AFM FINAL PROJECT-2

8/8/2019 AFM FINAL PROJECT-2

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Accounting for Managers

PROJECT ON

Analysis of Financial statements for Comparison

Sector - FMCG

Companies taken- Hindustan Unilever Limited(lead company)

Colgate Palmolive

Marico

Basis of analysis- Financial ratios

Section-B

Submitted by

Abhishek kumar deo-57

Krishna kaushal-77

Kumar Raunak-79

Nagendra bandaru-80

Sandeep rajbhushan-97


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TABLE OF CONTENT

Page no.

Executive summary................................................... 3

FMCG Sector overview..............................................4-8

HUL Financial analysis...............................................9-16

Comparative analysis...............................................17-20

HUL Dupont analysis................................................21-22

Annexure attached- Financial statements and ratios of all the

three companies.


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Executive summary

The project report analyses three leading companies in the FMCG sector inIndia in terms of their financial performance over the last two to three years.

These are Hindustan unilever limited, which is the lead company or the

industry leader ,Colgate Palmolive and Marico . First the general overview of

the FMCG sector in the country is shown to point towards immense growth

and potential in this sector with rising disposable income in both rural and

urban areas. The lead company has been separately analysed for its financial

performance over the last three years,using ratio and graphical analysis. Then

the comparison is done with other two companies using ratio analysis . Then

the exhaustive dupont analysis of the leader HUL is done to find out its

financial strengths and weaknesses. The finding points towards strong

performance of all the three companies but certain fine prints need to be

observed which basically point towards the fact that although HUL might have

performed well on some account its performance does not compare well with

the other two companies. The basic reason behind this is that HUL is a

behemoth with a wide product portfolio so its difficult for the company to

maintain financial efficiency while dealing with so many not good performing

products, whereas the other two companies are more nimble and smaller in

size with a limited product portfolio so its rather comfortable for them to

maintain a decent profitability although the volume of profits and revenue may

not match upto that of HUL. Further the dupont analysis of HUL revealed that

although the return on asset and equity multiplier is very sound , a high level of

asset turnover indicates not commensurate with net sales growth indicates

low fixed asset base which is worrisome for the company with rising

depreciation write-offs.


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Overview of FMCG Sector

WE regularly talk about things like butter, potato chips, toothpastes, razors,

household care products, packaged food and beverages, etc. But do we know under

which category these things come? They are called FMCGs. FMCG is an acronym for

Fast Moving Consumer Goods , which refer to things that we buy from local

supermarkets on daily basis, the things that have high turnover and are relatively

cheaper.

FMCG Products and Categories

- Personal Care, Oral Care, Hair Care, Skin Care, Personal Wash (soaps);

- Cosmetics and toiletries, deodorants, perfumes, feminine hygiene, paper products;

- Household care fabric wash including laundry soaps and synthetic detergents;

household cleaners, such as dish/utensil cleaners, floor cleaners, toilet cleaners, air

fresheners, insecticides and mosquito repellents, metal polish and furniture polish .

FMCG in 2010

The performance of the indus try was inconsistent in terms of sales and growth for

over 4 years. The investors in the sector were not gainers at par with other booming

sectors. After two years of sinking performance of FMCG sector, the year 2009 has

witnessed the FMCGs demand growing. Strong growth was seen across various

segments in FY10. With the rise in disposable income and the economy in good

health, the urban consumers continued with their shopping spree.

- Food and health beverages, branded flour, branded sugarcane, bakery

products such as bread, biscuits, etc., milk and dairy products,beverages

such as tea,coffee,juices,bottled water etc,snack food,chocolates, etc.

- Frequently replaced electronic products , such as audio equipments,

digital cameras,Laptops,CTVs;other electronic items such as

Refrigerator,washing machines, etc.coming under the category of White

Goods in FMCG;


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Sector Outlook

FMCG is the fourth largest sector in the Indian Economy with a total market size of

Rs. 60,000 crores. FMCG sector generates 5% of total factory employment in the

country and is creating employment for three million people, especially in sm all

towns and rural India.

