PROJECT REPORT Submitted in parti al fulfillment of the requirement for the reward of
Post Gradua ion Program in Business Managemen
2008
A EQUI Y RESEA CH on FAST MOVING CONSUMER GOODS ECTOR in
: DAIPAYAN LODH : 3015
NAME ROLL NUMBER
Under the Supervision of
Prof. Saravan Kris namurthy, Kohinoor Business School, Khandala &
Miss. Sheela Khatan , HR Head, Motilal Oswal Securities Ltd., Nagpur
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Kohin or Business School Old Pune – Mumb i Highway, Khandala – 410 301, Dis . Pune
This is to certify that Mr. DAIP YAN LODH, a student of Post Graduation Program in Business Management, 2007 – 09 batch as undertaken the project titled – “Equity Re earch on FMCG Sector in India” on behalf of Motilal Oswal Securities Ltd., Nagpur” for
uration of three
months. He has successfully completed t e above said project to the best of our satisfaction.
_______________________ Prof. Sarvan Krishnamurthy Project Guide Kohinoor Business School
____ _________ Dr. . P. Verma irector Kohinoor Business School
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Declaration I, DAIPAYAN LODH, a bona-fide student of Kohinoor Business School, declare that the project titled
handala hereby
“Equity Research on FMCG Sector in India” on behalf of
“Motilal Oswal Securities Ltd., Nagpur” in partial fulfillment of the require ents of the Post Graduation Program in Business Management is my original work.
Date: Place:
Signature
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Acknowledgement “There is joy in work. Ther
is no happiness except in the realizatio
that we have
accomplished something” - Hen ry Ford
The making of any project requires contribution from many people, right from inception till its completion. In my case also, there had been a few people who have made this happen. It was not only learning but also an enrichi g experience. I am deeply indebted to Dr. B. P. Verma, Director, Kohinoor Business School, Khandala for having allowed me to carry
ut the project successfully. I specially thank Prof. Sarvan
Krishnamurthy and Prof. Ja asheelan, for his constant guidance, profe sional help and support during the course of the project. I would also like to thanks Prof. Ajit Gaikwad, Prof .
Salim Samsher, Prof. Anjali
umar, and Prof. Sanjay Ashrit for explainin the concepts of
Financial Accounting to me, for being a source of inspiration and for the valuable suggestions provided throughout. Their constant follow-ups and result orientation ensured t at I successfully meet the deadlines. I would also like to thanks Mr. Harish Daf , Mr. Harish Mantri, Mr. Prashish Bharne, Ms.
Sheela Kathane, Ms. Neha Du ta and a special thanks to Mr. Prashant Aru Pimplewar for giving me the opportunity to wo k in his company and gain knowledge related t my project. I thank my colleagues and frien s for providing constant encouragement and h lp. Finally, I am grateful to my family for their m oral support and understanding. “Teachers open the door, but yo u must enter by yourself” - Chinese Proverb
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Table of Content TOPICS
Page No.
Industry Overview……………………….……………..
8
Company Overview……………………………………
10
Research Methodology………………………………...
13
Why FMCG Sector is Analyzed……………………….
14
Overview…………………………………………….....
16
Why India?......................................................................
17
Trends…………………………………………………..
19
Market Opportunities for Investment…………………..
22
Hindustan Unilever Limited……………………………
24
Annexure……………………………………………….
48
Bibliography……………………………………………
56
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Industry Overview Broking Insights The Indian broking industry is one of the oldest trading industries that has been around even before the establishment of the BSE in 1875. Despite passing through a number of changes in the post liberalisation period, the industry has found its way towards sustainable growth. With the purpose of gaining a deeper understanding about the role of the Indian stock broking industry in the country’s economy, we present in this section some of the industry insights gleaned from analysis of data received through primary research. Some key characteristics of the 394 broking firms are: •
On the basis of geographical concentration, the West region has the maximum representation of 52%. Around 24% firms are located in the North, 13% in the South and 10% in the East
•
3% firms started broking operations before 1950, 65% between 1950-1995 and 32% post 1995
•
On the basis of terminals, 40% are located at Mumbai, 12% in Delhi, 8% in Ahmedabad, 7% in Kolkata, 4% in Chennai and 29% are from other cities
•
From this study, we find that almost 36% firms trade in cash and derivatives and 27% are into cash markets alone. Around 20% trade in cash, derivatives and commodities
•
In the cash market, around 34% firms trade at NSE, 14% at BSE and 52% trade at both exchanges. In the derivative segment, 48% trade at NSE, 7% at BSE and 45% at both, whereas in the debt market, 31% trade at NSE, 26% at BSE and 43% at both exchanges
•
Majority of branches are located in the North, i.e. around 40%. West has 31%, 24% are located in South and 5% in East
•
In terms of sub-brokers, around 55% are located in the South, 29% in West, 11% in North and 4% in East
•
Trading, IPOs and Mututal Funds are the top three products offered with 90% firms offering trading, 67% IPOs and 53% firms offering mutual fund transactions
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In terms of various areas of growth, 84% firms have expressed interest in expanding their institutional clients, 66% firms intend to increase FII clients and 43% are interested in setting up JV in India and abroad
•
In terms of IT penetration, 62% firms have provided their website and around 94% firms have email facility
Financial Markets The financial markets have been classified as cash market, derivatives market, debt market and commodities market. Cash market, also known as spot market, is the most sought after amongst investors. Majority of the sample broking firms are dealing in the cash market, followed by derivative and commodities. 27% firms are dealing only in the cash market, whereas 35% are into cash and derivatives. Almost 20% firms trade in cash, derivatives and commodities market. Firms that are into cash, derivatives and debt are 7%. On the other hand, firms into cash and commodities are 3%, cash & debt market and commodities alone are 2%. 4% firms trade in all the markets.
In the cash market, around 34% firms trade at NSE, 14% at BSE and 52% trade at both exchanges. In the equity derivative market, 48% of the broking houses are members of NSE and 7% trade at BSE, while 45% operate in both stock exchanges. Around 43% of the broking houses operating in the debt market, trade at both exchanges with 31% and 26% firms uniquely at NSE and BSE respectively. Presented by | D a i p a y a n L o d h
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Of the brokers operating in the commodities market, 57% firms operate at NCDEX and MCX. Around 20% and 21% firms are solely in NCDEX and MCX respectively, whereas 2% firms trade in NCDEX, MCX and NMCE.
Products The sustained growth of the economy in the past couple of years has resulted in broking firms offering many diversified services related to IPOs, mutual funds, company research etc. However, the core trading activity is still the predominant form of business, forming 90% of the firms in the sample. 67% firms are engaged in offering IPO related services. The broking industry seems to have capitalized on the growth of the mutual fund industry, which was pegged at 40% in 2006. More than 50% of the sample broking houses deal in mutual fund investment services. The average growth in assets under management in the last two years is almost 48%. Company research is another lucrative area where the broking firms offer their services; more than 33% of the firms are engaged in providing company research services. Additionally, a host of other value added services such as fundamental and technical analysis, investment banking, arbitrage etc are offered by the firms at different levels.
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Company Ov rview Motilal Oswal Financial Servi ces Ltd. (MOFSL) is a well-diversified, fi nancial services company focused on wealth cr ation for all its customers, such as institution al and corporate clients, HNI and retail custome rs. Our services and product offerings includ equity broking, commodity broking, distribution of third party products, investment banking and venture capital management. Mr. Motilal Oswal and Mr. R amdeo Agrawal laid the foundation for MO SL and initially conducted business as a sub-bro ing firm. Thus, began the expedition of building a professional organisation with strong value s stems, to provide investment advice to investors. Today, Motilal Oswal Financial Services Ltd. is a well-established brand among retail and institutional investors in India,
ith a presence in over 1430 business location across over 430
cities. From a sub-broking firm, Motilal Oswal Financial Services Ltd. has today become a solid financial services company stra dling a spectrum of businesses in the financi l services space. These businesses include Wealth Management, Institutional Equities, Investment Banking and Venture Capital Management. Motilal Oswal Financial Services Limited is the holding company of th
following five
subsidiaries:
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MOFSL Businesses Wealth Management and Retail & Distribution MOFSL offer Wealth Management Services, Broking & third party products to retail customers through MOFSL, MOSL and MOCBPL. They also provide financing services, investment advisory, financial planning and portfolio management services (PMS) to their clients. As at March 31, 2008, they had 461,699 registered customers, to whom they provide equity & commodities brokerage and PMS. As at March 31, 2008, they had a total of 340,843 depository clients. They classify their clients into three segments - 'mass retail', 'mass affluent' (addressed by a separate offering called 'MOSt Select'), and 'high net worth' (addressed by a separate offering called 'Purple').
