Financial Management

Group Project

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Group Members Seat No. Company

1) VIGNAN REDDY 71 Heritage Foods

2) SUSMITHA PAUL 51 Dabur Ltd

3) NAMRATHA JHAMNAI 9 P & G Ltd

4) PARTH SIGHN 60 ITC Ltd

5) NEHAL 61 HUL Ltd

CONTENTS:

1) ACKNOWLEDGEMENT

2) INDIVIDUAL ANALYSIS COMPANIES.

3) INTERCOMPANY ANALYSIS.

4) WORKING CAPITAL MANAGEMENT ANALYSIS

5) REFERENCES

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1.ACKNOWLEDGMENT

A deep sense of gratitude is owed to Prof. Garima Sisodia, IBS Hyderabad whose extended support.

Needless to say, her knowledge and experience have served as a continuous source of encouragement and

motivation. Without her invaluable support and guidance this project would not have been possible.

Finally a note of thanks is due to all those were part of project, which have helped in no small measure by

cooperating during the project and by providing constructive criticisms.

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2. INDIVIDUAL COMPANY ANALYSIS

HERITAGE FOODS ANALYSIS

LIQUIDITY RATIOS:

CURRENT RATIO- Current ratio as calculated is 1.43 in 2011 and which is similar to previous years. The reason of ratio being low can be nature of the industry itself which is an FMCG sector where working capital requirement is low as operating cycle is short.

QUICK RATIO: - Quick ratio is more conservative approach to check the liquidity position; this is because in this we exclude inventories and prepaid expenses from current assets. Here the ideal ratio is 1:1. In our case the ratio comes out to be .779 in 2011. It is low and yet to grow for this company.

CASH RATIO: Cash ratio estimates exact amount of cash available to finance the current liabilities of the company. Here the cash amount includes cash available and market securities which can be readily converted to cash. Here the ratio is .264 for Heritage or 2% although the ratio is low.

NET WORKING CAPITAL: Net working capital estimates the total capital required for the day to today operations of the business. It is the difference between current assets and current liabilities. Heritage has a net working capital requirement of 0.18 which is very bad for this company.

PROFITABILITY RATIOS: - Profitability ratios are calculated to measure the Profit earning efficiency of the company. It can be calculated in terms of sales and investment.

GROSS PROFIT RATIO: Gross profit margin reflects the efficiency of the company in terms of sales. A high gross profit margin when compared to industry average indicates that the firm is

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able to produce at a relatively lower cost. Gross profit margin of Heritage is 0.94 which is 94%, relatively high figure as a sign of good management.

NET PROFIT RATIO- Net profit margin indicates management’s efficiency in manufacturing administrating and selling the product. It is a conservative approach as cost also includes overheads. Heritage has a net profit ratio of 0.12 which is lower than the gross profit ratio which means that the operating expenses of the company are high. A corrective action can be taken here to identify these expenses and control them for the future.

RETURN ON EQUITY: Return on equity is a profitability ratio in terms of investments which indicates how well the firm has used the resources of owners. This is the most important ratio as it is in alignment with the ultimate goal of the organization which is to maximize shareholder’s wealth. In this case, ROE is 19 % which reveals the firm’s strength in attracting future investments.

EARNING’S RATIO:-

EARNING PER SHARE- It is calculated by dividing profit after taxes by total number of outstanding shares. It indicates firm’s earning power on per share basis. EPS OF Heritage 2011 is 1.2 which is showing a downward trend from previous shares moreover EPS of the company should also be compared with industry average and with EPS of other firms to show its effectiveness as a profitability index.

DIVIDEND PER SHARE- DPS shows the trend of income distribution among the shareholders which is also important to keep them satisfied. A large number of investors and potential investors may be interested only in DPS rather than EPS as they may be risk-averse.DPS calculated here comes out to be 6.5 and the rest amount from DPS is retained to be reinvested in the business.

DIVIDEND PAYOUT RATIO: It explains the amount of dividend distributed to shareholders in ratio form. This helps the firm to calculate its growth rate which is given by b*ROE where b= retention ratio and ROE is return on equity. 1.2% of the earnings are paid as dividends in 2011.