Analysis of FMCG Sector

Strengths:

1. Low operational costs

2. Presence of established distribution networks in both urban and rural areas

3. Presence of well-known brands in FMCG sector

Weaknesses:

1. Lower scope of investing in technology and achieving economies of scale,

especially in small sectors

2. Low exports levels

3. "Me-too" products, which illegally mimic the labels of the established brands.

These products narrow the scope of FMCG products in rural and semi -urban market.

Opportunities:

1. Untapped rural market

2. Rising income levels, i.e. increase in purchasing power of consumers

3. Large domestic market- a population of over one billion.

4. Export potential

5. High consumer goods spending

Threats:

1. Removal of import restrictions resulting in replacing of domestic brands

2. Slowdown in rural demand

Tax and regulatory structure


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Scope Of The Sector

The Indian FMCG sector with a market size of US$13.1 billion is the fourth

largest sector in the economy. A well-established distribution network, intense

competition between the organized and unorganized segments characterize the

sector. FMCG Sector is expected to grow by over 60% by 2015. That will translate

into an annual growth of 10% over a 5 -year period. Hair care, household care, male

grooming, female hygiene, and the chocolates and confectionery categories are

estimated to be the fastest growing segments, says an HSBC report. Though the

sector witnessed a slower growth in 2002-2004, it has been able to make a fine

recovery since then.

Growth prospects

With the presence of 12.2% of the world population in t he villages of India, the

Indian rural FMCG market is something no one can overlook. Increased focus on

farm sector will boost rural incomes, hence providing better growth prospects to the

FMCG companies. Better infrastructure facilities will improve their supply chain.

FMCG sector is also likely to benefit from growing demand in the market. Because of

the low per capita consumption for almost all the products in the country, FMCG

companies have immense possibilities for growth. And if the companies are abl e to

change the mindset of the consumers, i.e. if they are able to take the consumers to

branded products and offer new generation products, they would be able to

generate higher growth in the near future. It is expected that the rural income willrise more by 2020, boosting purchasing power in the countryside. However, the

demand in urban areas would be the key growth driver over the long term. Also,

increase in the urban population, along with increase in income levels and the

availability of new categories, would help the urban areas maintain their position in

terms of consumption. At present, urban India accounts for 66% of total FMCG

consumption, with rural India accounting for the remaining 34%. However, rural

India accounts for more than 40% consumption in major FMCG categories such as

personal care, fabric care, and hot beverages. In urban areas, home and personal

care category, including skin care, household care and feminine hygiene, will keep

growing at relatively attractive rates. Within the foods segment, it is estimated thatprocessed foods, bakery, and dairy are long-term growth categories in both rural

and urban areas. :


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Competitiveness of the Indian market with respect to world markets

.

The following factors make India a competitive player in FMCG sector:

Raw-material availability

Because of the diverse agro-climatic conditions in India, there is a large

raw material base suitable for food processing industries. India is the

largest producer of livestock, milk, sugarcane, coconut, spices and cashew

and is the second largest producer of rice, wheat and fruits &vegetables.

India also produces caustic soda and soda ash, which are required for the

production of soaps and detergents. The availability of these raw

materials gives India the location advantage.

y Labor cost comparison

Low cost labor gives India a competitive advantage. India's labor cost is

amongst the lowest in the world, after China & Indonesia. Low labor costs

give the advantage of low cost of production. Many MNC's have


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established their plants in India to outsource for domestic and export

markets.

y Presence across value chain

Indian companies have their presence across the value chain of FMCG

sector, right from the supply of raw materials to packaged goods in the

food-processing sector. This brings India a more cost competitive

advantage. For example, Amul supplies milk as well as dairy products like

cheese, butter, etc.

Indian consumer class

India has a population of over 1 billion and 4 climatic zones . Several religious and

personal beliefs, 15 official languages, different social customs and food habits

characterize Indian consumer class. Besides , India is also different i n culture if

compared with other Asian countries. Therefore, India has high distinctiveness in

demand and the companies in India can get lot of market opportunities for various

classes of consumers. Consumer goods marketers experience that dealing with

India is like dealing with many small markets at the same time.

Indian consumer goods market is expected to reach $400 billion by 2010. India

has the youngest population amongst the major countries. There are a lot of young

people in India in different inco me categories.