Institutional Broking They offer equity broking services in the cash and derivative segments through MOSL to institutional clients in India and overseas. These clients include companies, mutual funds, banks, financial institutions, insurance companies, and FIIs. As at March 31, 2008, they were empanelled with over 300 institutional clients including 191 FIIs.
Investment Banking They offer financial advisory services relating to mergers and acquisitions (domestic and crossborder), divestitures, restructurings and spin-offs through MOIAPL. They also offer capital raising and other investment banking services such as the management of public offerings, private placements (including qualified institutional placements), rights issues, share buybacks, open offers/delistings and syndication of debt and equity.
Private Equity In 2006, their private equity subsidiary, MOVCAPL was appointed as the investment manager and advisor to a private equity fund, India Business Excellence Fund, which was launched with a target of raising US$100 million. The fund is aimed at providing growth capital to small and medium enterprises in India, with investments typically in the range of US$3 million to US$7 million.
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Research Methodology The project study has been done with the help of observation and analytical method. The value of the observation is that one can collect the original data at the time they occur and analysis them in a proper way with the help of varies financial tools and techniques. For this research, we have to depend on the financial result of the respective company as well as the daily price trends of that particular script. The goal of this research is to provide a foundation for understanding FMCG sector through fundamental analysis. Fundamental analysis is the cornerstone of investing. In fact, some would say that you aren't really investing if you aren't performing fundamental analysis. There are an endless number of investment strategies that are very different from each other, yet almost all use the fundamentals. The biggest part of fundamental analysis involves delving into the financial statements. Also known as quantitative analysis, this involves looking at revenue, expenses, assets, liabilities and all the other financial aspects of a company. My research looks at the information to gain insight on a company's future performance. Fundamental analysis serves to answer questions, such as: 1. Is the company’s revenue growing? 2. Is it actually making a profit? 3. Is it in a strong-enough position to beat out its competitors in the future? 4. Is it able to repay its debts? 5. Is management trying to "cook the books"? It all really boils down to one question: Is the company’s stock a good investment? Think of fundamental analysis as a toolbox to help you answer this question.
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Why FMCG
ector is Analyzed:
TATA Investment Corporation imited, non-banking financial company registered with Reserve Bank of India under the 'Inve tment Company' category. The company's activities comprise primarily of investing in long-ter m investments in equity shares and other securi ies of companies in a wide range of industries. TICL invested in almost all t e sectors. TICL’s portfolio proved to be a very successful portfolio. They had got a very good return from all the sectors. Among th se sectors, Fast Moving Consumer Goods (FM G) proved to be a very successful sector. It has a very good potentiality in long term in Indi . The overall cost of investment in FMCG sector was Rs. 13.69 crores and on May 20, 2008, thiis investment valued Rs. 306.72 crores, i.e. the cost of value of investment in FMCG sector was 5% of the overall investment that was increase in 2008 to 15% of the overall investment. Thus rom this, we can conclude that, there is a 214 .47% increase in value of investment. For this si nificant increase and also recent development of retails shops, malls, etc. in India, the FMCG ector is one of the booming sectors in India. or this reason, I had chosen this sector for my e quity analysis. Below, I had given a chart, which explains, the detail investment of TICL in FM CG sector:
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15 | P a g e From the given charts, I can rank the top most companies in FMCG sector in TICL’s portfolio. They can be ranked as follows:
Rank 1 2 3 4 5 6 7
Company Hindustan Unilever Ltd. Tata Tea Ltd. Asian Paints India Ltd. Nestle India Ltd. Indian Tobacco Company Ltd. Marico Industries Ltd. Godrej Consumer Products Ltd.
Among these companies, I had chosen three major companies for the Equity Analysis, i.e.: •
Hindustan Unilever (HUL) Ltd.
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Overview Products which have a quick urnover, and relatively low cost are known as Fast Moving Consumer Goods (FMCG). FM G products are those that get replaced within of FMCG generally include a
year. Examples
ide range of frequently purchased consumer products such as
toiletries, soap, cosmetics, tooth cleaning products, shaving products and detergents, as well as other non-durables such as glassware, bulbs, batteries, paper products, and plastic goods. FMCG may also include pharmaceutic ls, consumer electronics, packaged food products, soft drinks, tissue paper, and chocolate bars. Subsets of FMCGs are Fast Moving Consumer Electronics which include inn vative electronic products such as mobile phones, MP3 players, digital cameras, GPS Systems and Laptops. These are replaced more frequently than other electronic products. In 2005, the Rs. 48,000-crore FMCG segment was one of the fast growing industries in India. According to the AC Nielsen I dia study, the industry grew 5.3% in value b tween 2004 and 2005.
Mar et Leader
Strong No. 2
45
60
39.1
40
50
35 30
40 23.7
25
30.3
20.8
30
20 15
48.8
14.5
13.6 9.7
10
20 8.7
7.4 3.4
5 0
10 0
Fabric Wash
Personal Dishwa sh Wash
Sk in
Shampoo Tacum Powder
Packet Tea
Coffee
Jams
T othpaste Ketchups
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Why India? Large Domestic Market The Indian FMCG sector is the ourth largest in the economy and has a market size of US$13.1 billion. Well-established distrib ution networks, as well as intense competition between the organized and unorganized seg ents are the characteristics of this sector. FM G in India has a strong and competitive MNC presence across the entire value chain. It has been predicted that the FMCG market will reach to US$ 33.4 billion in 2015 from US $ billion 1 1.6 in 2003. The middle class and the rural segm nts of the Indian population are the most pro ising market for FMCG, and give brand makers the opportunity to convert them to branded products. Most of the product categories like jams, to thpaste, skin care, shampoos, etc, in India, ha e low per capita consumption as well as low penetration level, but the potential for growth is huge.
Turnover $ Mln
Market Capitalization $ Bln
3473
11.5
847
3.3 631
540
476
338
361
323
2.1 308
218
1.5
1.3
1
0.9
0.7
0.7
0.6
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India – A Large Consumer Goods Spender An average Indian spends around 40 per cent of his income on grocery and 8 per cent on personal care products. The large share of fast moving consumer goods (FMCG) in total individual spending along with the large population base is another factor that makes India one of the largest FMCG markets.
Consumption Pie 2%
4%
7%
8%
Clothing
7%
Consumer Durable 4%
Vacation Eating Out
10%
Foot Wear Movies & Theatre Entertainment
2% 40%
Accessories
5%
Books & Music
2% 1%
Grocery
8%
Change in the Indian Consumer Profile Consumer Profile Populations (in millions) Population < 25 years of Age Urbanization (%)
1999
2001
2006
846 480 26
1,012 546 28
1,087 565 31
Source: Statistical Outline of India (2002-03).
Rapid urbanization, increased literacy and rising per capita income, have all caused rapid growth and change in demand patterns, leading to an explosion of new opportunities. Around 45 per cent of the population in India is below 20 years of age and the young population is set to rise further. Aspiration levels in this age group have been fuelled by greater media exposure, unleashing a latent demand with more money and a new mindset.
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FMCG Category and Products Category Household Care
Products Fabric wash (laundry soaps and synthetic detergents); household cleaners (dish/utensil cleaners, floor cleaners, toilet cleaners, air fresheners, insecticides and mosquito repellents, metal polish and furniture polish). Health beverages; soft drinks; staples/cereals; bakery products (biscuits, bread, cakes); snack food; chocolates; ice cream; tea; coffee; soft drinks;
Food and Beverages
processed fruits, vegetables; dairy products; bottled water; branded flour; branded rice; branded sugar; juices etc. Oral care, hair care, skin care, personal wash (soaps); cosmetics and
Personal Care
toiletries; deodorants; perfumes; feminine hygiene; paper products.