SOLVENCY RATIO:

DEBT-EQUITY RATIO: - It is a ratio describing the lenders contribution for each rupee of the owner’s contribution. It is directly calculated by dividing total debt/net worth.

INTEREST COVERAGE RATIO: It indicates the firm’s ability to meet its interest obligations. It is used to test the firm’s debt servicing capacity. A higher ratio is desirable but too

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high indicates the firm is very conservative in using debt as a part of its capital structure. Thus a firm is losing the opportunity to raise funds at a lower cost.

DEBT RATIO: It explains the extent to which the debt financing has been used in the business. A higher ratio means the claim of creditors are greater than those of owners. Heritage has 1.2% on dept and not a good sign.

DABUR ANALYSIS:

LIQUIDITY RATIO

current ratio1.5375

7 1.1808 1.14798The ideal current ratio is considered to be 2:1.So the company is insufficiently liquid. Thus the company cannot easily satisfy its short-term obligations through its current assets

quick ratio0.6046

5 0.34264 0.41652The ideal quick ratio is 1:1.So the firm’s financial position is unsound. But, we cannot rely on this standard without further studies.Thus we can say that the company can satisfy its obligations by 60.46%.of its current assets excluding its inventories.

cash ratio0.1366

1 0.10698 0.07It only measures the ability of a firm's cash, along with investments (marketable securities) that are easily converted into cash, to pay its short-term obligations.In this company it is increasing over the year but it is very low.

networking capital ratio0.3953

2 1.11989 0.6415The NWC measures the firm’s potential reservoir of funds.

PROFITABLITY RATIO

Gross Profit Margin 0.1878376 0.23053 0.19004GPM is not stable over the years. It shows that company is not much efficient in making profit relative to its sales and thus will pay low premiums

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Net Profit margin 0.139086110.1470

1 0.1386The NPM is low with very slight difference over the years. It shows that firm is not able to each rupee sales into net profit.

Operating Expense Ratio0.8418659

20.8126

60.8403

1The OER is quite high thus it shows that the company have a small amount of operating income to meet interest,dividend,etc.

EARNING RATIO

dividend per share(cr) 0.037606266 0.115455 0.079101

EPS 3.27 5.77 4.52The company has paid .037%,.115%,.079 of dividend out what it has earned per share during the year.

dividend payout ratio (DPR)

0.01150039

0.02001 0.0175

The company has given very less dividend to its shareholders and has retained its income more in the business.

ACTIVITY RATIO

inventory turnover ratio

7.2089888

8.4924347

15.0189363

The inventory turnover is decreasing over the years. But as ratio is high we can say that company have strong sales or ineffective buying.

Debtors turnover ratio11.50645

628.40579

115.851023

2It tell us that how quickly debtors can be turned into cash.The DTR is high but not stable so we can say that company is efficient in making collection from debtors.

Net assets turnover ratio

2.9635471

3.6663317

3.47853592

This ratio shows that for 1 rupee on capital employed in net assestth e company is producing rs 2.96,rs3.66,Rs 3.47 of sales resp over the years.

LEVERAGE RATIO

debt-equity ratio 6.0079852932.01371599

8 2.617154086

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CE-NW ratio 13.9996553112.6913324

1 12.08207144Debt Ratio 0.429152373 0.157382218 0.216614684

The debt/equity ratio of DABUR is very low, which means that it is very less financed by the debtors as compared to the financing by the owners, hence becoming less risky.

The debt ratio of DABUR indicates the percentage of total finance contributed by the debtors.

P&G RATIO ANALYSIS

LIQUIDITY RATIOS:

CURRENT RATIO- CURRENT RATIO explains exact liquidity position of the company in terms whether its current assets are enough to finance its current liabilities. The ideal current ratio is given as 2:1 however; it is not the benchmark as current ratio also depends on the nature of the industry and business. Like in this case, current ratio as calculated is 0.51 in 2011 and which is similar to previous years. The reason of ratio being low can be nature of the industry itself which is an FMCG sector where working capital requirement is low as operating cycle is short.

