 132.92 -20.95

2008 191 29.08 220.08 65.5

2009 180.4 33.46 213.86 -2.82

Average cash flow growth rate 10.50%


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In table#12 average cash flow growth rate is found out for the year 2006-2009 which is found out to be

10.50%. Cash flow is computed by adding depreciation to pat as it does for Itc Company which was

calculated in table #10. Using average cash flow growth rate cash flow is projected for next five years as

shown in table#13.

BRITANNIA - TABLE# 13

Year

Cash flow of previous

year(In Crores)CashInflow

2010 213.86+10.50% 236.32

2011 236.32+10.50% 261.13

2012 261.13+10.50% 288.54

2013 288.54+10.50% 318.83

2014 318.83+10.50% 352.3

In table# 13 cash flow is projected for next five years using the average cash inflow growth rate which

was found to be 10.50% and there by estimated cash flow till 2014.

Calculation of Net initial investment:

Calculation of Net investment for2010

Table # 14 ITC(in crores)

For 2009 it is 1.42

For 2010

Fixed ass ratio of 2009 =Projected sales/fixedasset

Net investment = 18827.48

In table#14 net investment of a diversified company Itc is found out by using the fixed asset ratio of

2009 which is 1.42 and by using the projected sales for 2010 which is 26735.01 these figures are

calculated by using the formulae Fixed asset ratio of2009 = projected sales of asset for 2010 divided by

fixed asset and it has been fount that net initial investment for the project has 18827.48 crores.

Calculation of Net investment for2010

Table # 15 Britannia (incrores)

For 2009 it is 6.08 For 2010

Fixed ass ratio of 2009 = Projected sales/fixed asset

Net investment = 611.25


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In table#15 net initial investments for Britannia for the year 2010 is found in the same way as we found

out for Itc in table#14 and it was calculated that the net initial investment is 611.25 crores.

Calculation ofCoc (Cost of capital):

Formulae used - Kd(1-t)*D/V+Ke*S/V

Calculation Kd (Cost of debt) = Total interest paid / Total debt

For calculating Kd value, year 2008 is taken in to account for both the companies, since 2009

gives very abnormal value and also average ofKd for the year 2005-2009 gives very high value, because

if we take average value or 2009 value Kd will be high than Ke and also for 2009 interest is to high

compared to the debt. Hence 2008 value is considered as shown in table# 16.

Kd Table # 16

ITC 2005 2006 2007 2008 2009

Interest 50.8 21.1 16.04 24.61 47.65Totaldebt 245.63 119.73 200.88 214.43 177.55

0.206815 0.17623 0.079849 0.114769 0.268375

Britannia 2005 2006 2007 2008 2009

Interest 2.1 5.09 8.9 9.73 16.01Totaldebt 6.14 9.36 4.78 106.1 25.17

0.34202 0.543803 1.861925 0.091706 0.636075


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Calculation of Ke (Cost of equity) formulae used = D0(1+G)/P0)+G. Dps / Mps formulae is not used since

it gives very less value for both the companies which is shown in table#17.

Table # 17

Ke Dps/Mps

Itc Britannia

2009 2009

Dps 3.7 40

Mps 250.85 1680.6

0.01475 0.023801

For calculating Coc formulae used is Kd(1-t)*D/V+Ke*S/V. were Kd is cost of debt. T is tax which is taken

as 30% which is .3. D is the total debt and S is the net worth and Total value (V) = D+S and for

calculating Ke G is calculated which is the growth rate, D0 which is dividend at the end of the year

P0 which is current market price of the share.

Itc Coc - Table# 18

Calculating G

Retention Ratio*Ret onequity 1-Div pay out*ret on equity

(1-0.42)*.25 0.145

Calculating Ke (D0(1+G)/P0)+G

(3.7(1+0.145)/250.85)+0.145

0.1618

Ke

Calculating Cost of debt Total int paid/tot debt

2008 24.61/214.43

Kd 0.11477

Calculating Coc Kd(1-t)*D/V+Ke*S/V

0.11(1-.3)*177.55/13912.63+0.16*13735.08/13912.63

15.89%


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In table # 20 total present values is found out to be 21281.20384 by using 16% Pv factor as we calculated

in Coc for Itc company.

Britannia NPV - Table# 21

Year ProjectedCash Inflow (Cr) Pv Factor @13% Pv

2010 236.32 0.88495575 209.1327434

2011 261.13 0.78314668 204.5030934

2012 288.54 0.69305016 199.9726938

2013 318.83 0.61331873 195.5444099

2014 352.3 0.54275994 191.2143255

Total PV 1000.367266

In table # 21 total present value is found to be 100.367266 by using 13% Pv factor as we calculated in

Coc for Britannia company.

Table # 22 Npv of Itc & Britannia (Crores)

Diversified Un-Diversified

Total Pv 21281.2 Total Pv 1000.36

Minus Nco 18827.48 Minus Nco 611.25

NPV 2453.72 NPV 389.11

Table # 22 clearly shows that both the companies project will make a profitable growth in future since

both the companies show a positive figure. But when compared to the value of Npv we can see thatdiversified company Itc have high figure compared to Britannia an undiversified company and also they

have many advantage compared to Britannia, because since it is diversified company they can reduce

the risk, and also if there are any loss in one particular sector they can offset with another sector thus how

they minimize the risks. This shows that the diversified company is in better position as indicated by the

higher Npv.

