These objectives are to be achieved in order to remain one of the most valuable company‘s in the years to come. There are certain measures that are taken by the company for achieving these objectives. So, the objective of this study is to find out the various measures that are necessary for achieving the objectives and to find out and create a learning and growth model for the company for seven years based on this. This will help to understand whether the steps taken by the company is sufficient for continuing as the leader in the market.
Table 5.1 Showing the Objectives and the Measures
Objective Specific Measure
Sustain ITC‘s position as one of India‘s most valuable corporations
Financial Data analysis-ROI, ROCE, Dividend
Create value for the Indian economy Tax payment, CSR activities, awards and recognitions received for these initiatives Create value for its stakeholders Dividend payout
Analysis of the Objectives
I. The first two objectives are taken and analysed together as both these are quite similar and same measures are used to achieve them. The first two objectives are:
Objective 1 - To be one of India‘s most valuable and competitive corporations
Objective 2 -To maintain this position continuously over years to come and remain competent
In short, the main components of these objectives are:
a)Value Creation
81 b) To be highly competitive
c) To remain as the leader for years Value Creation
From an accounting perspective, profit can be defined as the amount by which revenues exceed costs. In the simplest cases, this profit definition may be good enough to define value creation as well. In order for value to be created, the business must return economic profits. If the business is profitable from an accounting perspective but not profitable enough to provide economic profits, the business will be worth less that the amount invested in it and value will have been destroyed. Similarly, if the business is profitable and provides a fair return on the amount invested but nothing more, the business will be worth an amount equal to that invested and value will not have been created. Value creation is a never-ending cycle.
Without Constant inspection, value will not be created at the maximum pace.
Value creation can be viewed from two angles. It can be either:
a) The Company respecting and giving value to its employees or b) The employees adding value to the Company or c) The Company creating and providing value for its customers
Value creation is studied and understood in terms of profitability of the company that is, whether the Company is making profit year after year and shows a steady growth.
Profitability is measured using:
1) Return on Investment (ROI)
2) Return on Capital Employed (ROCE) Return on Investment
A performance measure used to evaluate the efficiency of an investment or to compare the efficiency of a number of different investments. To calculate ROI, the benefit (return) of an investment is divided by the cost of the investment; the result is expressed as a percentage or a ratio. Return on Investment (ROI) is also called the rate of return (ROR) and is a measure of the performance of any investment. It is the ratio between the financial benefit or loss of an investment and the amount of money invested.
82 The return on investment formula:
ROI= (Gain from Investment – Cost of Investment) Cost of Investment
Return on investment is a very popular metric because of its versatility and simplicity.
That is, if an investment does not have a positive ROI, or if there are other opportunities with a higher ROI, then the investment should be not be undertaken. Non-financial factors like innovation, people and ideas are difficult to quantify, rarely acknowledged in accounting methods and not adequately measured, managed or reported on by organisations. However, these are some of the critical sources of value that can be utilised by companies to improve their competitive advantage.
Return on Investment of ITC shows a growing trend, which points towards greater profitability of the Company. The gross income of the Company is also growing year after year. The following graph shows the growing trend of the Company.
The gross income has increased tremendously from 2001 – 2010. The gross income during the year 2009-10 is Rs. 26863 Crores.
Figure 5.1 Showing the ROI of the Company
83 Return on Capital Employed
ROCE compares earnings with capital invested in the company. It is similar to Return on Assets (ROA), but takes into account sources of financing. It is a ratio that indicates the efficiency and profitability of a company's capital investments.
The formula for calculating ROCE is:
ROCE = EBIT Capital Employed
ROCE should always be higher than the rate at which the company borrows, otherwise any increase in borrowing will reduce shareholders' earnings.
