Accounting for Managers

PROJECT ON

Analysis of Financial statements for Comparison

Sector - FMCG
Companies taken- Hindustan Unilever Limited(lead company)
Colgate Palmolive
Marico

Basis of analysis- Financial ratios

Section-B
Submitted by
Abhishek kumar deo-57
Krishna kaushal-77
Kumar Raunak-79
Nagendra bandaru-80
Sandeep rajbhushan-97

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 TABLE OF CONTENT
Page no.
Executive summary................................................... 3
FMCG Sector overview..............................................4-8
HUL Financial analysis...............................................9-16
Comparative analysis...............................................17-20
HUL Dupont analysis................................................21-22
Annexure attached- Financial statements and ratios of all the
three companies.

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 Executive summary

The project report analyses three leading companies in the FMCG sector in
India in terms of their financial performance over the last two to three years.
These are Hindustan unilever limited, which is the lead company or the
industry leader ,Colgate Palmolive and Marico . First the general overview of
the FMCG sector in the country is shown to point towards immense growth
and potential in this sector with rising disposable income in both rural and
urban areas. The lead company has been separately analysed for its financial
performance over the last three years,using ratio and graphical analysis. Then
the comparison is done with other two companies using ratio analysis . Then
the exhaustive dupont analysis of the leader HUL is done to find out its
financial strengths and weaknesses. The finding points towards strong
performance of all the three companies but certain fine prints need to be
observed which basically point towards the fact that although HUL might have
performed well on some account its performance does not compare well with
the other two companies. The basic reason behind this is that HUL is a
behemoth with a wide product portfolio so its difficult for the company to
maintain financial efficiency while dealing with so many not good performing
products, whereas the other two companies are more nimble and smaller in
size with a limited product portfolio so its rather comfortable for them to
maintain a decent profitability although the volume of profits and revenue may
not match upto that of HUL. Further the dupont analysis of HUL revealed that
although the return on asset and equity multiplier is very sound , a high level of
asset turnover indicates not commensurate with net sales growth indicates
low fixed asset base which is worrisome for the company with rising
depreciation write-offs.

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 Overview of FMCG Sector

WE regularly talk about things like butter, potato chips, toothpastes, razors,
household care products, packaged food and beverages, etc. But do we know under
which category these things come? They are called FMCGs. FMCG is an acronym for
Fast Moving Consumer Goods, which refer to things that we buy from local
supermarkets on daily basis, the things that have high turnover and are relatively
cheaper.

FMCG Products and Categories

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

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

- Household care fabric wash including laundry soaps and synthetic detergents;
household cleaners, such as dish/utensil cleaners, floor cleaners, toilet cleaners, air
fresheners, insecticides and mosquito repellents, metal polish and furniture polish.

FMCG in 2010

The performance of the industry was inconsistent in terms of sales and growth for
over 4 years. The investors in the sector were not gainers at par with other booming
sectors. After two years of sinking performance of FMCG sector, the year 2009 has
witnessed the FMCGs demand growing. Strong growth was seen across various
segments in FY10. With the rise in disposable income and the economy in good
health, the urban consumers continued with their shopping spree.

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

products such as bread, biscuits, etc., milk and dairy products, beverages
such as tea, coffee, juices, bottled water etc, snack food, chocolates, etc.

- Frequently replaced electronic products, such as audio equipments,

digital cameras, Laptops, CTVs; other electronic items such as
Refrigerator, washing machines, etc. coming under the category of White
Goods in FMCG;

Sector Outlook
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FMCG is the fourth largest sector in the Indian Economy with a total market size of
Rs. 60,000 crores. FMCG sector generates 5% of total factory employment in the
country and is creating employment for three million people, especially in small
towns and rural India.

Analysis of FMCG Sector

Strengths:
1. Low operational costs
2. Presence of established distribution networks in both urban and rural areas
3. Presence of well-known brands in FMCG sector

Weaknesses:
1. Lower scope of investing in technology and achieving economies of scale,
especially in small sectors
2. Low exports levels
3. "Me-too" products, which illegally mimic the labels of the established brands.
These products narrow the scope of FMCG products in rural and semi-urban market.