Table # 23 - Pay back period method ( crores)

ITC Cash InflowAmountrecovered Britannia Cash Inflow

Amountrecovered

Nco -18827.48 0 Nco -1000.36 0

2010 5014.45 5014.45 2010 236.32 236.32

2011 5771.63 10786.08 2011 261.13 497.452012 6643.15 17429.23 2012 288.54 785.99

2013 7646.26 25075.49 2013 318.83 1104.82

2014 8800.84 33876.33 2014 352.3 1457.12

In Table # 23 Npv is calculated by using pay back period method for both the companies with using

projected cash inflows to find out in how many years they are able to recover their initial investment and it


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is found out that one of the company Itc were able to recover their initial investment between 3rd

and 4th

year and another company Britannia which can able to recover in between 2nd

and 3rd

year. Which means

both the company itc and Britannia will recover their initial investment of 18827.48 and 611.25 in between

3rd

- 4th

year and 2nd

3rd

year respectively. To find the exact time of both the companies when they

recover their initial investment it is calculated as shown in Table#24.

Table# 24 - Pay back Period

ITC BRITANNIA

25075.49 - 17429.23 = 7646.26 785.99-497.45 = 288.54

76426.26/25075.49 = 0.3049 288.54/785.99 = 0.3671

0.3049*12 = 3.6591 0.3671*12 = 4.4052

3.6591 is rounded to = 4 months 4.4052 is rounded to = 4 months

Pay back period =3 year and 4months Pay back period =

2 year and 4months

In table# 24 exact pay back period is found out for both the companies. Since one of the company Itc

felled in between 3rd

and 4th

year to recover the initial investment, different between the cash flow of 4th

year and 3rd

year were taken and divided by the cash flow of 4th

year and multiplied by 12 to find exact

payback period for both the companies and thus it gave a payback period of 3year and 4 months to a

diversified company Itc and 2 year and 4 months to a undiversified company Britannia. Comparing pay

back period of both the company Britannia is better than Itc since they recover their initial investment in 2

years and 4 months were as for Itc the recovery period is 3 years and 4 months.

Table # 25 - Discounted Pay back period method (crores)

ITC PvAmountrecovered Britannia Pv

Amountrecovered

Nco -18827.48 0 Nco -1000.36 0

2010 4322.8017 4322.8017 2010 209.13274 209.1327

2011 4289.2613 8612.063 2011 204.50309 413.6358

2012 4255.985 12868.048 2012 199.97269 613.6085

2013 4222.9613 17091.009 2013 195.54441 809.1529

2014 4190.1945 21281.204 2014 191.21433 1000.367

Since calculation for pay back period did not give accurate information since it his calculated from cash

inflow, discounted pay back period method is used using Pv amount which is calculated @16% for Itc and

13% for Britannia as shown in the table 20 & 21 using that Pv discounted pay back perios is calculated as

shown in the table# 25 for which Itc resulted in recovering the initial investment in between 4th

and 5th


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year and Britannia in between 2rd and 3rd

year. To find the exact amount it is calculated as the same way

it his computed for payback period method as shown in the table #24. For computing the exact period it is

computed as shown in the below table# 26.

Table# 26 - Discounted Pay back Period

ITC BRITANNIA

21821.201-17091.009 = 4730.19 613.60-413.63 = 199.97

4730.19/21821.20 = 0.21677 199.97/613.60 = 0.3258

0.21677*12 = 2.6 0.3258*12 = 3.9096

2.6 is rounded to = 3 months 3.9096 is rounded to = 4 months

Discounted Pay back period =4 year and 3months

Discounted Pay backperiod =

2 year and 4months

From the above table# 26 we can find that Britannia is still better than Itc because their recovery period

under discounted pay back period method is only 2 years and 4 months were as Itc takes 4 years and 3

months to recover the initial investment.

Conclusion:

From the above computation of Initial investment, Npv and finding exact period to recover the

initial investment using pay back period method and discounted pay back period method we can infer that

Itc a diversified business plays a better performance than Britannia. Even though Britannia recover the

initial investment very soon in both the method than Itc does, but Itcs initial investment is extremely

higher than the undiversified company Britannia. For Itc company the initial investment is about 18827.48

Crores were as Britannia had initial investment of just 611.25 crores. Since Britannia is a undiversified

company their initial investment is too less compared to Itc. Comparing by Npv method Itcs Npv is very

high compared to Britannia, Itcs Npv is 2453.72 Crores were as Britannias Npv is just 389.11 crores. Itc

have high figure compared to Britannia an undiversified company and also they have many advantage

compared to Britannia, because since it is diversified company they can reduce the risk, and also if there

are any loss in one particular sector they can offset with another sector thus how they minimize the risks.This shows that the diversified company is in better position as indicated by the higher Npv.


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REFERENCES:

http://www.itcportal.com/

http://www.britannia.co.in/

www.moneycontrol.com

www.bseindia.com

Pandey I M, (2007 Reprint) FinancialManagementVikas Publishing House

. Chandra Prasanna (2008) FinancialManagement7th Ed., Tata McGraw Hill.

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