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Company Information

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ITC LTD.

24 September 2021 | 12:00

Industry >> Cigarettes & Tobacco Products

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ISIN No INE154A01025 52Week High 246 Book Value (Rs.) 47.60 Face Value 1.00
Bookclosure 11/06/2021 52Week Low 163 EPS 10.68 P/E 22.32
Market Cap. 293778.18 Cr. P/BV 5.01 Div Yield (%) 4.51 Market Lot 1.00
Security Type Other

NOTES TO ACCOUNTS

You can view the entire text of Notes to accounts of the company for the latest year
Year End :2021-03 

(ii) Expenditure incurred under Section 135 of the Companies Act, 2013 on Corporate Social Responsibility (CSR) activities -' 353.46 Crores (2020 - ' 326.49 Crores) comprising employee benefits expense of ' 14.96 Crores (2020 - ' 9.69 Crores) and other expenses of ' 338.50 Crores (2020 - ' 316.80 Crores), of which ' 11.94 Crores (2020 - ' 26.66 Crores) is accrued for payment as on 31st March, 2021. Such CSR expenditure of ' 353.46 Crores (2020 - ' 326.49 Crores) excludes ' 5.72 Crores (2020 - ' 11.83 Crores) being the excess of expenditure of salaries of CSR personnel and administrative expenses over the limit of 5% of total CSR expenditure laid down under Rule 7(1) of the Companies (Corporate Social Responsibility Policy) Amendment Rules, 2021 for such expenses.

(iii) Research and Development expenses for the year amount to ' 131.22 Crores (2020 - ' 141.55 Crores).

(iv) Contingent liabilities and commitments:

(a) Contingent liabilities

Claims against the Company not acknowledged as debts ' 884.97 Crores (2020 - ' 735.31 Crores), including interest

on claims, where applicable, estimated to be ' 257.55 Crores (2020 - ' 233.50 Crores). These comprise:

• Excise duty, VAT / sales taxes, GST and other indirect taxes claims disputed by the Company relating to issues of applicability and classification aggregating ' 608.26 Crores (2020 - ' 573.99 Crores), including interest on claims, where applicable, estimated to be ' 245.88 Crores (2020 - ' 222.46 Crores).

• Local Authority taxes / cess / royalty on property, utilities, etc. claims disputed by the Company relating to issues of applicability and determination aggregating ' 231.50 Crores (2020 - ' 117.72 Crores), including interest on claims, where applicable, estimated to be ' 5.40 Crores (2020 - ' 5.29 Crores).

• Third party claims arising from disputes relating to contracts aggregating ' 32.41 Crores (2020 - ' 32.28 Crores), including interest on claims, where applicable, estimated to be ' 0.88 Crore (2020 - ' 0.75 Crore).

• Other matters ' 12.80 Crores (2020 - ' 11.32 Crores), including interest on other matters, where applicable, estimated to be ' 5.39 Crores (2020 - ' 5.00 Crores).

It is not practicable for the Company to estimate the closure of these issues and the consequential timings of cash flows, if any, in respect of the above.

• Estimated amount of contracts remaining to be executed on capital accounts and not provided for ' 1398.30 Crores (2020 - ' 1563.33 Crores).

• Uncalled liability on investments partly paid is ' 55.88 Crores (2020 - ' 59.10 Crores).

(v) (a) Defined Benefit Plans / Long Term Compensated Absences:-Description of Plans

The Company makes contributions to both Defined Benefit and Defined Contribution Plans for qualifying employees. These Plans are administered through approved Trusts, which operate in accordance with the Trust Deeds, Rules and applicable Statutes. The concerned Trusts are managed by Trustees who provide strategic guidance with regard to the management of their investments and liabilities and also periodically review their performance.

Provident Fund, Pension and Gratuity Benefits are funded and Leave Encashment Benefits are unfunded in nature. The Defined Benefit Pension Plans are based on employees' pensionable remuneration and length of service. Under the Provident Fund, Gratuity and Leave Encashment Schemes, employees are entitled to receive lump sum benefits.