Analysis of FMCG Sector Strengths: • •
•
Low Operational Costs Presence of established distribution networks in both urban and rural areas Presence of well-known brands in FMCG sector
Opportunities: • •
•
• •
Untapped rural market Rising income levels, i.e. increase in purchasing power of consumers Large domestic market- a population of over one billion. Export potential High consumer goods spending
Weakness: •
• •
Lower scope of investing in technology and achieving economies of scale, especially in small sectors Low exports levels “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.
Threats: •
• •
Removal of import restrictions resulting in replacing of domestic brands Slowdown in rural demand Tax and regulatory structure
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Trends The Structure The Indian FMCG sector is the fourth largest sector in the economy and creates employment for three million people in downstream activities. Within the FMCG sector, the Indian food processing industry represented 6.3 per cent of GDP and accounted for 13 percent of the country's exports in 2003-04. A distinct feature of the FMCG industry is the presence of most global players through their subsidiaries (HUL, P&G, Nestle), which ensures new product launches in the Indian market from the parent's portfolio.
Critical Operating Rules in FMCG Sector •
Heavy launch costs on new products on launch advertisements, free samples and product promotions.
•
Majority of the product classes require very low investment in fixed assets.
•
Existence of contract manufacturing.
•
Marketing assumes a significant place in the brand building process.
•
Extensive distribution networks and logistics are key to achieving a high level of penetration in both the urban and rural markets.
•
Factors like low entry barriers in terms of low capital investment, fiscal incentives from government and low brand awareness in rural areas have led to the mushrooming of the unorganized sector.
•
Providing good price points is the key to success.
Rural Markets: Small is Beautiful By the early nineties FMCG marketers had figured out two things: •
Rural markets are vital for survival since the urban markets were getting saturated.
•
Rural markets are extremely price-sensitive.
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21 | P a g e Thus, a number of companies f llowed the strategy of launching a wide range of package sizes and prices to suit the purchasing preferences of India's varied consumer seg ents. Hindustan Unilever, a subsidiary of Unilev r, coined the term nano-marketing in the early nineties, when it introduced its products in small sachets. Small sachets were introduced in alm st all the FMCG segments from oil, shampoo, and detergents to beverages.
Consumer-Class Boom Household Income Distribution 2003 60
2015
54
50
41 40
34
t n e c r30 e p
6 18
20
13 10
5 2
4
3
Aspirants
Desti tutes
0
Very Rich
Con suming lass
Climbers
Source: HUL, NCAER.
.
Demand for FMCG products is set to boom by almost 60 per cent by 2007 and more than 100 per cent by 2015. This will be dr iven by the rise in share of middle class (defined as the climbers and consuming class) from 67 er cent in 2003 to 88 per cent in 2015. The boom in various consumer categories, further, indicates a latent demand for various product segments. For example, the upper end of very rich and a part of the consuming class indicate a small but rapidly growing segment for branded products. The middle segment, on the other hand, indicates a large market for the mass end product .
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Market Opportunities for Investment Measuring the Opportunity: Domestic FMCG Market to treble FMCG Market Size (US$ billion) 40
33.4
35 30 25 20 15
11.6
10 5 0 India - 2003
India - 2015
According to estimates based on China's current per capita consumption, the Indian FMCG market is set to treble from US$ 11.6 billion in 2003 to US$ 33.4 billion in 2015. The dominance of Indian markets by unbranded products, change in eating habits and the increased affordability of the growing Indian population presents an opportunity to makers of branded products, who can convert consumers to branded products.
Sectoral Opportunities According to the Ministry of Food Processing, with 200 million people expected to shift to processed and packaged food by 2010, India needs around US$ 28 billion of investment to raise food processing levels by 8-10 per cent. In the personal care segment, the lower penetration rates also present an untapped potential. Key sectoral opportunities are mentioned below: •
Staple: Branded and Unbranded: Investment in branded staples is likely to rise with the popularity of branded rice and flour among urban population.
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Dairy Based Products: Investment opportunities exist in value-added products like desserts, puddings etc. The organized liquid milk business is in its infancy and also has large long-term growth potential.
•
Packaged Food: Growth of dual income households, where both spouses are earning, has given rise to demand for instant foods, especially in urban areas. Increased health consciousness and abundant production of quality soya-bean also indicates a growing demand for soya food segment.
•
Personal Care and Hygiene: Rapid urbanization is expected to propel the demand for cosmetics to 100,000 metric tonnes by 2011-12, with an annual growth rate of 10 per cent.
•
Beverages: According to CIER, demand for coffee is expected to rise to 535,000 metric tonnes by 2012, with an annual growth rate of 5 per cent between 2006-12.
•
Edible Oil: The demand for edible oil in India, according to CIER, is expected to rise to 21 million tonnes by 2011-12 with an annual growth rate of 7 per cent per annum.
•
Confectionary: The explosion of the young age population in India will trigger a spurt in confectionary products. In the long run the industry is slated to grow at 8 to 10 per cent annually to 870,000 metric tonnes by 2011-12.
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Hindustan Unilever Limited Overview Hindustan Unilever Limited, erstwhile Hindustan Lever Limited (also called HLL), headquartered in Mumbai, is India's largest consumer products company, formed in 1933 as Lever Brothers India Limited. Its 41,000 employees are headed by Mr. Harish Manwani, the non-executive chairman of the board. HUL is the market leader in Indian products such as tea, soaps, detergents, as its products have become daily household name in India. The Anglo-Dutch company Unilever owns a majority stake in Hindustan Lever Limited. Recently in February 2007, the company has been renamed to "Hindustan Unilever Limited" to provide the optimum balance between maintaining the heritage of the Company and the future benefits and synergies of global alignment with the corporate name of "Unilever".
Brands 6 Mega Brands ~ $ 150 to 200 million each, 53% FMCG Portfolio
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Home & Personal Care Personal Wash: • • • •
Lux Lifebouy Liril Hamam
Hair Care: • •
Sunsilk Naturals Clinic
Ayurvedic Personal and Health Care: • • • • •
Ayush Breeze Dove Peers Rexona
Oral Care: • •
Pepsodent Closeup
Laundry: • • •
Surf Excel Rin Wheel
Deodorants: • •
Axe Rexona
Skin Care: • • •
Fair & Lovely Pond’s Vaseline
Colour Cosmetics: •
Lakme
Foods Tea: • •
Coffee: Brooke Bond Lipton
Foods: • • •
Kissan Annapurna Knorr
•
Brooke Bond Bru
Ice-Cream: •
Kwality Wall’s
Hindustan Lever Network Started in 2003, Hindustan Unilever Network (HLN) is HUL's Direct Selling arm. It already has about 3.5 lakh consultants - all independent entrepreneurs, trained and guided by HLN's expert managers and trainers. HLN offers you to build a business with different categories of Home & Personal Care (HPC) and Food products. They are all essential household needs. And they are all exclusive to HLN, specifically developed for the Direct Selling channel, and not available in the retail channel.
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Water Hindustan Unilever Limited has launched Pureit, the most advanced in-home water purifier in the world. It is the only purifier that gives you water that is ‘as safe as boiled water'™ without boiling, and without needing electricity or continuous tap water supply.
Exports Over time HUL has developed into a viable & competitive sourcing base for Unilever world wide in Home and Personal Care & Foods & Beverages category of products. HUL is also a global marketing arm for select licensed Unilever brands and also works on building categories with core country advantage such as branded basmati rice.
Management Structure Hindustan Unilever Limited is India's largest Fast Moving Consumer Goods (FMCG) Company. It is present in Home & Personal Care and Foods & Beverages categories. HUL and Group companies have about 16,000 employees, including 1200 managers.