QUICK RATIO: - Quick ratio is more conservative approach to check the liquidity position, this is because in this we exclude inventories and prepaid expenses from current assets. Here the ideal ratio is 1:1. In our case the ratio comes out to be .1798 in 2011. It is very low and the huge fall from value of current ratio is also due to the fact that company has huge amount of inventories as given.

CASH RATIO: Cash ratio estimates exact amount of cash available to finance the current liabilities of the company. Here the cash amount includes cash available and market securities which can be readily converted to cash. Here the ratio is 0.019 for P&G or 2% although the ratio is low but there is nothing to worry about as P&G is a debt-free company.So, it has a high borrowing power which can be used when there are investment opportunities.

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NET WORKING CAPITAL: Net working capital estimates the total capital required for the day to today operations of the business. It is the difference between current assets and current liabilities. P&G has a net working capital requirement of 0.67 which is a good signal that there are no blockages of funds in the operating cycle.

PROFITABILITY RATIOS: - Profitability ratios are calculated to measure the Profit earning efficiency of the company. It can be calculated in terms of sales and investment.

GROSS PROFIT RATIO: Gross profit margin reflects the efficiency of the company in terms of sales. A high gross profit margin when compared to industry average indicates that the firm is able to produce at a relatively lower cost. Gross profit margin of P&G is 0.20 which is 20%, relatively high figure as a sign of good management.

NET PROFIT RATIO- Net profit margin indicates management’s efficiency in manufacturing administrating and selling the product. It is a conservative approach as cost also includes overheads. P&G has a net profit ratio of 0.15 which is lower than the gross profit ratio which means that the operating expenses of the company are high. A corrective action can be taken here to identify these expenses and control them for the future.

RETURN ON EQUITY: Return on equity is a profitability ratio in terms of investments which indicates how well the firm has used the resources of owners. This is the most important ratio as it is in alignment with the ultimate goal of the organization which is to maximize shareholder’s wealth. In this case, ROE is 25 % which reveals the firm’s strength in attracting future investments.

EARNING’S RATIO:-

EARNING PER SHARE- It is calculated by dividing profit after taxes by total number of outstanding shares. It indicates firm’s earning power on per share basis. EPS OF P&G 2011 is 46.48 which is showing a downward trend from previous shares moreover EPS of the company should also be compared with industry average and with EPS of other firms to show its effectiveness as a profitability index.

DIVIDEND PER SHARE- DPS shows the trend of income distribution among the shareholders which is also important to keep them satisfied. A large number of investors and potential investors may be interested only in DPS rather than EPS as they may be risk-averse.DPS calculated here comes out to be 10.45 and the rest amount from DPS is retained to be reinvested in the business.

DIVIDEND PAYOUT RATIO: It explains the amount of dividend distributed to shareholders in ratio form. This helps the firm to calculate its growth rate which is given by b*ROE where b= retention ratio and ROE is return on equity.47% of the earnings are paid as dividends in 2011.

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SOLVENCY RATIO:

DEBT-EQUITY RATIO: - It is a ratio describing the lenders contribution for each rupee of the owners contribution. It is directly calculated by dividing total debt/net worth. As P&G is a debt free company this ratio turns out to be 0.

INTEREST COVERAGE RATIO: It indicates the firm’s ability to meet its interest obligations. It is used to test the firm’s debt servicing capacity. A higher ratio is desirable but too high indicates the firm is very conservative in using debt as a part of its capital structure. Thus a firm is losing the opportunity to raise funds at a lower cost.This is what happens with P&G 5969.33 AS DEBT IS 0.

DEBT RATIO: It explains the extent to which the debt financing has been used in the business. A higher ratio means the claim of creditors are greater than those of owners. However in P&G’s case it is 0 as debt is 0 that means the firm has not used debt as a part of its capital structure.

HUL RATIO ANALYSIS

SOVENCY RATIO Solvency ratios measure the financial soundness of a business and how well the company can satisfy its short- and long-term obligations.