The liabilities arising in the Defined Benefit Schemes are determined in accordance with the advice of independent, professionally qualified actuaries, using the projected unit credit method. The Company makes regular contributions to these Employee Benefit Plans. Additional contributions are made to these plans as and when required based on actuarial valuation. Some Group companies also participate in these Plans. These participating Group companies make contributions to the Plans for their respective employees on a uniform basis and each entity ascertains their obligation through actuarial valuation. The net Defined Benefit cost is recognised by these companies in their respective Financial Statements.

Risk Management

The Defined Benefit Plans expose the Company to risk of actuarial deficit arising out of investment risk, interest rate risk and salary cost inflation risk.

Investment Risks: This may arise from volatility in asset values due to market fluctuations and impairment of assets due to credit losses. These Plans primarily invest in debt instruments such as Government securities and highly rated corporate bonds - the valuation of which is inversely proportional to the interest rate movements.

Interest Rate Risk: The present value of Defined Benefit Plans liability is determined using the discount rate based on the market yields prevailing at the end of reporting period on Government bonds. A decrease in yields will increase the fund liabilities and vice-versa.

Salary Cost Inflation Risk: The present value of the Defined Benefit Plan liability is calculated with reference to the future salaries of participants under the Plan. Increase in salary might lead to higher liabilities.

These Plans have a relatively balanced mix of investments in order to manage the above risks. The investment strategy is designed based on the interest rate scenario, liquidity needs of the Plans and pattern of investment as prescribed under various statutes.

The Trustees regularly monitor the funding and investments of these Plans. Risk mitigation systems are in place to ensure that the health of the portfolio is regularly reviewed and investments do not pose any significant risk of impairment. Periodic audits are conducted to ensure adequacy of internal controls. Pension obligation of the employees is secured by purchasing annuities thereby de-risking the Plans from future payment obligation.

(b) Amounts towards Defined Contribution Plans have been recognised under “Contribution to Provident and other funds” in Note 23: ' 100.96 Crores (2020 - ' 114.30 Crores).

(vi) Transactions with subsidiaries of TMI's [Tobacco Manufacturers (India) Limited] ultimate parent company comprise Sale of goods / services ' 758.00 Crores (2020 - ' 696.30 Crores), Dividend payments ' 971.52 Crores (2020 - ' 368.73 Crores), Others ' 28.58 Crores (2020 - ' 27.33 Crores).

(vii) Leases:

As a Lessee

The Company's significant leasing arrangements are in respect of operating leases for land, buildings (comprising licensed properties, residential premises, office premises, stores, warehouses etc.) and plant & equipment. These arrangements generally range between 2 years and 10 years, except for certain land and building leases where the lease term ranges up to 99 years. The lease arrangements have extension / termination options exercisable by either parties which may make the assessment of lease term uncertain. While determining the lease term, the Management considers all facts and circumstances that create an economic incentive to exercise an extension option, or not exercise a termination option.

The amount of ROU Assets and Lease Liabilities recognised in the Balance Sheet are disclosed in Note 3G and Note 15 respectively. The total cash outflow for leases for the year is ' 373.38 Crores (2020 - ' 424.06 Crores) [including payments of ' 295.00 Crores (2020 - ' 346.79 Crores) in respect of short-term / low-value leases and variable lease payments of ' 0.69 Crore (2020 - ' 4.32 Crores)].

The sensitivity of variable lease payments and effect of extension / termination options not included in measurement of lease liabilities is not material.

(viii) Under the terms of the Joint Venture Agreement (JVA), Logix Developers Private Limited (LDPL) was to develop a luxury hotel-cum-service apartment complex. However, Logix Estates Private Limited, Noida, the JV partner communicated its intention to explore alternative development plans to which the Company reiterated that it was committed only to the project as envisaged in the JVA. The JV partner refused to progress the project and instead expressed its intent to exit the JV by selling its stake to the Company and subsequently proposed that both parties should find a third party to sell the entire shareholding in LDPL. The resultant deadlock has stalled the project. The Company's petition that the affairs of the JV are being conducted in a manner that is prejudicial to the interest of the Company and the JV entity, as also a petition for winding up of LDPL filed by Logix Estates, are currently before the Hon'ble National Company Law Tribunal. The financial statements of LDPL for the year ended 31st March, 2021 are yet to be approved by its Board of Directors.