Board Mr. Harish Manwani
Chairman
Mr. Nitin Paranjpe
CEO and Managing Director
Mr. D. Sundaram
Vice Chairman and CFO
Mr. Sanjiv Kakkar Mr. Dhaval Buch Mr. D. S. Parekh Mr. C. K. Prahalad
Director
Mr. A. Narayan Mr. S. Ramadorai Mr. R. A. Mashelkar
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Listing Details of Equity Shares Name of the Stock Exchange
Stock Code
Bombay Stock Exchange Limited
500696
National Stock Exchange of India Limited
HINDUNILVR
The listing fee for the financial year 2007-2008 has been paid to the above stock exchanges. The ISIN Number allotted to the Company’s equity shares of face value of Re. 1/- each under the depository system is INE030A01027 and it’s belong to the BSE Group A. The Company Forms A Part Of The Following Indices: •
Sensex
•
BSE-200
•
Nifty
•
S&P CNX 500
•
BSE-100
•
CNX FMCG
Shareholding Pattern as on December 31, 2007 Percentage 16%
16%
15%
1%
52%
Foreign Holdings (15.44%)
Govt. / Financial Institutions (15.2%)
Corpor ate Bodie s(not c over ed above ) (0.89%)
Dir ec tor s a nd the ir Relatives (52.11%)
Other including Indian Public (16.31%)
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Categories of Shareholders as on December 31, 2007 Percentage 16.79 0.01 0.29
1.12
52.12 14.29
12.56 0.35
2.47 Unilever and its associates Financial Institutions/Banks Foreign Institutional Investors NRIs/Foreign Bodies Corporate/Foreign Nationals Resident Individuals and Others
Mutual Funds & Unit Trust of India Insurance Companies Bodies Corporate Directors and their Relatives
Bifurcation of Shares Held in Physical and DEMAT Form as on December 31, 2007 Particulars
Percentage
Physical Segment: Unilever & its Associates
52.12
Others
4.57
DEMAT Segment: National Securities Depository Limited
42.47
Central Depository Services (India) Limited
0.84
Total
100
Dividend The Board of Directors at their meeting held on 13th February, 2008 recommended a final dividend of Rs. 3/- for Equity Shares of face value of Re. 1/- each for the year 2007, subject to the approval of the shareholders. Together with the Interim Dividend of Rs. 3/- per share paid on 22nd August, 2007 and the Platinum Jubilee Dividend of Rs. 3/- per share paid on 22nd November, 2007, the Total Dividend for the year works out to Rs. 9/- per share. Final dividend, if approved, will be paid on or after 8th April, 2008. Presented by | D a i p a y a n L o d h
29 | P a g e
Mergers/Acquisitions/Joint Ventures and Disposals 1. Divestment of “Sangam Direct” In March 2007 "Sangam Direct" a non-store home delivery retail business, operated by Unilever India Exports Limited (UIEL), a fully owned subsidiary of HUL was transferred to Wadhavan Foods Retail Pvt. Limited (WFRPL) on a slump sale basis.
2. Amalgamation of Modern Foods Industries (India) Limited and Modern Foods and Nutrition Industries Limited with Hindustan Unilever Limited HUL had sought approval from the shareholders and the Courts to merge the above Companies as of 30th September, 2006. While the shareholder approvals were received in 2006, HUL received approvals from the High Courts of Mumbai and Delhi in March Quarter 2007. Thus the two companies have been merged with your Company w.e.f. 1st October, 2006.
3. Demerger of the Non-Operational Facilities in Shamnagar, Jamnagar and the “Janmam” Land into Separate Companies HUL had undertaken demerger of its nonoperational facilities in Shamnagar, Jamnagar and Nilgiris district into three independent and separate companies, being 100% subsidiaries of the Company known as Shamnagar Estates Pvt. Limited, Jamnagar Properties Pvt. Limited and Daverashola Estates Private Limited (Formerly known as Hindustan Kwality Walls Foods Private Limited).
4. Joint Venture with Smollan Holdings HUL has entered into a strategic tie-up through a Joint Venture (JV) with Smollan Holdings of South Africa, which aims to build long term capabilities and bring ‘in-store’ execution focus in servicing the Company’s Modern Trade customers. Smollan Holdings is one of the leading ‘in-store execution and field services’ companies internationally. It has leading edge capabilities in servicing Modern Trade focused on shelf filling, logistics for merchandising materials and in-store execution.
Presented by | D a i p a y a n L o d h
30 | P a g e
Project Shakti - Changing Lives in Rural India Hindustan Unilever’s Project Shakti is a rural initiative that targets small villages with a population of less than 5000. It is a unique win-win initiative that empowers women in rural India even as it benefits the business. Project Shakti impacts society in three favorable ways – Shakti Entrepreneur program creates livelihood opportunities for underprivileged rural women; Shakti Vani program improves quality of life by spreading health and hygiene awareness and; iShakti community portal empowers rural community by creating access to information. Parallel, Project Shakti benefits your business by significantly enhancing its direct rural reach, and by enabling Company’s brands to communicate effectively in regions not touched by any media.
Objectives •
•
•
To Reach: •
Small, scattered settlements and poor infrastructure make distribution difficult.
•
Over 500,000 villages not reached directly by HUL.
To Communicate: •
Low literacy hampers effectiveness of print media.
•
Poor media-reach: 500 million Indians lack TV and radio
To Influence: •
Low category penetration, consumption, brand awareness
•
Per capita consumption in Unilever categories is 33% of urban levels
Initiatives •
Shakti entrepreneur; currently ~ 44000 women cover 1,25,000 villages
•
Shakti Vani: one-to-many communication for categor y growth
•
iShakti: customized interaction with remote consumers
Impact on Community •
Business and social impact can go together
•
Partnerships with diverse stakeholders
Presented by | D a i p a y a n L o d h
31 | P a g e
Financial Overview Ratio Analysis Liquidity Ratios Dec ' 07 Dec ' 06 Dec ' 05 Dec ' 04 Dec ' 03 Current Ratio
0.69
0.74
0.70
0.95
0.97
Quick Ratio
0.24
0.33
0.32
0.47
0.52
Inventory Turnover Ratio
8.20
9.27
9.97
8.23
8.78
Debtors Velocity (Days)
11
12
12
11
10
Creditors Velocity (Days)
87
85
81
78
81
1.2 1 0.8 0.6 0.4 0.2 0 Dec'03
Dec'04
Dec'05
Current Ratio 12
Dec'07
Quick Ratio 100 90
9.97 10
Dec'06
8.78
9.27 8.23
80
8.2
8
70 60 50
6
40 30
4
20 10
2
0 Dec'03
0 Dec'03
Dec'04
Dec'05
Dec'06
Inventory Turnover Ratio
Dec'07
Dec'04
Dec'05
Dec'06
Dec'07
Debtors Velocity Creditors Velocity
Presented by | D a i p a y a n L o d h
32 | P a g e Current Ratio of HUL has been less than 1 for all the 5 years taken for analysis. This implies that working capital of HUL is always negative. This is generally considered an aggressive strategy i.e. to financing its long term asset by short term sources that increases profitability because current liabilities are non interest bearing items. There is significant difference between CR and LR which indicates that the current asset of HUL consists of good amount of inventory. Value of sundry debtors is quite low since there is minor difference between LR and ACR. The liquidity ratios have decreased from previous year which shows that HUL has reduced its liquidity further. On analyzing the operating cycle it can be said that HUL takes good amount of time to pay its creditors and this is how it manage to run its operations with negative working capital.
Solvency Ratios Dec ' 07 Dec ' 06 Dec ' 05 Dec ' 04 Dec ' 03 Total Debt/Equity
0.06
0.02
0.02
0.70
0.79
Interest Coverage
82.73
171.46
85.57
12.42
33.47
Debt to Total Assets
0.018
0.016
0.014
0.311
0.355
Reserve to Total Assets
0.254
0.548
0.497
0.396
0.400
0.9 0.8 0.7 0.6 0.5 0.4 0.3 0.2 0.1 0
Dec'03
Dec'04
Total Debt/Equity
Dec'05
Dec'06
Debt to Total Assets
Dec'07
Reserve to Total Assets
200
171.46
150
85.57
100 50
82.73
33.47 12.42
0
Dec'03
Dec'04
Dec'05
Dec'06
Dec'07
Interest Coverage Ratio
Presented by | D a i p a y a n L o d h
33 | P a g e The loans taken by HUL were high in 2004 which is indicated by high debt to total source ratio and this is why its ICR ratio was low (as compared to ICR in 2007 and 2006). It has decreased its loan and currently it is financing its business mostly by net worth and current liability. Debt to equity ratio has decreased over the years as it has reduced the loans, but in 2007, debt/equity ratio has increased. This implies that HUL is relying less on its owner equity to finance its assets rather than on borrowed funds. Its RS to Total source has decreased which indicates that HUL invests accumulated profit into business with increasing debt.