In India they do not have to face this dilemma largely because rapid

urbanization, increase in demand, presence of large number of young population,

any number of opportunities are available . The bottom line is that Indian market is

changing rapidly and is showing unprecedented consumer business opportunity .


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Financial analysis of Hindustan Unilever Limited

The Graphs for various ratios and there financial analysis follows below:

Per Share Ratios

(1)Adjusted EPS

It can be seen that the adjusted EPS has changed corresponding to the change in Income in

various years.

(2)DPS (Dividend Per Share)

Having a growing dividend per share can be a sign that the company's management believes that the

growth can be sustained. But during last years it has decreased which shows that company did not

earn as much as previous years and hence the decrease.

0

2

4

6

8

10

12

Mar ' 10 Mar ' 09 Dec ' 07 Dec ' 06 Dec ' 05

Adjusted EPS (Rs)

j ste E S ( s)

0

1

2

3

4

5

6

7

8

9

10


Dividend per share

Divi

en

per share


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Profitability Ratios

(1) Operating Margin (%).

When looking at operating margin to determine the quality of a company, it is best to look at the

change in operating margin over time and to compare the company's yearly or quarterly figures to

those of its competitors. If a company's margin is increasing, it is earning more per dollar of sales. The

higher the margin, the better. Also the Income though has gone down in Mar 10 the operating Margin

has increased which shows lot of improvement in quality.

(2) Net Profit Margin (%).

13

13.5

14

14.5

15

15.5

16

M ar ' 10 M ar ' 09 Dec ' 07 Dec ' 06 Dec ' 05

perating margin (%)

erati

g

argi

(%)

0

2

4

6

8

10

12

14

16


Net profit margin (%)

Net

rofit

argi

(%)


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Leverage Ratios:

(1) Total Debt/Equity Ratio.

The total debt/equity ratio has increased in Mar10 which means that it is using more

leverage and has a weaker equity position.

(2) Fixed Assets Turn-Over Ratio

Fixed asset turnover has increased over the years disproportionate to the change in net sales

which shows fixed asset base has come down owing to high amount of depreciation and wear and

tear.

0

0.05

0.1

0.15

0.2

0.25

Mar ' 10 Mar ' 09 Dec ' 07 Dec ' 06

Total debt/Equity Ratio

Total debt/e

uity -

0

1

2

3

4

5

6

7

8

9


Fixed assets turnover ratio

Fixed assets turnover

ratio


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Liquidity Ratios:

(1) Current Ratio:

The current ratio can give a sense of the efficiency of a company's operating cycle or its

ability to turn its product into cash. The Mar10 data shows a decrease in the current ratio

of the company. The higher the current ratio, the more capable the company is of paying

its obligations.

(2) Quick Ratio:

0

0.2

0.4

0.6

0.8

1

1.2


Current ratio

rre t rati

0

0.1

0.2

0.3

0.4

0.5

0.6


Quick ratio

Q ick rati


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(3) Inventory Turn-Over Ratio:

Inventory turnover ratio has remained more or less constant which shows that company

has managed to keep inventory at constant level , although slight increase is warrented to avoid

stock out.

Payout Ratios:

(1) Dividend Payout Ratio (net profit):

0

2

4

6

8

10

12


Inventory turnover ratio

Inventory turnover ratio

0

20

40

60

80

100

120

140


Dividend payout ratio (net profit)

Divi

en

ayout ratio (net

rofit)


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The payout ratio provides an idea of how well earnings support the dividend payments. More mature

companies tend to have a higher payout ratio. The Dividend payout ratio of Mar10 has decreased in

Mar10.

(2) Cash earnings retention ratio:

Coverage Ratios:

(1) Financial Charges coverage ratio:

-40

-30

-20

-10

0

10

20

30

40


Cash earnings retention ratio

Cash earnings retention

ratio

0

50

100

150

200

250

300

350

400

450


Financial charges coverage ratio

Financial charges

coverage ratio


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(2) Financial charges coverage ratio (post tax):

Financial charges coverage ratio has gone up substantially which shows over the years interestburden on company has come down as ratio is ebit/interest. , this is good for long term solvency

of the company.

Component ratios:

(1) Material Cost component (% earning).

0

50

100

150

200

250

300

350

400


Fin. charges cov.ratio (post tax)

Fi . c arges c ! v.rati !