(ix) The Company on 27th July, 2020, acquired, in an all cash deal, 100% of the equity share capital of Sunrise Foods Private Limited (Sunrise), an Indian company primarily engaged in the business of spices under the trademark ‘Sunrise'. The Scheme of Amalgamation of Sunrise with the Company was sanctioned by the Hon'ble National Company Law Tribunal, Kolkata Bench, vide order dated 26th February, 2021 and became effective from 1st April, 2021, with the Appointed Date being 27th July, 2020.

Further, pursuant to the amalgamation of Sunrise, its wholly owned subsidiaries viz., Hobbits International Foods Private Limited and Sunrise Sheetgrah Private Limited, have become direct wholly owned subsidiaries of the Company with effect from the Appointed Date. Necessary petition for amalgamation of these subsidiaries with the Company is pending before the Hon'ble National Company Law Tribunal, Allahabad Bench.

The amalgamation has been accounted for using the acquisition method prescribed under Ind AS 103 - ‘Business Combinations', and accordingly, the identifiable assets (both tangible and intangible) acquired and liabilities assumed are recorded at their acquisition date fair values as determined by an independent valuer. Excess of purchase consideration over the fair value of identified assets acquired and liabilities assumed has been recognised as Goodwill.

The total purchase consideration (including fair value of contingent consideration of ' 134.93 Crores) is ' 2340.10 Crores. The fair value of identifiable assets acquired and liabilities assumed on acquisition are as follows:

Particulars

' in Crores

Tangible assets

69.72

Right of use assets

9.99

Other intangible assets

1508.61

Investments in subsidiaries

12.96

Trade receivables

28.32

Other assets (net)

133.30

Sub Total

1762.90

Goodwill #

577.20

Total

2340.10

# Goodwill is attributed to the potential of growing the brand nationally, assembled workforce, expected operating synergies etc. Goodwill has not been considered as a depreciable asset for income tax purpose.

As a part of the acquisition, contingent consideration of an amount not exceeding ' 150.00 Crores (undiscounted value) i payable to the Sellers of Sunrise in two annual tranches on the business achieving mutually agreed operational and financia milestones. The fair value of contingent consideration as on 31st March, 2021 is ' 139.51 Crores.

(x) The Company on 17th September, 2020 acquired, in the second tranche, 1964 Compulsorily Convertible Preference Share of ' 10/- each of Delectable Technologies Private Limited (Delectable), consequent to which the Company's shareholding ii Delectable aggregated 20.06% of its share capital on a fully diluted basis. Accordingly, Delectable has become an associate c

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(xiii) Micro, Small and Medium scale business entities:

A sum of ' 76.92 Crores is payable to Micro and Small Enterprises as at 31st March, 2021 (2020 - ' 51.35 Crores). The above amount comprises ' 59.34 Crores (2020 - ' 34.67 Crores) on account of trade payables and ' 17.58 Crores (2020 - ' 16.68 Crores) on account of liabilities other than trade payables. There are no Micro, Small and Medium Enterprises to whom the Company owes dues, which are outstanding for more than 45 days during the year and also as at 31st March, 2021. This information as required to be disclosed under the Micro, Small and Medium Enterprises Development Act, 2006 has been determined to the extent such parties have been identified on the basis of information available with the Company.

(xiv) The financial statements were approved for issue by the Board of Directors on 1st June, 2021.

