PROJECT REPORT ON Comparative Analysis On The Basis Of Corporate Finance Concepts

SUBMITTEDTO: Ms. Sandhya Prakash

SUBMITTEDBY: Vineet Singh PGP 2010-2422 Email ID vineet.singh.pgp12@iilm.edu Contact No- 9873601112

HINDUSTAN UNILIVER LTD. Introduction- In 1931, Unilever set up its first Indian subsidiary, Hindustan Vanaspati
Manufacturing Company, followed by Lever Brothers India Limited (1933) and United Traders Limited (1935). These three companies merged to form HUL in November 1956; HUL offered 10% of its equity to the Indian public, being the first among the foreign subsidiaries to do so. Unilever now holds 52.10% equity in the company. The rest of the shareholding is distributed among about 360,675 individual shareholders and financial institutions. With over 35 brands spanning 20 distinct categories such as soaps, detergents, shampoos, skin care, toothpastes, deodorants, cosmetics, tea, coffee, packaged foods, ice cream, and water purifiers, the Company is a part of the everyday life of millions of consumers across India. Its portfolio includes leading household brands such as Lux, Lifebuoy, Surf Excel, Rin, Wheel, Fair & Lovely, Ponds, Vaseline, Lakm, Dove, Clinic Plus, Sunsilk, Pepsodent, Closeup, Axe, Brooke Bond, Bru, Knorr, Kissan, Kwality Walls and Pureit. The Company has over 16,000 employees and has an annual turnover of around Rs.19, 401 crores (financial year 2010 - 2011). HUL is a subsidiary of Unilever, one of the worlds leading suppliers of fast moving consumer goods with strong local roots in more than 100 countries across the globe with annual sales of about 44 billion in 2011.

Corporate governance analysis:

The purpose of corporate governance analysis is to understand the relationship between managers and stockholder. Transparency and accountability are the two basic tenets of Corporate
Governance. at Hindustan Unilever, feel proud to belong to a Company whose visionary founders had laid the foundation stone for good governance long back and made it an integral principle of the business, demonstrated in the words above. To succeed, we believe, requires the highest standards of corporate behaviour towards everyone we work with, the communities we touch and the environment on which we have an impact. This is our road to sustainable, profitable growth and creating long-term value for our shareholders, our people and our business partners.

Board of Directors:
The Board ofDirectors (the Board) is entrustedwith the ultimate responsibility of the management, general affairs, direction and performance of the Company and has been vested with the requisite powers, authorities and duties. The Board consists of 9 Directors comprising four Executive Directors, one NonExecutive Director and four Independent Directors. The Chairman of the Board is a Non-Executive Director.

Balance of power
The Company has robust systems for internal audit and corporate risk assessment and mitigation. The Companyhas independent Control Assurance Department (CAD) assisted by dedicated audit teams. The internal audit covers all the factories, sales offices, warehouses and businesses and functions controlled centrally. The audit cover plan of CAD is approved by the Audit Committee at the beginning of every year. Every quarter, theAudit Committee of the Board is presented with key control issues and actions taken on past issues.

Management Compensation:
The Remuneration and Compensation Committee comprises of Independent Directors - Mr. A. Narayan, Mr. S. Ramadorai and Dr. R. A. Mashelkar. Mr. A. Narayan is the Chairman of the Remuneration and Compensation Committee of the Company. The reward philosophy of the Company is to pay market competitive reward with a strong linkage to performance. The reward philosophy is set forth into practice by various policies governing different elements of reward.

Performance in terms of EarningsCompany registered an overall growth of 6.4% in 2009-10 while the domestic consumer business grew by nearly 9%. The growth momentum improved through the year with double-digit volume growth in the last quarter. During the year, operating margin was improved by 15 basis points compared to the previous year, despite a significant increase in investment behind brand support. Over the last five years, your Company has performed well with a CAGR of 10% for total sales and 11.5% for FMCG sales.

Stockholder analysisThe purpose of Stockholder analysis is to understand who our companies marginal investors are.

As we can see that unilever and its associates have the largest share in the HUL. And then the resident and individual have the largest shareholding in the HUL. And the shareholding of other companies is very less as compare to individual resident and there is a large invest of FII also in the HUL.