1. Current ratio: This ratio is a comparison of current assets to current liabilities, commonly used as a measure of short-run solvency, i.e., the immediate ability of a business to pay its current debts as they come due. Potential creditors use this ratio to measure a company's liquidity or ability to pay off short-term debts. Since the current ratio of the firm varies between 0.9 and 0.6 between the year 2006-11.

2. Liquidity ratio: liquidity ratio, also called as quick ratio, considers only cash, marketable securities (cash equivalents) and accounts receivable because they are considered to be the most liquid forms of current assets. A Quick Ratio less than 1.0 implies dependency on inventory and other current assets to liquidate short-term debt. Since the quick ratio for the firm is less than 1 for all the years the implication stated above is true.

3. Debt equity ratio: it is the measure of a company's financial leverage calculated by dividing its total liabilities by stockholders' equity. It indicates what proportion of equity and debt the company is using to finance its assets.

ITC FINANCIAL ANALYSIS

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1. Current ratio – considering the current ratio of last 3 consecutive yrs, we can say that the ability of the company to meet its current obligations is not quite healthy with respect to the 2:1 as the idle ratio. So as per the calculated figs the short term liquidity of the firm is not good.

2. Quick ratio: trend of quick ratio its again falling hence we can say that firm is relying more on the sale and recovery of the inventories to meet pay out its current liabilities.

3. Gross profit margin ratio: from 09-10 it has fallen , which means the direct production cost has increased but again we can see a marginal increase in 2011 which states there is quite an improvement in the production operations.

4. Net profit marginal ratio: calculation figure shows increase in the ratio, hence we can interpret that the earning for share holders as a % of net sale s has inc over the period of time. The co’s overall efficiency of production, administration and tax management has improved, leading to this positive change.

5. Return on equity: from calculations it has increased hence we can say that the productivity of the capital employed in the firm has increased specifically the profitability equity funds has improved.

6. Inventory turnover ratio: the increase in the ratio over the period of time sates that the inventory is moving fast through the firm and generating sales. An inc in inventory turn over ratio helps the firm in reducing its inventory carrying charges.

7. Debtors turnover ratio: because of the poor recovery cycle and a small inc in the bad debts in 2009 -10 the ratio has fallen but with inc in 2011 can be attributed toward the strict credit policy and hence the liquidity if the firm has improved.

8. Total asset turnover ratio : in 2009-10 its states that the firm has ability to generate the large volume of sales on a small asset based but in 2011 its shows there is are idle or improperly used assets which are increasing the firm’s cost and expenses for maintenance.

9. Debt equity ratio: it depends upon the industry in which you are operating in but as per the calculated figures we can see there is a fall in the debt equity ratio of the firm which gives the higher degree of protection to the lenders as the fixed payment in the form of interest on debt will fall.

10. Capital employed to net worth: the ratio has decreased over the period of time which states that the firm has not raised additional capital and has adequate retained earnings to carry on its operations. The proportion of equity in the total cap is employed is less .

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3. INTERCOMPANY ANALYSIS

Variables Dabur

India

ITC Heritag

e Foods

HUL P&G FMCG

Industry

Average

EPS 3.27 4.5 0.97 10.68 46.48 8.8

Current Ratio

1.53 1.10 1.43 0.823691 0.517848 1.1

Net Profit Margin

.13 .224 3.65 11.56 0.150696 8.9

Capital Gearing Ratio.55 .23 .113 .34 .28 .43

Interest coverage ratio

21 2.1 1.07 .8 1.5 2.9

Return on equity

.45 .25 .012 0.106994 0.255095 .33

Inventory Turnover ratio7.208 1.47 15.39 7.91 20.48 12.1

Debt turnover ratio11.05 24.4 75.91 24.28 33.58 40.6

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Net assets turnover ratio2.96 2.09 12.66 5.63 3.20 3.9