3. Financial risk management objectives

The Company has a system-based approach to risk management, anchored to policies and procedures and internal financial controls aimed at ensuring early identification, evaluation and management of key financial risks (such as market risk, credit risk and liquidity risk) that may arise as a consequence of its business operations as well as its investing and financing activities. Accordingly, the Company's risk management framework has the objective of ensuring that such risks are managed within acceptable and approved risk parameters in a disciplined and consistent manner and in compliance with the applicable regulations. It also seeks to drive accountability in this regard.

Liquidity Risk

The Company's Current assets aggregate ' 31815.42 Crores (2020 - ' 36506.91 Crores) including Current Investments, Cash and cash equivalents and Other Bank Balances of ' 18048.21 Crores (2020 - ' 24018.29 Crores) against an aggregate Current liability of ' 10174.17 Crores (2020 - ' 9089.41 Crores). Other Non-current liabilities other than lease liabilities due between one year to three years amounted to ' 162.10 Crores (2020 - ' 16.38 Crores) and Other Non-current liabilities due after three years amounted to ' 82.53 Crores (2020 - ' 79.72 Crores) on the reporting date. The maturity analysis of undiscounted lease liabilities are disclosed under Note 27(vii).

Further, while the Company's total equity stands at ' 59004.58 Crores (2020 - ' 64029.16 Crores), it has non-current borrowings of ' 5.28 Crores (2020 - ' 5.63 Crores). In such circumstances, liquidity risk or the risk that the Company may not be able to settle or meet its obligations as they become due does not exist.

Market Risks

The Company is not an active investor in equity markets; it holds certain investments in equity for long term value accretion which are accordingly measured at fair value through Other Comprehensive Income. The value of investments in such equity instruments as at 31st March, 2021 is ' 827.25 Crores (2020 - ' 581.71 Crores). Accordingly, fair value fluctuations arising from market volatility is recognised in Other Comprehensive Income.

As the Company is virtually debt-free and its deferred payment liabilities do not carry interest, the exposure to interest rate risk from the perspective of Financial Liabilities is negligible. Further, treasury activities, focused on managing investments in debt instruments, are centralised and administered under a set of approved policies and procedures guided by the tenets of safety, liquidity and returns. This ensures that investments are made within acceptable risk parameters after due evaluation.

The Company's investments are predominantly held in bonds / debentures, fixed deposits and debt mutual funds. Mark to market movements in respect of the Company's investments in bonds / debentures that are held at amortised cost are temporary and get recouped through fixed coupon accruals. Other investments in bonds / debentures are fair valued through the Statement of

Profit and Loss to recognise market volatility, which is not considered to be significant. Fixed deposits are held with highly ratec banks and companies and have a short tenure and are not subject to interest rate volatility.

The Company also invests in mutual fund schemes of leading fund houses. Such investments are susceptible to market price risks that arise mainly from changes in interest rate which may impact the return and value of such investments. However, given the relatively short tenure of underlying portfolio of the mutual fund schemes in which the Company has invested, such price risk is not significant.

For select agricultural commodities primarily held for trading, futures contracts are used to hedge price risks till positions in the physical market are matched. Such activities are managed by the business team within an approved policy framework. The carrying value of inventories is adjusted to the extent of fair value movement of the risk being hedged. Such hedges are generally for short time horizons and recognised in profit or loss within the crop cycle and are managed by the business within the approved policy framework. Accordingly, the Company's net exposure to commodity price risk is considered to be insignificant.

Foreign currency risk

The Company undertakes transactions denominated in foreign currency (mainly US Dollar, Pound Sterling, Euro and Japanese Yen) which are subject to the risk of exchange rate fluctuations. Financial assets and liabilities denominated in foreign currency including the Company's net investments in foreign operations (with a functional currency other than Indian Rupee), are also subject to reinstatement risks.

The Company has established risk management policies to hedge the volatility arising from exchange rate fluctuations in respect of firm commitments and highly probable forecast transactions, through foreign exchange forward and options contracts. The proportion of forecast transactions that are to be hedged is decided based on the size of the forecast transaction and market conditions. As the counterparty for such transactions are highly rated banks, the risk of their non-performance is considered to be insignificant.