Figure 5.2 Showing the ROCE of the Company
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The growth of a Company is determined by looking at its sales and the earnings growth rate. The following table shows the sales and the PAT of the Company for the five years:
Table 5.2 Showing Sales and Profit for the Years 2006-2010 (Rs. in Crores)
Year 2010 2009 2008 2007 2006
Sales 18,567.45 14,985.81 14,032.20 12,313.83 9,798.33 Profit After Tax 4,061.00 3,263.59 3,120.10 2,699.97 2,235.35
The financial health of a company is dependent on a combination of profitability, short-term liquidity and long term liquidity. Companies, which are profitable, but have poor short term or long term liquidity measures, do not survive the troughs of the trade cycle. Also firms, which are not profitable but are cash rich, do not survive in the long term either. Such companies are taken over for their cash flow or by others who believe that they can improve the profitability of the business. Thus, those companies that do succeed and survive over the long term have a well-rounded financial profile, and perform well in all aspects of financial analysis. Profitability ratios reflect the business environment of the time. The profitability ratios of the Company are given in the following table.
Table 5.3 Showing the Key Profitability Ratios
Return on Total Assets (ROTA) 22.55%
Return on Capital Employed (ROCE) 28.76%
Net Profit Margin 21.30%
The Company‘s profitability ratios show that the Company‘s position in the industry is quite strong and has the possibility of further growth over the years to come.
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Table 5.4 Sowing the Company’s Performance against its Competitors in the Cigarette Segment for the Financial Year 2009-10:
Company Sales (Rs
cr.)
PAT (Rs cr.)
Market Cap (Rs cr.)
ITC Ltd. 18,567.45 4,061.00 114,537.58
Godfrey Philips India Ltd. 1,119.84 108.90 1,928.25 VST Industries Ltd. 470.54 62.05 857.88
Golden Tobacco Ltd. 86.82 0.25 179.08
RTCL Ltd. 1.20 0.16 5.39
This shows that the Company is way ahead of its competitors in terms of sales as well as profit. ITC alone accounts for 60% volume market share and 70% by value of all filter cigarettes in India. Earlier the tobacco business contributed to 100% of the Company‘s revenue. It was completely dependent on the income from tobacco business. But after the diversification of the Company into various other sectors, the dependence on the tobacco revenue has decreased greatly over the years. It has thus slowly overcome its weakness of complete dependence on the cigarette revenue.
The next objective is regarding serving the Indian economy. The objective is:
Objective 3 - To serve the Indian economy through creating value
ITC is a responsible citizen that gives great importance to serving the economy and making it better. It is committed to protecting the environment in which it operates. It also works for the development of the community and also to providing education for the children. As a responsible citizen, it works towards the betterment of the Indian economy.
ITC's aspiration to create enduring value for the nation provides its employees the inspirational motive force to sustain growing shareholder value. This compelling vision is called "A commitment beyond the market". 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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ITC, as a truly ‗Indian‘ company, whilst recognising the need to create a fair reward for shareholders, goes the extra mile, in partnership with other participants in the economy, to create conducive conditions for international competitiveness towards maximising value for the Indian society.
The depth of ITC's commitment to the Indian economy is manifest in the way its diverse businesses contribute to strengthening their related value chains – through R&D, extension services, IT-enablement and the social and economic empowerment of the marginalised. The most telling example of this commitment is ITC's path breaking initiative in building sustainable rural partnerships, which carry the potential to transform the landscape of rural India and the lives of our rural population.
ITC's "commitment beyond the market" encompasses the larger social canvas to include the preservation of India's cultural heritage. ITC is particularly proud of its pioneering contribution in the area of Hindustani classical music.
As a concerned corporate citizen, ITC is committed to the highest standards in the key areas of Environment, Occupational Health and Safety (EHS). ITC strives to sustain and continuously improve its EHS standards to match the finest international benchmarks.
The special feature that follows captures ITC's inspired commitment to create and sustain a model that harmonises service to society with enhancing shareholder value.
The measures for achieving this objective are:
1) Tax payment
2) CSR activities, awards and recognitions received for these initiatives Tax payment
The tax paid by the Company helps in the growth of the Indian economy. The tax payment of the Company has been increasing over the years. The tax paid by the Company during the years 2007, 2880 2009 and 2010 are as follows:
Tax paid by the Company for the year 2007 – Rs.1226.73 Crores Tax paid by the Company for the year 2008 – Rs.1451.67 Crores
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Tax paid by the Company for the year 2009 – Rs. 1562.15 Crores Tax paid by the Company for the year 2010 – Rs. 1954.31 Crores
From the above data it is clear that the tax paid by the Company is increasing over the years.