Opportunities:

1. Untapped rural market

2. Rising income levels, i.e. increase in purchasing power of consumers
3. Large domestic market- a population of over one billion.
4. Export potential
5. High consumer goods spending

Threats:
1. Removal of import restrictions resulting in replacing of domestic brands
2. Slowdown in rural demand
Tax and regulatory structure

5
 Scope Of The Sector

The Indian FMCG sector with a market size of US$13.1 billion is the fourth
largest sector in the economy. A well-established distribution network, intense
competition between the organized and unorganized segments characterize the
sector. FMCG Sector is expected to grow by over 60% by 2015. That will translate
into an annual growth of 10% over a 5-year period. Hair care, household care, male
grooming, female hygiene, and the chocolates and confectionery categories are
estimated to be the fastest growing segments, says an HSBC report. Though the
sector witnessed a slower growth in 2002-2004, it has been able to make a fine
recovery since then.

Growth prospects

With the presence of 12.2% of the world population in the villages of India, the
Indian rural FMCG market is something no one can overlook. Increased focus on
farm sector will boost rural incomes, hence providing better growth prospects to the
FMCG companies. Better infrastructure facilities will improve their supply chain.
FMCG sector is also likely to benefit from growing demand in the market. Because of
the low per capita consumption for almost all the products in the country, FMCG
companies have immense possibilities for growth. And if the companies are able to
change the mindset of the consumers, i.e. if they are able to take the consumers to
branded products and offer new generation products, they would be able to
generate higher growth in the near future. It is expected that the rural income will
rise more by 2020, boosting purchasing power in the countryside. However, the
demand in urban areas would be the key growth driver over the long term. Also,
increase in the urban population, along with increase in income levels and the
availability of new categories, would help the urban areas maintain their position in
terms of consumption. At present, urban India accounts for 66% of total FMCG
consumption, with rural India accounting for the remaining 34%. However, rural
India accounts for more than 40% consumption in major FMCG categories such as
personal care, fabric care, and hot beverages. In urban areas, home and personal
care category, including skin care, household care and feminine hygiene, will keep
growing at relatively attractive rates. Within the foods segment, it is estimated that
processed foods, bakery, and dairy are long-term growth categories in both rural
and urban areas.:

6
 Competitiveness of the Indian market with respect to world markets
.

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

Raw-material availability
Because of the diverse agro-climatic conditions in India, there is a large
raw material base suitable for food processing industries. India is the
largest producer of livestock, milk, sugarcane, coconut, spices and cashew
and is the second largest producer of rice, wheat and fruits &vegetables.
India also produces caustic soda and soda ash, which are required for the
production of soaps and detergents. The availability of these raw
materials gives India the location advantage.

 Labor cost comparison

Low cost labor gives India a competitive advantage. India's labor cost is
amongst the lowest in the world, after China & Indonesia. Low labor costs
give the advantage of low cost of production. Many MNC's have

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established their plants in India to outsource for domestic and export
markets.

 Presence across value chain

Indian companies have their presence across the value chain of FMCG
sector, right from the supply of raw materials to packaged goods in the
food-processing sector. This brings India a more cost competitive
advantage. For example, Amul supplies milk as well as dairy products like
cheese, butter, etc.

Indian consumer class

India has a population of over 1 billion and 4 climatic zones . Several religious and
personal beliefs, 15 official languages, different social customs and food habits
characterize Indian consumer class. Besides , India is also different in culture if
compared with other Asian countries. Therefore, India has high distinctiveness in
demand and the companies in India can get lot of market opportunities for
various classes of consumers. Consumer goods marketers experience that dealing
with India is like dealing with many small markets at the same time.

Indian consumer goods market is expected to reach $400 billion by 2010. India
has the youngest population amongst the major countries. There are a lot of
young people in India in different income categories.
In India they do not have to face this dilemma largely because rapid
urbanization, increase in demand, presence of large number of young
population, any number of opportunities are available . The bottom line is that
Indian market is changing rapidly and is showing unprecedented consumer
business opportunity .