The Company uses derivatives to hedge its exposure to foreign exchange rate fluctuations. Where such derivatives are not designated under hedge accounting, changes in the fair value of such hedges are recognised in the Statement of Profit and Loss.

The Company may also designate certain hedges, usually for large transactions, as a cash flow hedge under hedge accounting, with the objective of shielding the exposure from variability in cash flows. The currency, amount and tenure of such hedges are generally matched to the underlying transaction(s). Changes in the fair value of the effective portion of cash flow hedges are recognised as cash flow hedging reserve in Other Comprehensive Income. While the probability of such hedges becoming ineffective is very low, the ineffective portion, if any, is immediately recognised in the Statement of Profit and Loss.

For every percentage point increase / decrease in the underlying exchange rate of the outstanding foreign currency denominated assets and liabilities, including derivative contracts, holding all other variables constant, the profit before tax for the year ended 31st March, 2021 would decrease / increase by ' 6.16 Crores (2020 - ' 2.51 Crores) and other equity as at 31st March, 2021 would decrease / increase by ' 5.76 Crores (2020 - ' 6.93 Crores) on a pre-tax basis.

Credit Risk

Company's deployment in debt instruments are primarily in fixed deposits with highly rated banks and companies, bonds issued by government institutions, public sector undertakings and certificate of deposits issued by highly rated banks and financial institutions. Of this, investments that are held at amortised cost stood at ' 13561.33 Crores (2020 - ' 17093.80 Crores). With respect to the Company's investing activities, counter parties are shortlisted and exposure limits determined on the basis of their credit rating (by independent agencies), financial statements and other relevant information. As these counter parties are Government institutions / public sector undertakings with investment grade credit ratings and taking into account the experience of the Company over time, the counter party risk attached to such assets is considered to be insignificant.

The Company's customer base is large and diverse limiting the risk arising out of credit concentration. Further, credit is extended in business interest in accordance with guidelines issued centrally and business-specific credit policies that are consistent with such guidelines. Exceptions are managed and approved by appropriate authorities, after due consideration of the counterparty's credentials and financial capacity, trade practices and prevailing business and economic conditions. The Company's exposure to trade receivables on the reporting date, net of expected loss provisions, stood at ' 2090.35 Crores (2020 - ' 2092.00 Crores).

Fair value hierarchy

Fair value of the financial instruments is classified in various fair value hierarchies based on the following three levels:

Level 1: Quoted prices (unadjusted) in active market for identical assets or liabilities.

Level 2: Inputs other than quoted price included within Level 1 that are observable for the asset or liability, either directly (i.e. as prices) or indirectly (i.e. derived from prices).

The fair value of financial instruments that are not traded in an active market is determined using market approach and valuation techniques which maximize the use of observable market data and rely as little as possible on entity-specific estimates. If significant inputs required to fair value an instrument are observable, the instrument is included in Level 2.

Derivatives are valued using valuation techniques with market observable inputs such as foreign exchange spot rates and forward rates at the end of the reporting period, yield curves, risk free rate of returns, volatility etc., as applicable.

Level 3: Inputs for the assets or liabilities that are not based on observable market data (unobservable inputs).

If one or more of the significant inputs is not based on observable market data, the fair value is determined using generally accepted pricing models based on a discounted cash flow analysis, with the most significant inputs being the discount rate that reflects the credit risk of counterparty.

The fair value of trade receivables, trade payables and other current financial assets and liabilities is considered to be equal to the carrying amounts of these items due to their short-term nature. Where such items are non-current in nature, the same has been classified as Level 3 and fair value determined using discounted cash flow basis. Similarly, unquoted equity instruments where most recent information to measure fair value is insufficient, or if there is a wide range of possible fair value measurements, cost has been considered as best estimate of fair value and has been excluded in the fair value measurement disclosed above.

There has been no change in the valuation methodology for Level 3 inputs during the year. The Company has not classified any material financial instruments under Level 3 of the fair value hierarchy. There were no transfers between Level 1 and Level 2 during the year.