EPS

Current R

atio

Net Pro

fit Marg

in

Capita

l Gear

ing Rati

o

Interest

cover

age ra

tio

Return on eq

uity

Inventory

Turn

over r

atio

Debt tu

rnover ra

tio

Net ass

ets tu

rnover

ratio

020406080

100120140160180

P&GHULHeritage FoodsITCDabur India

EPS

Current R

atio

Net Pro

fit Marg

in

Capita

l Gear

ing Rati

o

Interest

cover

age ra

tio

Return on eq

uity

Inventory

Turn

over r

atio

Debt tu

rnover ra

tio

Net ass

ets tu

rnover

ratio

01020304050607080

Dabur IndiaITCHeritage FoodsHULP&G

EPS

The EPS is profits (after tax and everything else) divided by the number of shares in issue. It is the amount of the company’s profits that belong to a single ordinary share. Companies are required to publish the statutory (also called “basic”) EPS but there are a number of adjusted EPS numbers which can be more useful to analysis.

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Through our current valuation measures we can see that ITC is the highest EPS earners amongst all the three companies, whereas ITC is the second best company in terms of EPS. While Heritage Foods has the lowest EPS across industries valuated.

Current Ratio

The concept behind this ratio is to ascertain whether a company's short-term assets (cash, cash equivalents, marketable securities, receivables and inventory) are readily available to pay off its short-term liabilities (notes payable, current portion of term debt, payables, accrued expenses and taxes). The higher the current ratio, the better for the company. Dabur, ITC and Heritage foods are maintaining current ratio above 1 and below 2. It’s a good sign but recommended current ratio would be 2:1. Short term assets for all these companies is currently low and need to increase current ratio to avoid any discrepancies of goods from suppliers. HUL and P& G present current ratio is below 1 as this year revenues have been a dip for this companies.

Net Profit margin:

The profit margin tells you how much profit a company makes for every $1 it generates in revenue or sales. Profit margins vary by industry, but all else being equal, the higher a company's profit margin compared to its competitors, the better.

Heritage has the highest profit margin when compared to remaining all other competitors. Industry needs to increase the sales/revenue as the current 2011 stats shows profit margin is quite low in the industry.

Capital gearing ratio

This ratio measures the extent of capitalization by the funds raised by the issue of fixed cost securities. This ratio is interpreted by the use of two terms. Highly geared mean lower proportion of equity. Low geared means high proportion of equity as compared to fixed cost bearing capital.

Dabur has highest CGR ratio is more vulnerable to downturns in the business cycle because it must continue to service its debt regardless of how bad sales are. Remaining companies are under acceptable levels.

Capital gearing ratio is important to the company and the prospective investors. It must be carefully planned as it affects the company's capacity to maintain a uniform dividend policy during difficult trading periods. It reveals the suitability of company's capitalization.

Interest coverage ratio

A ratio used to determine how easily a company can pay interest on outstanding debt. Dabur and ITC has very good ratio and Heritage foods need to increase its ratio. Generally companies go for external finance when they are unable to pay interest through their business. This makes company vulnerable.

Return on Equity

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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.   Dabur and ITC has very high rate compared to heritage foods. Investors have a very high risk investing in Heritage foods. Dabur and ITC are comfortable at this level. HUL and P&G has issued a large quantity of shares to public and in great pressure for sustainable return on equity. Big companies in the long run try to increase their returns on equity.

Inventory turnover ratio

A ratio showing how many times a company's inventory is sold and replaced over a period. A low turnover is usually a bad sign because products tend to deteriorate as they sit in a warehouse. Companies selling perishable items have very high turnover. Usually FMCG industry has high inventory turnover ratio and is a good sign for industry. Dabur and Heritage foods has good turnover ratio but ITC has very low inventory turnover ratio, this shows that ITC has lot of troubles in inventory management. ITC need to revamp their inventory management strategy and make proper use of inventory. Dabur and HUL companies faced the heat of economic down turn and lot of inventory is unsold for these big companies.

Debt turnover ratio

Debtors’ turnover ratio or accounts receivable turnover ratio indicates the velocity of debt collection of a firm. In simple words it indicates the number of times average debtors (receivable) are turned over during a year. The higher the value of debtors’ turnover the more efficient is the management of debtors or more liquid the debtors are. Similarly, low debtors turnover ratio implies inefficient management of debtors or less liquid debtors. It is the reliable measure of the time of cash flow from credit sales. There is no rule of thumb which may be used as a norm to interpret the ratio as it may be different from firm to firm. Debt turnover ratio is very high in all companies and this shows companies have good liquid debtors. Industry like FMCG needs high debt turnover ratio to make on hand liquid assets.