Dividend policyThe Board of Directors at their meeting held on 25th May, 2010 recommended a final dividend of Rs.3.50 per share on equity share of face value of Re.1/- each, for the financial year ended 31st March, 2010, subject to the approval of the shareholders at the Annual General Meeting. Together with the interim dividend of Rs. 3.00 per share on equity share of face value of Re. 1/- each, paid on 23rd November, 2009, the total dividend for the year works out to Rs.6.50 per share on equity share of face value of Re.1/- each. Final dividend, if approved by shareholders, will be paid on or after 30th July, 2010.

Cost of capital
The cost of capital is the weighted average cost of equity (Ke) and cost of debt (Kd). We therefore address the calculation of Ke and Kd first and then conclude section III with our analysis of the weighted average costs of capital. Cost of Equity: The Cost of Equity is the minimum rate of return a firm must offer shareholders to compensate for waiting for their returns, and for bearing some risk. This is the return expected by equity investors in the observed companies and an important input for the calculation of the overall cost of capital. For a particular company, it is the rate of return on investment that is required by the company's ordinary shareholders. Cost of equity of the HUL for the FY10 is calculated as following: Dividend = Rs. 6.5 ; Price per share (Po) = Rs.248; Growth rate= 6% Cost of equity = (D1/Po) +g = (6.5/248) +6% = 0.0262+0.06 Ke = 8.62%

Cost of Debt:Cost of debt is the effective rate that a company pays on its debt. From the balance sheet, it is noticed that HUL has no debenture, secured and unsecured loan. So they dont have cost of debt it means total cost of capital belongs to equity.

WEIGHTED AVERAGE COST OF CAPITAL

Before introducing the cost of capital analyses for our companies, we will explain the calculation of the market value of both equity and debt. These figures are required for the final calculations of the weighted average cost of capital.

a) Market value of equity: By multiplying the number of shares outstanding in the market at the end of the period and the market price of each stock for the same period, we calculated the market value of equity shares of the company. Number of shares outstanding= 964,567,363 Market value per share= Rs. 248 Market value of total shares= Rs. 239212706000 b) Value of debt: From the balance sheet, it is noticed that HUL has no debentures, secured and unsecured loan. We now have all the inputs to solve the following equation that gives us the cost of capital: WACC = Ke (E/(D+E)) + Kd (D/(D+E)) cost of weighted components average cost 0. 0. 0.0862 0.0862

Particulars market value Equity share capital 239212706000 Debt Total 239212706000

Weights 1 1

So weighted average cost of capital is 10.29% CAPITAL WEIGHTS Market Value of Equity (a) Market Value of Debt (b) Firm Value (a) + (b) D/(D+E) E/(D+E) Rs.239212706000 Rs. 239212706000 100%

NESTLE Introduction- Nestls relationship with India dates back to 1912, when it began trading as
The Nestl Anglo-Swiss Condensed Milk Company (Export) Limited, importing and selling finished products in the Indian market. After Indias independence in 1947, the economic policies of the Indian Government emphasized the need for local production. Nestl responded to Indias aspirations by forming a company in India and set up its first factory in 1961 at Moga, Punjab, where the Government wanted Nestl to develop the milk economy.

Nestl Indias first production facility, set up in 1961 at Moga (Punjab), was followed soon after by its second plant, set up at Choladi (Tamil Nadu), in 1967. Consequently, Nestl India set up factories in Nanjangud (Karnataka), in 1989, and Samalkha (Haryana), in 1993. This was succeeded by the commissioning of two more factories - at Ponda and Bicholim, Goa, in 1995 and 1997 respectively. The seventh factory was set up at Pantnagar, Uttarakhand, in 2006. The 4 branch offices in the country help facilitate the sales and marketing of its products. They are in Delhi, Mumbai, Chennai and Kolkata. The Nestl India head office is located in Gurgaon, Haryana. Corporate governance analysis:
Nestl Indias business objective and that of its management and employees is to manufacture and market the Companys products in such a way as to create value that can be sustained over the long term for consumers, shareholders, employees, business partners and the national economy. Nestl India is conscious of the fact that the success of a corporation is a reflection of the professionalism, conduct and ethical values of its management and employees. In addition to compliance with regulatory requirements, Nestl India endeavours to ensure that highest standards of ethical and responsible conduct are met throughout the organisation.