Profitability Ratios Dec ' 07 Dec ' 06 Dec ' 05 Dec ' 04 Dec ' 03 Operating Margin (%)
14.95
14.74
14.14
15.32
20.58
PBT/Net Sales (%)
17.01
18.12
14.65
14.95
21.45
Gross Profit Margin (%)
13.96
13.68
13.03
14.12
19.36
Net Profit Margin (%)
12.58
14.94
12.42
11.68
16.84
Return On Net Worth (%)
82.89
61.48
64.05
56.61
61.14
Return on Total Assets (%)
49.03
48.10
39.15
34.16
46.58
Return on Capital Employed (%)
97.61
71.34
55.46
43.62
59.13
Earning Per Share
8.73
8.41
6.40
5.44
8.05
Dividend Per Share
9.00
6.00
5.00
5.00
5.50
CFO/PBIT
0.714
0.725
1.198
0.806
0.661
25 20 15 10 5 0 Dec'03
Dec'04
Dec'05
Gross Profit Margin
Dec'06
Dec'07
Net Profit Margin
Presented by | D a i p a y a n L o d h
34 | P a g e 120 100 80 60 40 20 0 Dec'03
Dec'04
Dec'05
RONW
Dec'06
ROTA
Dec'07
ROCE
PBIT as percentage of sales is moderately good and there has been significant change in it during last three years. Similar is the case of PBT/Sales. PBT/Sales are higher than the PBIT/Sales for year 2007 and 2006 which indicate that PBT is more than PBIT. This implies that interest paid by the company is negative. On closely watching the financial statement, it has been found that Net Income from Interest for HUL is positive for the years 2007 and 2006 making PBT higher than PBIT. That is because Income Received by the company is more than that to be paid. There has not been any significant change in operating expense as percentage of sales in last three years. For FMCG business the operating expense to sales ratio around 30% can be considered good as the company has to spend heavily on its distribution network and promotional activities. The profit distributing ability of the firm is excellent with return on net worth (RONW) being around 82.89% over the years. The profit generating ability similar to the profit distributing ability is pretty good with ROCE over 97.61% during the year 2007. ROCE in year 2006 has increased from the figure of 2005, perhaps because of the decrease in debt (change in capital structure) and increase in current liability (non interest bearing item). Return on total asset (ROTA) has been moderately good with almost constant value of around 43.40% over the years. 10 8 6 4 2 0 Dec'03
Dec'04
Dec'05
EPS
Dec'06
Dec'07
DPS
Presented by | D a i p a y a n L o d h
35 | P a g e The face value of Equity Share of HUL is Rs. 1. Analyzing the EPS and DPS, which are profit distributing ability ratios, for HUL we can see that it has been generating more than 500% times profit for its shareholders over the years. The EPS increased over the years from Rs.5.xx in year 2004 to Rs. 8.xx in year 2007. It has been generous in distributing the profit in form of dividend with DPS Rs. 5.00 in year 2004 and Rs. 9.00 in year 2007. 1.4
1.198
1.2 1 0.8
0.806 0.661
0.725
0.714
Dec'06
Dec'07
0.6 0.4 0.2 0
Dec'03
Dec'04
Dec'05
CFO/PBIT
The trend of CFO/PBIT is worth analyzing since the company’s CFO is close to its PBIT which indicates that almost entire profit of HUL comes from its operation and the profit is realized. In year 2005 the CFO is higher than PBIT indicating the negative CFF or CFI i.e. the company has realized the profit(in form of cash) and invested in long term assets or paid its long term outside liabilities(loans).
Presented by | D a i p a y a n L o d h
36 | P a g e Market Based Return Dec ' 07
Dec ' 06
Dec ' 05
Dec ' 04
Dec ' 03
Price to Earning Ratio
29.67
28.61
34.79
30.02
32.24
Market Capitalization
47222.70
47786.09
43418.67
31587.22
45058.56
32.826
17.550
18.837
15.099
21.075
P.B. Ratio 40 35 30 25 20 15 10 5 0
Dec'03
Dec'04
Dec'05
Dec'06
Price to Earning Ratio
s d n a s u o h T
Dec'07
P.B. Ratio
60 50
45.05856
40
47.78609
47.2227
Dec'06
Dec'07
43.41867 31.58722
30 20 10 0 Dec'03
Dec'04
Dec'05
Market Capitalization
PER ratio for HUL is not so good with values over 30 in year 2007 and 2006 and somewhat better with value around 30 in the year 2007. It means an investor will get return around 1/30 times on his actual investment. Market capitalization of HUL has increased after 2004, but there is a small decrease in the year 2007.
Presented by | D a i p a y a n L o d h
37 | P a g e
Economic Value Added (Rs. crores) Cost of Capital Em loyed (COCE) 1 Average Debt 2 Average Equity 3 Average Capital Employed : (1) + (2) 4 Cost of Debt, post-tax % 5 Cost of Equity 6 Weighted Average Cost of Capital % (WACC) 7 COCE : (3) x (6 ) Economic Value Ad ed (EVA) 8 Profit after tax, efore exceptional items 9 Add : Interest, a ter taxes 10 Net Operating P ofits After Taxes (NOPAT) 11 COCE, as per (7 above 12 EVA : (10) - (11 )
2005
2006
2007
360 163 382 2200 2515 2402 2560 2677 2785 3.38 5.9 6.24 15.5 16.38 17.59 13.8 15.74 16.03 353 421 446 1355 12 1367 353 1014
1540 7 1547 421 1125
1769 17 1786 446 1340
1340 1400 1200
1014
1125
1000 800 600 400 200 0 200
•
2006
2007
Cost of debt is taken at the effective rate of interest applicable to
n “AAA” rated
company like HUL with an appropriate mix of short, medium and long term debt, net of taxes. I had considered a pre tax rate of 9.45% for 2007 (8.90% for 2006 after taking into account the trends over t e years and market situations. •
Cost of Equity is the r eturn expected by the investors to compens te them for the variability in returns caus ed by fluctuating earnings and share prices.
Presented by | D a i p a y a n L o d h
38 | P a g e
Du Pont Analysis The data used to calculate all the ratios used in Du Pont chart are shown below: COGS / Sales (0.45)
PBIT / Sales (0.16)
Expenses / Sales (0.87)
Depn. / Sales (0.01)
ROTA = PBIT / Total Asset (1.63)
Sales / FA (0.08)
Sales / Debtors (0.30)
Sales / CA (0.04)
Sales / Cash (0.53)
Sales / Total Asset (9.65)
Sales / Inventory (0.07)
Analysis •
HUL has a lower ROTE mainly because of low operating profit (PBIT) and comparatively higher capital employed. This has been the recent trend in past 5 years when HUL is trying to expand and hence incurring more cost on it, as a result its nontrade investment is quite low as compared to other competitors who have been operating in market for a quit long time.
•
PBIT/SALES are less for HUL mainly because of higher EXP/SALES.
•
SALES/TA of HUL is more than the industry average mainly because of lower TotalAssets, which in turn is due to lower Current-Assets.
•
SALES/CA is also quite high for HUL because of lower amounts of ‘OTHER CA’ and ‘LOANS & ADV’, or in other words, huge SALES/OTHER CA and SALES/LOANS & ADV.
•
As explained earlier, Capital Employed of HUL is low mainly because it has low Net Worth and it has raised lower amount of Long Term.