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Financial analysis of Hindustan Unilever Limited

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

Per Share Ratios

(1)Adjusted EPS

Adjusted EPS (Rs)

12

10

8
Adjusted EPS (Rs)
6

0
Mar ' 10 Mar ' 09 Dec ' 07 Dec ' 06 Dec ' 05

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

(2) DPS (Dividend Per Share)

Dividend per share

10
9
8
7
6 Dividend per share
5
4
3
2
1
0
Mar ' 10 Mar ' 09 Dec ' 07 Dec ' 06 Dec ' 05

Having a growing dividend per share can be a sign that the company's management believes that the
growth can be sustained. But during last years it has decreased which shows that company did not
earn as much as previous years and hence the decrease.

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Profitability Ratios

(1) Operating Margin (%).

Operating margin (%)

16

15.5

15
Operating margin (%)
14.5

14

13.5

13
Mar ' 10 Mar ' 09 Dec ' 07 Dec ' 06 Dec ' 05

When looking at operating margin to determine the quality of a company, it is best to look at the
change in operating margin over time and to compare the company's yearly or quarterly figures to
those of its competitors. If a company's margin is increasing, it is earning more per dollar of sales. The
higher the margin, the better. Also the Income though has gone down in Mar’ 10 the operating Margin
has increased which shows lot of improvement in quality.

(2) Net Profit Margin (%).

Net profit margin (%)

16

14

12

10
Net profit margin (%)
8

0
Mar ' 10 Mar ' 09 Dec ' 07 Dec ' 06 Dec ' 05

10
Leverage Ratios:

(1) Total Debt/Equity Ratio.

Total debt/Equity Ratio

0.25

0.2

0.15 Total debt/equity -

0.1

0.05

0
Mar ' 10 Mar ' 09 Dec ' 07 Dec ' 06 Dec ' 05

The total debt/equity ratio has increased in Mar’10 which means that it is using
more leverage and has a weaker equity position.

(2) Fixed Assets Turn-Over Ratio

Fixed assets turnover ratio

9
8
7
6
5 Fixed assets turnover ratio

4
3
2
1
0
Mar ' 10 Mar ' 09 Dec ' 07 Dec ' 06 Dec ' 05

Fixed asset turnover has increased over the years disproportionate to the change in net sales
which shows fixed asset base has come down owing to high amount of depreciation and wear and
tear.

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Liquidity Ratios:

(1) Current Ratio:

Current ratio
1.2

0.8
Current ratio
0.6

0.4

0.2

0
Mar ' 10 Mar ' 09 Dec ' 07 Dec ' 06 Dec ' 05

The current ratio can give a sense of the efficiency of a company's operating cycle or its
ability to turn its product into cash. The Mar’10 data shows a decrease in the current ratio
of the company. The higher the current ratio, the more capable the company is of paying
its obligations.

(2) Quick Ratio:

Quick ratio
0.6

0.5

0.4
Quick ratio
0.3

0.2

0.1

0
Mar ' 10 Mar ' 09 Dec ' 07 Dec ' 06 Dec ' 05

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 (3) Inventory Turn-Over Ratio:

Inventory turnover ratio

12

10

8
Inventory turnover ratio
6

0
Mar ' 10 Mar ' 09 Dec ' 07 Dec ' 06 Dec ' 05

Inventory turnover ratio has remained more or less constant which shows that company
has managed to keep inventory at constant level , although slight increase is warrented to avoid
stock out.

Payout Ratios:

(1) Dividend Payout Ratio (net profit):

Dividend payout ratio (net profit)

140

120

100
Dividend payout ratio (net
80 profit)
60

40

20

0
Mar ' 10 Mar ' 09 Dec ' 07 Dec ' 06 Dec ' 05

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The payout ratio provides an idea of how well earnings support the dividend payments. More mature
companies tend to have a higher payout ratio. The Dividend payout ratio of Mar’10 has decreased in
Mar’10.

(2) Cash earnings retention ratio:

Cash earnings retention ratio

40

30

20

10 Cash earnings retention

ratio
0
Mar ' 10 Mar ' 09 Dec ' 07 Dec ' 06 Dec ' 05
-10

-20

-30

-40

Coverage Ratios:

(1) Financial Charges coverage ratio:

Financial charges coverage ratio

450
400
350
300
Financial charges coverage
250 ratio
200
150
100
50
0
Mar ' 10 Mar ' 09 Dec ' 07 Dec ' 06 Dec ' 05

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

Fin. charges cov.ratio (post tax)

400
350
300
250 Fin. charges cov.ratio (post
tax)
200
150
100
50
0
Mar ' 10 Mar ' 09 Dec ' 07 Dec ' 06 Dec ' 05

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

Component ratios:

(1) Material Cost component (% earning).