( " ! st tax)

48

49

50

51

52

53

54

55

56

Mar ' 10 Mar ' 09 D ec ' 07 D ec ' 06 D ec ' 05

Material cost component (%

earnings)

Material c ! st c ! m " ! e t

( # ear i gs)


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(2) Long term assets/total assets.

The company has increased its long term assets/total assets ratio. The company is investing for

assets in the long run.

(3) Export as % of Sales:

0

0.1

0.2

0.3

0.4

0.5

0.6


Long term assets / total Assets

L $ % g ter & assets / t $ tal'

ssets

0

2

4

6

8

10

12

14


Exports as percent of total sales

Exp $ rts as perce % t $ f t $ tal

sales


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COMPARATIVE ANALYSIS

Per share ratio/Market value ratio

Earnings per share (net income/no. Of outstanding shares) If we

analyse the financial statements of the three companies we observe that the

EPS for HUL has hovered around 10 for the last two financial years whereas for

Colgate and Marico it has been around 30 and 4 respectively. At the outset it

may look that Colgate is the best performing company of all but the fact is

although net profit of HUL is far more than Colgate or Marico the number of

share traded in the market of HUL is far more than the other two so the

resultant ratio comes out to be lower.

Dividend per share (total dividend/no of outstanding shares) - The

dividend per share of HUL for the last two financial year has been around 6

whereas in case of Colgate and Marico it is 20 and .65 respectively. Again in

this case the picture seems rosy for Colgate because the number of share

traded of Colgate in the market of Colgate is far less than HUL. Also in case of

Marico the net profit or retained earnings is lowest so the dividend per share is

so low in this. But all the three companies have been consistent in terms of

amount of dividend they are providing to the shareholders for the last 2or 3

financial years which is a sign of a good performing company.

Profitability ratio

Operating profit margin /ratio of operating profit to net sales - The

operating margin in case of hul for the last 2 financial year has been in therange of 14-15, whereas in case of colgate and marico it has been 24 and 16

respectively. This shows that colgate is more efficient than hul and marico in

generating profit out of core operation on each unit of sale. This shows greater

operational efficiency at colgate but again we should also keep in mind that hul

being a bigger company and with a wide and diverse array of product it is


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difficult for it to manage sales of such a large portfolio of products and

generate profit margins comparable to colgate or marico which are

comparatively smaller companies and have smaller product portfolio to

manage.

Gross profit margin The gross profit margin or the ratio of gross profit

to net sales in case of hul for the last 2 financial year has been 13-14, whereas

in case of colgate and marico it has been around 22 and 14 respectively. This

again shows that colgate is more efficient in generating gross profit on sales as

compared to hul and marico. Again the same logic of wider product portfolio

will hold good here which makes hul gross profit margin look worse than

colgate. Same will hold for net profit margin. This also shows that is colgate is

most efficient in using its labour and material and ade quately covers its

operating expenses.

Return on networth The return on networth which is the ratio of net

profit to total networth(shareholders equity+reserve and surplus) in case of

hul for the year 2009-10 has been 98 whereas fot the last financial year it was

113, Which shows that although decrease in profit after tax from last year is

not much (Rs 2346 cr to 2106 cr) but the reserve and surplus have gone up

significantly (Rs 1842 cr to 2364 cr) on account of ploughed back profit so theratio has gone down. Thus reduced return on networth is not a cause of worry.

Now in case of colgate Palmolive and marico the ratio for former is maintained

at a high level for the last two financial year (around 130) . whereas for the

latter it has been at low level of 40-45. This is because there has been a

quantum jump in profit for colgate as compared to hul or marico and any

increase in reserve and surplus has been more than offset by it. This is not a

good news for industry leader hul as more nimble companies like colgate are

becoming efficient in sales management and hul is finding it difficult to manage

sales of its huge product portfolio.