Presented by | D a i p a y a n L o d h
39 | P a g e
Recommendation downgraded to Sell
Over the last two years, HUL’s business has turned around buoyed by stronger topline growth, improvement in margins and higher fiscal benefits. Going forward we are becoming concerned about renewed competitive pressures and hence believe earnings growth will be below market expectations. Coupled with rich valuation I believe downside risks are high. Key trigger will likely be consensus earnings downgrades beginning post the September quarter results due at the end of this month.
Henceforth, I am downgrading HUL to Sell for the following reasons:
Earnings momentum is slowing – HUL’s 1H 2006 profit grew 30% Y-o-Y. In the second half of the year profit growth to slow to just 13% Yo-Y. While 1H had the benefit of positive base effect, this plays negatively in 2H. Overall, I believe the turnaround in HUL is now behind us and normalized earnings growth of 15% in 2007 is unexciting.
Competitive issues continue to persist – HUL’s topline has benefited from volume rebound led by sharp price cuts and rising income levels. However, it is disappointed by the fact that HUL’s market share in most of its key categories is either flat or down despite substantial jump in advertising costs over the last 2 years. Going forward, while
Presented by | D a i p a y a n L o d h
40 | P a g e Procter & Gamble (P&G) remains a latent risk, we believe there will also be increasing risk from ITC’s likely launch of new FMCG products.
Valuation is rich – Over the last two years, HUL has re-rated from its trough P/E of 20x to now 30xDec07E. In my opinion this is excessive for a business forecast to grow profits at 15% CAGR.
Risks for Sell recommendation: •
Can topline growth exceed expectations? – Given its diversified product range and distribution depth, HUL is well positioned to benefit from growing income levels. Indeed, we have already seen this in the last two years with volume growth improving to double digits in shampoos, detergents and skin care and to high single digit in soaps. The key question is – does it get any better from here? I have some doubts owing to likely new competition from ITC and also poor monsoons this year. Should HUL resort aggressively to the other topline driver – price, then it may end up re-visiting the problems of low priced competition.
•
Growing organized retailing – opportunity or obstacle? – A number of large corporate houses have announced plans to start food and grocery retailing. This may substantially reduce wastage in the farm economy and thereby boost demand for HUL’s products. On the other hand, trade margins may rise with bargaining power moving from HUL to organized retailers. It is at this stage difficult to comment on the timing of these possible developments. I believe in the initial stages, organized retailing may be either neutral or positive for HUL but will likely hit negatively in a few years time.
•
New management, new processes – Contrary to the tradition of last two decades when HUL was run by local managers, Doug Bailley, an expatriate and turnaround expert from South Africa, has been appointed the MD. This may possibly lead to new processes and culture with more focus on product innovation and new avenues of cost cutting. However we think the near term impact on earnings will likely be small.
Presented by | D a i p a y a n L o d h
41 | P a g e
Competitive issues – The worst is not over Looking back the problems in HUL began in early 2000 when focus on innovation began to reduce and retail price increases were sharp which led to mushrooming of regional low-priced competition. I believe today HUL is a far improved company with greater focus on innovation and a lot more sensitivity towards maintaining the appropriate price value equation. Yet, my key concern is HUL’s market share is not growing despite increased advertising costs over the last two years.
P&G – Peaceful co-existence for how long? I saw the P&G offensive in March 2004 when they cut detergent prices by 30% forcing HUL to follow suit. Since then there seems to be some pricing power coming back and there appears to be a relatively peaceful co-existence between the two companies. However, I believe it is a matter of time before P&G expands its product portfolio in India and intensifies the competitive pressure on HUL. P&G is a global giant but India is perhaps the only large market where its business is less than 1/5th of Unilever’s business. With emerging markets being a priority for global companies we believe P&G will eventually increase its efforts in India.
ITC – Emerging competition The second major threat I foresee is emerging competition from ITC. The trade participants indicate that ITC is set to launch its personal care business over the next few months. While this is a new category for ITC, I would be wary of this development from HUL’s perspective given the former’s strong balance sheet, powerful distribution, desire to build a large FMCG business and tremendous capability in executing its plans. A case in point is the flour business where in the last 5-6 years ITC has become the market leader surpassing multinationals such as HUL, Conagra, Pillsbury, etc.
Market share gains is a priority Management has stated (and rightly so) that market share gains is a priority. Given this strategy and my belief that the Indian market will get even more competitive in the future, it implies that advertising costs for HLL will rise faster than has been the case in the last two years. Indeed in 1H 2006, advertising costs have risen 32%. I expects ad-spend to rise 29% in the current year and 18% CAGR next two years. In terms of % of domestic consumer sales, I expect the ratio to
Presented by | D a i p a y a n L o d h
42 | P a g e increase to 12.6% in 2008, up from 10.1% in 2005 (see chart 3). I expect a large part of this increase to be funded by savings from crude oil linked raw material costs.
HUL’s market share not rising despite higher advertising HUL’s advertising costs increased 10% in 2004 and 20% in 2005. As a percentage of domestic consumer business, it has improved from 8.6% in 2003 to 10.1% in 2005 (see chart 3). This has however not resulted in market share gains in its key categories (see chart 4). Soap and toothpaste shares continue to fall and skin and detergent shares are largely flat. The only bright spot is shampoos where shares are on an upward trend.
Presented by | D a i p a y a n L o d h
43 | P a g e
Peer Group Comparison •
QoQ volume growth shows mixed trend: 2QFY09 volume growth shows mixed trend across companies and product categories. Companies such as Dabur, Godrej Consumer, GSK Consumer and ITC have reported QoQ increase in volume growth by 14%. HUL, Asian Paints, United Spirits and Colgate have reported lower QoQ volume growth by 1-4%. YoY trend still shows 3-5% higher volume growth for most of the companies in our coverage universe. Our FMCG universe posted 19.9% YoY growth in revenue in the quarter ended September 2008.
•
Input costs impact gross margins by 382bp (excluding ITC): The impact of a decline in raw material cost is not reflected in the September quarter results, as most companies have been carrying inventories at higher levels. Gross margin for our coverage universe declined 220bp YoY. Excluding ITC, the decline in gross margins is 382bp. Small cap and mid-sized companies reported gross margin decline of 630bp and 420bp respectively while large caps gross margins improved by 90bp (due to 330bp expansion in ITC gross margins led by cigarettes). Meltdown in commodity prices is expected to increase profit margins in the December quarter. Margin expansion beyond that would be category specific, and would depend on the competitive intensity and strength of the market leader in that segment.
•
Cost control restricts EBITDA margin decline to 220bp: Our FMCG universe companies were able to restrict EBITDA margin decline to 220bp by focusing on cost control measures in adspend and other overheads. Advertising spend grew by 27% YoY growth in June 2008. Lower growth in other expenditure also resulted in a positive operating leverage. EBITDA growth for our coverage universe was just 6.5% YoY.
•
Mid-sized companies continue to outperform: Mid-sized (based on market cap) companies in our coverage universe continue to outperform others. Sales growth for midsized companies is 23.7% versus 21.1% for small companies and 17.4% for large companies. EBITDA of these companies have grown by 13% compared with decline of 6.1% for small caps and growth of 7.6% for large caps. EBITDA margin erosion for midcaps has been 160bp versus 330bp (for small caps) and 190bp (for large caps). Midcaps have reported 12.1% PAT growth versus 6.1% for small caps and 5.1% for large caps. Presented by | D a i p a y a n L o d h
44 | P a g e •
Challenging times
head but softer raw material prices could boost
profitability: Most FMCG companies are positive on long-term gro th potential; the short-term outlook is un certain due to uncertain economic environme t and erosion in purchasing power. Alth ugh no clear signs of a downturn are visibl , select product segments are witnessing down trading and a shift toward small packs, which might impact near term volum growth. We expect full impact of price incre ases to reflect in the coming quarter, which might show lower volume growth on a QoQ basis. We expect margin expansion for m st of the companies in our universe from 3QFY09 as the full benefits of decline in input cost and price increases are reflected. We believe that companies with a presence in product segments that lack substitutes, high consumer switching costs and stro g pricing power, will emerge stronger in this period. We rate ITC as our top pick in large caps. United Spirits and Nestle are top pic s in the mid-cap space, while we rate Marico Industries as our top pick in small caps.