Material cost component (% earnings)

56
55
54
53 Material cost component
(% earnings)
52
51
50
49
48
Mar ' 10 Mar ' 09 Dec ' 07 Dec ' 06 Dec ' 05

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 (2) Long term assets/total assets.

Long term assets / total Assets

0.6

0.5

0.4
Long term assets / total
Assets
0.3

0.2

0.1

0
Mar ' 10 Mar ' 09 Dec ' 07 Dec ' 06 Dec ' 05

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

(3) Export as % of Sales:

Exports as percent of total sales

14

12

10
Exports as percent of total
8 sales
6

0
Mar ' 10 Mar ' 09 Dec ' 07 Dec ' 06 Dec ' 05

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 COMPARATIVE ANALYSIS
Per share ratio/Market value ratio

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

analyse the financial statements of the three companies we observe that the
EPS for HUL has hovered around 10 for the last two financial years whereas for
Colgate and Marico it has been around 30 and 4 respectively. At the outset it
may look that Colgate is the best performing company of all but the fact is
although net profit of HUL is far more than Colgate or Marico the number of
share traded in the market of HUL is far more than the other two so the
resultant ratio comes out to be lower.

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

dividend per share of HUL for the last two financial year has been around 6
whereas in case of Colgate and Marico it is 20 and .65 respectively. Again in
this case the picture seems rosy for Colgate because the number of share
traded of Colgate in the market of Colgate is far less than HUL. Also in case of
Marico the net profit or retained earnings is lowest so the dividend per share is
so low in this. But all the three companies have been consistent in terms of
amount of dividend they are providing to the shareholders for the last 2or 3
financial years which is a sign of a good performing company.

Profitability ratio
Operating profit margin /ratio of operating profit to net sales - The
operating margin in case of hul for the last 2 financial year has been in the
range of 14-15, whereas in case of colgate and marico it has been 24 and 16
respectively. This shows that colgate is more efficient than hul and marico in
generating profit out of core operation on each unit of sale. This shows greater
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operational efficiency at colgate but again we should also keep in mind that hul
being a bigger company and with a wide and diverse array of product it is
difficult for it to manage sales of such a large portfolio of products and
generate profit margins comparable to colgate or marico which are
comparatively smaller companies and have smaller product portfolio to
manage.

Gross profit margin – The gross profit margin or the ratio of gross profit
to net sales in case of hul for the last 2 financial year has been 13-14, whereas
in case of colgate and marico it has been around 22 and 14 respectively. This
again shows that colgate is more efficient in generating gross profit on sales as
compared to hul and marico. Again the same logic of wider product portfolio
will hold good here which makes hul gross profit margin look worse than
colgate. Same will hold for net profit margin. This also shows that is colgate is
most efficient in using its labour and material and adequately covers its
operating expenses.

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

profit to total networth(shareholder’s equity+reserve and surplus) in case of
hul for the year 2009-10 has been 98 whereas fot the last financial year it was
113, Which shows that although decrease in profit after tax from last year is
not much (Rs 2346 cr to 2106 cr) but the reserve and surplus have gone up
significantly (Rs 1842 cr to 2364 cr) on account of ploughed back profit so the
ratio has gone down. Thus reduced return on networth is not a cause of worry.
Now in case of colgate Palmolive and marico the ratio for former is maintained
at a high level for the last two financial year (around 130) . whereas for the
latter it has been at low level of 40-45. This is because there has been a
quantum jump in profit for colgate as compared to hul or marico and any
increase in reserve and surplus has been more than offset by it. This is not a
good news for industry leader hul as more nimble companies like colgate are
becoming efficient in sales management and hul is finding it difficult to manage
sales of its huge product portfolio.