Liquidity ratios

Current ratio(current assets/current liabilities) the current ratio for

hul is .83, whereas for colgate and marico it is 1.1 and 2.7 respectively. Now at


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the outset it looks that hul has sub-optimal current ratio as it is below the

optimal

level of2. but this is due to high amount of provisioning done by hul to

account for its debtors and taxes payble in future, also an expansive business

with different product verticals require hul to have a large amount of working

capital so more short term loans are taken this increases the current

liabilities, but again hul would have to take care of its cash flows from different

products to sustain different product line as net addition to cash flows has

remained low, also with interest rate on short term loans increasing it may

further add to their current liabilities. now maricos current ratio although

looks quite impressive but it is a way too above the optimal level of 2 and it

appears that debtors in this case are quite high as cash is not lying idle as is

evident from the cash flow statement , the net cash balance has actually come

down owing to investing activities. Colgates current ratio is the best of all the

three as it is not only close to optimal level of2 but also a good deal of cash is

used in paying off long-term debts, this shows that cash is not lying idle and

also business is efficiently generating cash to cover for liabilities.

Leverage ratio

Debt-equity ratio (total debt/total shareholders equity) the debt-equity

ratio in case of hul is .2 whereas in case of colgate and marico it is .02 and .33

respectively. Now the average level of debt-equity ratio in the fmcg sector

over the last 2 years has been in the range of .02 -.04. ,so the debt-equity ratio

of hul and marico seem to be on the higher side, this is owing to increase in

long term loans taken by these companies in the last two year to expand

selling and distribution network, but it is still under the permissible limit of .4,

which shows that there is adequate amount of equity to cover for debt and

solvency situation is healthy. In case of colgate it is quite in accordance with

fmcg sector norm, and there is healthy balance of equity and debt fund base.

Interest coverage or financial charges coverage ratio ( earning before

interest and tax or ebit/total interest burden)- the interest coverage ratio for


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hul in the last fiscal was around 300, which shows that income before interest

is more than sufficient to cover for interest charges or debt servicing was

efficient. Thus solvency situation is very healthy. Now in case of colgate it is

around 70 which is also quite good considering that their total revenue base is

small as compared to hul., but in case of marico it is 19 which is still sufficientbut as compared to colgate which has smaller product base than marico as it

deals only with oral care products, it is sub-optimal, this is mainly because

growth in operating income for marico has not been substantial over the years

owing to intense competition in the fmcg sector and the onslaught of global

giants.

Activity ratios

Fixed assets turnover ratio (net sales/net fixed assets) the fixed assetturnover in case of hul is 5.35 for the last fiscal whereas in case of colgate and

marico it is 4.08 and 7.88 respectively. Now generally in the fmcg sector this

ratio hovers around 3-5. So going by that all the three companies seem to be

efficiently utilising their fixed long term assets to generate sales. However in

case of marico it is bit higher because its total asset base in terms of

manufacturing plant, office establishment is lowe r as compared to hul and

colgate.

Inventory turnover ratio- (cost of goods sold/average inventory)- the

inventory turnover ratio in case of hul is 8.99 for the last fiscal, whereas in case

of colgate and marico it is 19.84 and 6.36 respectively. Now the average

inventory turnover ratio in the fmcg sector has been around 5, so going by this

maricos performance looks most efficient, as more sales have been achieved

with the given level of inventory while not letting average inventory levels

going down to avert any supply volatility, whereas in case of hul and colgate it

is bit too high which indicates low level of inventory as compared to total sales

and especially for companies in fmcg sector is not a good sign as continuous

availability of products at the retail outlets is key to generating good sales and

with low level of inventory they run the risk of stock outs and more nimble

competitors like marico can cash in on this. so too high level of inventory


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turnover ratio is also not desirable especially for companies in the fmcg sector.

Dupont analysis ofHindustan Unilever

On the basis of above dupont analysis following conclusions can be drawn

about the financial performance of hul :-

Strengths

The return on assets for hul is very sound at 51.74, which shows that

the operations of hul despite wide product portfolio has remainedsatisfactorily efficient.

Also the profit margin has remained high over the last two to three years

which shows good tax planning and efficient production.

Weakness

ROE

91.8

ROA

51.74

Profit Margin

12.29

Total Asset Turnover

4.21

Equit

Multi lier

1.8


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Total asset turnover although looks impressive at 4.21 but it is

worrisome as this is more because low asset base since accumulated

depreciation over the year has increased, this shows wear and tear of

fixed assets and these need to be replaced as soon as possible to avoid

any hiccups in production.

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