Presented by | D a i p a y a n L o d h
45 | P a g e
HUL and Dabur emerge
ost aggressive in product launches
HUL and Dabur have been on the forefront for launch of new products and v riants. HUL has launched new variants across s gments — prominent being Rin Matic in det rgents and entry into the ready-to-eat segment under the Knorr brand. Dabur has focused on the ulabari brand in Skin Care and Dazzl brand in Home Care. GCPL has launched its power hair dye, Godrej Hair Expert in four new colors. ITC ontinues to launch new variants in its Personal Care and Foods range. We expect new launches to gain momentum in the coming months
ith players like
Dabur, Nestle, ITC and HUL being in the forefront for new launches.
Presented by | D a i p a y a n L o d h
46 | P a g e
Top-2 Buys
Top-2 Switches
ITC
Hindustan Unilever •
Adverse
regulatory
environment
in
cigarette business is near its peak; 75-80% non-filter
conversion
rate
and
•
10.4% in Q1CY08 to 8.4% in 2QCY08 and
price
6.8% in 3QCY08. We expect volume
increases have ensured 12-15% PBIT
growth to decline to 5% levels in the
growth. •
coming quarter.
Increase in paper capacity by 50% and pulp capacity by 100%, will start contributing
•
contribute 25% to total sales and 35% to
boost sales and profits from 2HFY09.
the PBIT of the company.
Rising consumer acceptability in Skin Care is positive due to 20-25% EBITDA
•
poor implementation.
US$2b.
•
United Spirits has posted 16% volume
•
Dabur India •
Dabur India has planned capex of Rs2-2.5b
growth in 1HFY09; we expect 12-15%
for
volume growth in the coming years due to
implementation of the sunset clause for
60% share in IMFL, strong brands and
excise and income tax benefits in 2010.
presence across price points and segments. •
HUL’s attempt to create a strong presence in the high potential food market has seen
margins and market size of more than
United Spirits
The share in toilet soaps has declined by around 400bp to 50.2%. Toilet Soaps
positively in another 3-6 months and would
•
HUL’s volume growth has declined from
•
capacity
expansion
before
It plans to open 15-18 NewU stores in the
Input cost pressures are expected to subside
coming 6-8 months to take advantage of
as the prices of molasses, ENA and glass
decline in lease rental rates. I expect long
bottles are expected to decline due to more
gestation period as Health and Beauty
than 50% decline in crude prices.
stores as a concept store is yet to catch up
We expect the company to sell treasury
in India.
stock (17.75m shares) in the coming 12-15
•
Performance in Skin Care and Household
months to reduce debt (US$619m from
Care has been below expectations. Further,
Citibank, GBP325m from ICICI Bank and
high growth segments like juices are
rupee borrowings of Rs14b).
witnessing cut throat competition.
Presented by | D a i p a y a n L o d h
47 | P a g e
Conclusion FMCG companies are fighting to stand out amid the clutter of a massively vigorous and strengthening consumer market. To keep consumers interested India's brands are diversifying well-loved favorites by entering new FMCG territory. It is quite common for emerging market companies to want to sell their share of the business to their global partners. In case the global company is willing to acquire the local partner, the latter would improve its negotiating power and strengthen its position. FMCG sector is long established and over the years, sustaining ups and downs of the Indian economy. Thus the Critical operating rules in Indian FMCG sector can be summarized as follows: •
Heavy launch costs on new products on launch advertisements, free samples and product promotions.
•
Majority of the product classes require very low investment in fixed assets
•
Existence of contract manufacturing
•
Marketing assumes a significant place in the brand building process
•
Extensive distribution networks and logistics are key to achieving a high level of penetration in both the urban and rural markets
•
Factors like low entry barriers in terms of low capital investment, fiscal incentives from government and low brand awareness in rural areas have led to the mushrooming of the unorganized sector
•
Providing good price points is the key to success.
Nevertheless, the FMCG growth story is here to stay. According to a survey on fast moving consumer goods (FMCG) industry undertaken by Federation of Indian Chambers of Commerce and Industry (FICCI), the growth momentum is likely to continue in the current fiscal as well, spurred by lifestyle category goods. It includes products categories like skin care, shampoos, deodorants, anti-aging solutions, fairness products and various men's products. Most are counting on two factors as driving forces:•
Increased market penetration in rural areas and
•
A shift in urban outlook regarding expenditure. Presented by | D a i p a y a n L o d h
48 | P a g e
Annexure Balance Sheet of HUL (Rs. in Crs.) Year
Dec 07
Dec 06
Dec 05
Dec 04
Dec 03
SOURCES OF FUNDS : Share Capital
217.75
220.68
220.12
220.12
220.12
Reserves Total
1,221.49
2,502.81
2,085.50
1,872.59
1,918.60
Total Shareholders Funds
1,439.24
2,723.49
2,305.62
2,092.71
2,138.72
Secured Loans
25.52
37.13
24.5
1,453.06
1,603.70
Unsecured Loans
63.01
35.47
32.44
18.06
100.61
Total Debt
88.53
72.6
56.94
1,471.12
1,704.31
1,527.77
2,796.09
2,362.56
3,563.83
3,843.03
Gross Block
2,669.08
2,462.69
2,375.11
2,314.22
2,141.72
Less : Accumulated Depreciation
1,146.57
1,061.94
951.17
891.08
846.09
Net Block
1,522.51
1,400.75
1,423.94
1,423.14
1,295.63
185.63
110.26
98.03
94.42
73.84
Investments
1,440.81
2,413.93
2,014.20
2,229.56
2,574.93
Inventories
1,953.60
1,547.71
1,321.77
1,479.58
1,402.45
Sundry Debtors
443.37
440.37
522.83
489.27
470.85
Cash and Bank
200.86
416.94
355.03
698.05
806.48
Loans and Advances
679.58
764.63
573.38
638.06
822.01
Total Current Assets
3,277.41
3,169.65
2,773.01
3,304.96
3,501.79
Current Liabilities
3,837.09
3,201.63
2,969.45
2,590.79
2,559.49
Provisions
1,273.89
1,321.42
1,158.87
1,123.46
1,311.11
Total Current Liabilities
5,110.98
4,523.05
4,128.32
3,714.25
3,870.60
-1,833.57
-1,353.40
-1,355.31
-409.29
-368.81
Deferred Tax Assets
403.71
385.43
338.68
365.85
377.09
Deferred Tax Liability
191.32
160.88
118.54
139.85
109.65
Net Deferred Tax
212.39
224.55
220.14
226
267.44
1,527.77
2,796.09
2,362.56
3,563.83
3,843.03
494.37
476.4
468.34
476.41
478.34
Total Liabilities APPLICATION OF FUNDS :
Capital Work in Progress
Less : Current Liabilities and Provisions
Net Current Assets
Total Assets Contingent Liabilities
Presented by | D a i p a y a n L o d h
49 | P a g e
Income & Expenditure Statement of HUL (Rs. in Crs.) Year INCOME : Sales Turnover Excise Duty Net Sales Other Income Stock Adjustments Total Income EXPENDITURE : Raw Materials Power & Fuel Cost Employee Cost Other Manufacturing Expenses Selling and Administration Expenses Miscellaneous Expenses Total Expenditure Operating Profit Interest Gross Profit Depreciation Profit Before Tax Tax Deferred Tax Net Profit before Minority Interest Minority Interest Net Profit after Minority Interest Extraordinary Items Adjusted Net Profit Adjst. below Net Profit P & L Balance brought forward Appropriations P & L Balance carried down Dividend Equity Dividend (%) EPS before Minority Interest (Unit Curr.) EPS after Minority Interest (Unit Curr.) Book Value (Unit Curr.)