Liquidity ratios

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 Current ratio(current assets/current liabilities) – the current ratio for
hul is .83, whereas for colgate and marico it is 1.1 and 2.7 respectively. Now at
the outset it looks that hul has sub-optimal current ratio as it is below the
optimal

level of 2. but this is due to high amount of provisioning done by hul to

account for its debtors and taxes payble in future, also an expansive business
with different product verticals require hul to have a large amount of working
capital so more short – term loans are taken this increases the current
liabilities, but again hul would have to take care of its cash flows from different
products to sustain different product line as net addition to cash flows has
remained low, also with interest rate on short – term loans increasing it may
further add to their current liabilities. now marico’s current ratio although
looks quite impressive but it is a way too above the optimal level of 2 and it
appears that debtors in this case are quite high as cash is not lying idle as is
evident from the cash flow statement , the net cash balance has actually come
down owing to investing activities. Colgate’s current ratio is the best of all the
three as it is not only close to optimal level of 2 but also a good deal of cash is
used in paying off long-term debts, this shows that cash is not lying idle and
also business is efficiently generating cash to cover for liabilities.

Leverage ratio
Debt-equity ratio (total debt/total shareholder’s equity) – the debt-equity
ratio in case of hul is .2 whereas in case of colgate and marico it is .02 and .33
respectively. Now the average level of debt-equity ratio in the fmcg sector
over the last 2 years has been in the range of .02-.04. ,so the debt-equity ratio
of hul and marico seem to be on the higher side, this is owing to increase in
long term loans taken by these companies in the last two year to expand
selling and distribution network, but it is still under the permissible limit of .4,
which shows that there is adequate amount of equity to cover for debt and
solvency situation is healthy. In case of colgate it is quite in accordance with
fmcg sector norm, and there is healthy balance of equity and debt fund base.

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Interest coverage or financial charges coverage ratio –( earning before
interest and tax or ebit/total interest burden)- the interest coverage ratio for
hul in the last fiscal was around 300, which shows that income before interest
is more than sufficient to cover for interest charges or debt servicing was
efficient. Thus solvency situation is very healthy. Now in case of colgate it is
around 70 which is also quite good considering that their total revenue base is
small as compared to hul., but in case of marico it is 19 which is still sufficient
but as compared to colgate which has smaller product base than marico as it
deals only with oral care products, it is sub-optimal, this is mainly because
growth in operating income for marico has not been substantial over the years
owing to intense competition in the fmcg sector and the onslaught of global
giants.

Activity ratios
Fixed assets turnover ratio – (net sales/net fixed assets) –the fixed asset
turnover in case of hul is 5.35 for the last fiscal whereas in case of colgate and
marico it is 4.08 and 7.88 respectively. Now generally in the fmcg sector this
ratio hovers around 3-5. So going by that all the three companies seem to be
efficiently utilising their fixed long term assets to generate sales. However in
case of marico it is bit higher because its total asset base in terms of
manufacturing plant, office establishment is lower as compared to hul and
colgate.

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

inventory turnover ratio in case of hul is 8.99 for the last fiscal, whereas in case
of colgate and marico it is 19.84 and 6.36 respectively. Now the average
inventory turnover ratio in the fmcg sector has been around 5, so going by this
marico’s performance looks most efficient, as more sales have been achieved
with the given level of inventory while not letting average inventory levels
going down to avert any supply volatility, whereas in case of hul and colgate it
is bit too high which indicates low level of inventory as compared to total sales
and especially for companies in fmcg sector is not a good sign as continuous
availability of products at the retail outlets is key to generating good sales and
with low level of inventory they run the risk of stock outs and more nimble

20
competitors like marico can cash in on this. so too high level of inventory
turnover ratio is also not desirable especially for companies in the fmcg sector.

Dupont analysis of Hindustan Unilever

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

about the financial performance of hul :-

Strengths

 The return on assets for hul is very sound at 51.74, which shows that
the operations of hul despite wide product portfolio has remained
satisfactorily efficient.
 Also the profit margin has remained high over the last two to three years
which shows good tax planning and efficient production.

Weakness

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 Total asset turnover although looks impressive at 4.21 but it is
worrisome as this is more because low asset base since accumulated
depreciation over the year has increased, this shows wear and tear of
fixed assets and these need to be replaced as soon as possible to avoid
any hiccups in production.

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