CSR Activities
The Company is creating value to the Indian economy through its various CSR initiatives. There are a number of CSR initiatives that the Company has taken up and for this the Company has won numerous awards as well. Corporate Strategies are designed to create enduring value for the nation and the shareholder, through leadership in each business and the attainment of world-class competitive capabilities across the value chain.
Being a socially responsible corporate citizen, ITC endeavours to create value for the Indian society in multiple ways, one of them being ―Preservation of India‖ rich culture heritage. ITC has made significant contribution to the promotion of Indian classical music, theatre, art and cuisine.
As a responsible corporate citizen, ITC promotes art, culture and education. Besides working for the protection and enrichment of the environment and over all social development, ITC also looks into:
i) Community development.
ii) Education.
iii) Protecting the environment.
ITC‘s CSR initiatives include:
A) Environmental
i) ITC has been Carbon Positive 3 years in a row.
ii)Water Positive 6years in a row.
iii)100% solid waste recycling
88 B) Social
i)ITC's businesses generate livelihoods for over 5 million people.
ii) ITC‘s globally recognised e-Choupal initiative is the world's largest rural digital infrastructure benefiting over 4 million farming families. The e-choupal model has been specifically designed to tackle the challenges posed by the unique features of Indian agriculture, characterized by fragmented farms, weak infrastructure and the involvement of numerous intermediaries, among others.
iii) ITC‘s Social and Farm Forestry initiative has greened over 80,000 hectares creating an estimated 35 million person days of employment among the disadvantaged.
iv) ITC‘s Watershed Development Initiative brings precious water to nearly 35,000 hectares of dry lands and moisture-stressed areas.
v) ITC‘s Sustainable Community Development initiatives include women empowerment, supplementary education, integrated animal husbandry programmes.
vi) The first ITC Sangeet Sammelan showcasing the best in Indian classical music was held in Delhi in 1971.
For its CSR initiatives, the Company has won several prestigious awards. These include:
a) ITC has won the Golden Peacock Awards for 'Corporate Social Responsibility (Asia)' in 2007, the Award for ‗CSR in Emerging Economies 2005‘ and ‗Excellence in Corporate Governance' in the same year.
b) The Best Corporate Social Responsibility Practice Award 2008 jointly instituted by the Bombay Stock Exchange, Times Foundation and the NASSCOM Foundation.
c) ITC is the first Indian company and the second in the world to win the prestigious Development Gateway Award. It won the Award for the year 2005 for its e-Choupal initiative which has achieved the scale of a movement in rural India. The Development Gateway Award recognizes ITC's e-Choupal as the most exemplary contribution in the field of Information and Communication Technologies (ICT) for development during the last 10 years. ITC e-Choupal won the Award for the importance of its contribution to development
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priorities like poverty reduction, its scale and reliability, sustainability and transparency. The company also won the award in 2004 for its e-Choupal initiative.
d) ITC has won the inaugural 'World Business Award', the worldwide business award recognising companies who have made significant efforts to create sustainable livelihood opportunities and enduring wealth in developing countries.
e) The Corporate Social Responsibility Crown Award for Water Practices from UNESCO and Water Digest for its distinguished work carried out in the water sector in India. ITC also received the National Award for Excellence in Water Management 2007 in the 'beyond the fence' category from the CII Sohrabji Godrej Green Business Centre for its leadership role in implementing water and watershed management practices.
f) The watershed programme also won the Asian CSR Award 2007 for Environmental Excellence given by the Asian Institute of Management.
The CSR activities of the Company and the various awards that the Company has won for these activities clearly indicate towards the fact that the Company is creating value for the Indian economy. This shows that the Company‘s objective of creating value for the Indian economy is necessarily undertaken and fulfilled.
Objective 4: To create value for the stakeholders of the organization and also to be loyal to