Dec 07
Dec 06
Dec 05
Dec 04
14,930.12 13,321.08 12,464.87 11,550.76 1,058.54 946.32 885.07 948.07 13,871.58 12,374.76 11,579.80 10,602.69 667.03 998.94 455.33 596.95 91.39 70.23 -181.13 -154.93 14,630.00 13,443.93 11,854.00 11,044.71 6,323.23 5,659.96 5,302.58 201.46 193.07 190.29 799.6 784.21 734.95 1,500.02 1,371.92 1,279.99 2,560.82 2,371.52 2,066.95 748.13 683.57 519.89 12,133.26 11,064.25 10,094.65 2,496.74 2,379.68 1,759.35 26.49 13.97 24.2 2,470.25 2,365.71 1,735.15 141.91 135.67 138.38 2,328.34 2,230.04 1,596.77 313.07 310.29 220.66 56.17 -10.38 17.53 1,918.87 1,894.16 1,358.58 3.98 3.63 2.66 1,914.89 1,890.53 1,355.92 197.45 351.13 36.3 1,717.44 1,539.40 1,319.62 150.01 -3.63 -2.66 640.27 452.12 498.45 2,532.23 1,702.38 1,402.25 176.92 640.27 452.12 1,976.12 1,325.48 1,100.62 900 600 500 7.18 7.74 5.45 7.16 7.72 5.43 6.92 11.89 9.85
4,837.02 179.86 720.65 1,138.02 1,787.51 545.47 9,208.53 1,836.18 136.25 1,699.93 195.68 1,504.25 265.17 37.77 1,201.31 -2.19 1,203.50 33.44 1,170.06 7.09 670.46 1,380.41 498.45 1,100.62 500 4.77 4.78 9.59
Dec 03 11,785.67 990.97 10,794.70 568.71 62.39 11,425.80 4,945.87 184.05 687.57 1,097.39 1,626.54 525.46 9,066.88 2,358.92 69.12 2,289.80 199.99 2,089.81 410.03 3.93 1,675.85 -9.02 1,684.87 30.1 1,654.77 104.39 1,048.04 2,157.82 670.46 1,599.21 550 5.9 5.94 9.76
Presented by | D a i p a y a n L o d h
50 | P a g e
Ratio Analysis Ratio Analysis assumes there is a relationship between certain aspects of the activities of the firm as revealed in its income statement and balance sheet. Such a relationship indicates a pattern of behavior.
Liquidity Ratio Liquidity Ratios indicate the company’s ability to meet its short-term liability. These ratios indicate the availability of liquid asset to meet short term obligations. Creditors usually check this ratio to assess the ability of firm to meet its short term obligations.
Current Ratio This is the ratio of the current assets and current liabilities, and is found out by dividing the current assets by the current liabilities. This ratio is the indicator of the short-term liquidity position of a firm. The conventional ratio is taken at 2:1 i.e., every current liability of Re.1 should be backed by a current asset of Rs.2. Current Ratio =
Quick Ratio Quick ratio is computed as follows: Quick Ratio
=
While calculating the quick ratio, inventories are excluded from current assets on the assumption that they take more time for conversion than debtors or other receivables. The conventional ratio is 1:1, i.e., every rupee of short-term liabilities must be backed by equivalent liquid assets. If, however, the ratio is less than 1, then some portion of the short-term liabilities must be met from the funds to be collected from outside.
Stock Turnover Ratio This ratio indicates the number of times the stock is turned over, on an average, and must be replaced during a given accounting period. Stock Turnover Ratio =
Presented by | D a i p a y a n L o d h
51 | P a g e Debtors Turnover Ratio This ratio shows the number of day for which credit is outstanding in the value of the amounts owed by the debtors. It gives an indication of the efficiency or otherwise of the credit and collection policies of the firm. Debtors Turnover Ratio Average Debtors
=
Average Daily Credit Sales
=
=
Creditors Turnover Ratio This ratio measures the promptness or otherwise with which payment is made to creditors for credit purchase. It is measured as follows: Creditors’ Turnover Ratio
=
Leverage Ratio Leverage Ratios indicate the company’s ability to meet its Long-term liability. These ratios indicate the ability of the firm to return the investment made by its owners and debt providers in the business, in case the company is closed down. These ratios are usually seen by the debt providers or financial institutions in order to assess the risk involved in the business. If the firm is closed down then first it is liable to pay back its loan and then if it is left with something that belongs to the share holders.
Debt/Equity Ratio This measures the relation between debt and equity in the capital structure of a firm and is expressed as: Debt/Equity Ratio
=
Generally, the higher the ratio, the greater is the possibility of increasing the rate of return to the equity, as long as the cost of debt is lower then the rate of return from the investment.
Presented by | D a i p a y a n L o d h
52 | P a g e Fixed Assets Turnover Ratio This indicates the extent to which the fixed assets contributed towards sales and is measured by:
Fixed Assets Turnover Ratio =
Profitability Ratio Profitability Ratios show how successful a company is in terms of generating returns or profits on the Investment that has been made in the business i.e. the Profitability ratios indicates the ability of the firm to generate and distribute the profit. It can be broadly categorized into profit generating ability (PGA) ratios and profit distributing ability (PDA) ratios. It can be said the higher these ratios the better it is for the company.
Gross Profit Ratio This ratio shows the amount of gross profit made out of the total net sales. Gross Profit Ratio
=
Net Profit Margin Ratio This ratio shows the amount of net operating profit made out of the total net sales Net Profit Margin Ratio
=
Operating Margin Ratio This ratio shows the amount of operating expenses made out of the total net sales. Operating Margin Ratio
=
Return on Net Worth This ratio gives an indication about the profit being made by the firm on the investment made by the owner. This ratio is used to analyze the business from the perspective of the owner. RONW is an indicator of profit distributing ability of a firm. Return on Net Worth =
Presented by | D a i p a y a n L o d h
53 | P a g e Interest Coverage Ratio This ratio measures the ability of the firm to meet its interest payments as they become due and is computed as follows: Interest Coverage Ratio
=
Payout Ratio Earning Per Share EPS is an indicator of profit distributing ability of a firm. This ratio tells how much profit the firm is making on owner’s investment on a single share of the company. Earning Per Share
=
Dividend Per Share DPS ratio gives an idea of the actual distribution of profit to the owners i.e. profit distributed to shareholders per share. Dividend Per Share
=
Dividend Payout Ratio It is a ratio between dividends distributed to equity shareholders and net earnings of the firm. Thus: Dividend Payout Ratio
=
100
Presented by | D a i p a y a n L o d h
54 | P a g e
Economic Value Added M/s Stern Steward and Company (USA) pioneered the concept of Economic Value Added (EVA) as a measure of the business performance in the 1980s. Any surplus generated from operating activities over and above the cost of capital is termed as EVA Operationally, a firm’s EVA is the excess of its after-tax operating profits over the required minimum rate of return that investors could get by investing in securities of comparable risk, i.e., EVA
=
NOPAT – (WACC TCE
where, NOPAT
=
Net Operating Profit after Tax, i.e., Net Profit + Interest Expenses + Non-Operating – Non-Operating Income Stern-Stewart adjustments
WACC
=
Weighted Average Cost of Capital expressed in percentage
=
(Kd W1) + (Ke W2) + (Kp W3)
where, Kd
=
cost of debt after tax (interest rate)
Ke
=
cost of equity under Capital Asset Pricing Model (CAPM)
Kp
=
cost of per preference and W1, W2, W3 are the market value weights assigned to debt equity and preference capital, respectively.
TCE
=
Total Capital Employed, i.e., the sum total of adjusted equity Shareholder’s fund, all interest bearing obligations and preference share capital circulating in the business.
Presented by | D a i p a y a n L o d h
55 | P a g e
Du Pont Analysis Centrec’s Du-Pont Financial Analysis Model provides the framework to understand the drivers of ROI. The Du Pont Model can be used to troubleshoot operational or structural problems from a financial perspective, with a specific focus on ROTA, ROCE and RONW. It is an approach to analyse the firm by evaluating inter relationships among many of the performance measures. In the Dupont Analysis we try to find out what are the factors/drivers that are causing the profits to move up. By identifying these factors/drivers we can concentrate on them and improve our efficiency.
COGS / Sales PBIT / Sales
Expenses / Sales Depn. / Sales
ROTA = PBIT / Total Asset Sales / Total Asset
Sales / FA
Sales / Debtors
Sales / CA
Sales / Cash Sales / Inventory
Presented by | D a i p a y a n L o d h