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Dabur India

ITC Heritage Foods

HUL P&G0

10

20

30

40

50

60

70

80

Debt turnover ratio

Debt turnover ratio

o The debt turnover ratio indicates the velocity at which a company collects its receivables. A single ratio calculation doesn't say anything about the company because every company has its own collection period. It is the direction of the ratio over time that tells a manager whether the company is collecting its receivables faster or slower than before. If the ratio gets progressively lower, it can indicate that the company isn't converting sales into cash as quickly, which can put a strain on the company's cash flows. It can be a leading indicator of a collection process problem or a customer quality problem.

Net Assets Turnover Ratio

This ratio measures how asset-intensive a business is and the efficiency of the assets employed. Asset Turnover shows the speed, with which an amount of cash, equivalent to the money invested in the business by head office, comes back in through the door in fresh sales. It isn’t concerned with profit, only with cash flow. If sales are rapid, little cash is tied up to keep the business going; which may make it easier to expand. Net assets turnover ratio is very high for heritage foods and is a good sign for long run. ITC and Dabur

have just above 2.0 and needs sustainable investments and increase this ratio. For the long run perspective

this ratio plays a key role in judging the position of the business.

4. WORKING CAPITAL MANAGEMENT ANALYSIS

Gross operating cycle and Net operating cycle

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DABUR GOC

DABUR NOC

Heritag

e Foods G

OC

Heritag

e Foods N

OC

P&G GOC

P&G NOC

HUL GOC

HUL NOC

ITC G

OC

ITC NOC

-800

-700

-600

-500

-400

-300

-200

-100

0

100

200

2009

200920102011

Industry has a steady Gross and Net operating cycle. HUL high NOC indicates that that it has

been hit economic recession.

Raw material Consumption period (days)

dabur heritage P&G ITC HUL0

10

20

30

40

50

60

200920102011

Work in progress conversion period (days)

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dabur heritage P&G ITC HUL0

10

20

30

40

50

60

200920102011

Finished goods conversion period(days)

dabur heritage P&G ITC HUL0

5

10

15

20

25

30

35

40

45

50

200920102011

P& G Company faced a huge problem because of 2010 factory mishap that has occurred.

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Debtors conversion period (days)

dabur heritage P&G ITC HUL0

2

4

6

8

10

12

14

16

18

200920102011

Dabur as an old company in India facing the debtors due payments crunch and in great trouble.

Creditors conversion period (days)

dabur heritage P&G ITC HUL0

100

200

300

400

500

600

700

800

900

200920102011

HUL and P &G due to its wide variety of product categories has usually high credit conversion period.

References

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http://www.moneycontrol.com/competition/apollohospitalsenterprises/comparison/AHE

http://www.moneycontrol.com/india/stockpricequote/hospitalsmedicalservices/

apollohospitalsenterprises/AHE

http://www.moneycontrol.com/india/stockpricequote/hospitalsmedicalservices/polymedicure/

PM06

http://www.moneycontrol.com/competition/apollohospitalsenterprises/comparison/AHE

http://www.moneycontrol.com/india/stockpricequote/hospitalsmedicalservices/

optocircuitsindia/OCI01

http://www.moneycontrol.com/india/stockpricequote/hospitalsmedicalservices/

indraprasthamedicalcorporation/IMC03

http://www.moneycontrol.com/india/stockpricequote/hospitalsmedicalservices/

fortishealthcareindia/FH

http://www.bseindia.com/stockinfo/stockprc2.aspx?scripcode=532150&flag=sp&Submit=G

http://www.bseindia.com/stockinfo/stockprc2.aspx#

http://www.bseindia.com/stockinfo/stockprc2.aspx?scripcode=532391&flag=sp&Submit=G

https://nsdl.co.in/downloadables/excel/cp-debt/Debt%20A-B.xls

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