BOARD OF DIRECTORS Composition, Attendance of the Directors at the Board Meetings and the last Annual General Meeting, Outside Directorships and other Board Committees Above information as on 31st December, 2010 or for the year 2010, as applicable, is tabulated hereunder:

Management Compensation:

Remuneration of Executive Directors is considered by the Board of Directors of the Company, with the interested Executive Director(s), not participating or voting. The terms of remuneration of Executive Directors are approved by the shareholders at the Annual General Meeting. Therefore, no separate Remuneration Committee has been constituted.

Performance in terms of Earnings and stock priceDuring the 2010 company delivered a strong performance. Net sales for the year 2010 increased by 21.9% over the previous year. Domestic sales increased by 22.9% on increased volume and realization. Export sales increased by 7.6%. overall, the business continued to grow the market while retaining leadership in most businesses.

STOCKHOLDER ANALYSIS
The purpose of Stockholder analysis is to understand who our companies marginal investors are.

From the table we can see that majority part of the shares are held by the promoters of the company, then the second largest investors are individuals with 16% holding in shares. Then comes the FIIS with 10% holding.

DIVIDEND POLICY
Final dividend of Rs.12.50 per share has been recommended by the Board of Directors and subject to the approval of the shareholders at the ensuing Annual General Meeting, is proposed to be paid on and around 6th May, 2011.Two interim dividends for the year 2010, first at the rate of Rs. 9.00 per share and the second at the rate of Rs. 27.00 per share, were paid on 7th May, 2010 and 16thNovember, 2010, respectively.

The dividend payout ratio of the company for the FY10 year is 13.5%. It is calculated by dividing the dividend per equity share with earning per share (EPS).

COST OF CAPITAL
The cost of capital is the weighted average cost of equity (Ke) and cost of debt (Kd). We therefore address the calculation of Ke and Kd first and then conclude section III with our analysis of the weighted average costs of capital. Cost of Equity: The Cost of Equity is the minimum rate of return a firm must offer shareholders to compensate for waiting for their returns, and for bearing some risk. This is the return expected by equity investors in the observed companies and an important input for the calculation of the overall cost of capital. For a particular company, it is the rate of return on investment that is required by the company's ordinary shareholders. Cost of equity of the Nestle for the FY10 is calculated as following: Dividend = Rs. 12.5; Price per share (Po) = Rs.2650; Growth rate= 12% Cost of equity = (D1/Po) +g = (12.5/2018) +12% = 0.0042+0.1 Ke =12.0042% Cost of Debt:Cost of debt is the effective rate that a company pays on its debt. From the balance sheet, it is noticed that NESTLE has no debentures but has taken secured and unsecured loan of Rs.1,514,412 (in Thousands). So cost of debt is cost of secured and unsecured loan. Interest rate on loans is 7%. So Before Tax Cost of Debt is 6% After tax Cost of Debt= I(1-Tax Rate) =7 (1-.28) =5.04% Cost of Debt (after tax) is 5.04% Before introducing the cost of capital analyses for our companies, we will explain the calculation of the market value of both equity and debt. These figures are required for the final calculations of the weighted average cost of capital.

WEIGHTED AVERAGE COST OF CAPITAL

a) Market value of equity: By multiplying the number of shares outstanding in the market at the end of the period and the market price of each stock for the same period, we calculated the market value of equity shares of the company. Number of shares outstanding= 35,900,637 Market value per share= Rs. 2650 Market value of total shares= Rs. 95136688050 b) Value of debt: From the balance sheet, it is noticed that NESTLE has no debentures but has taken secured and unsecured loan of Rs.1,514,412 thousands. So value of debt is value of secured and unsecured loan. We now have all the inputs to solve the following equation that gives us the cost of capital: WACC = Ke (E/(D+E)) + Kd (D/(D+E)) market value (in Rs. millions) weights 0.98433 0.01566 1 cost of weighted components average cost 0.1204 0.0504 0.1185 0.0007 0.1192

Particulars Equity share capital 95136688050 Debt 1514412000 Total 96651100050

So weighted average cost of capital is 11.92% CAPITAL WEIGHTS Market Value of Equity (a) Market Value of Debt (b) Firm Value (a) + (b) D/(D+E) E/(D+E) Rs. 95136688050 Rs. 1514412000 Rs. 96651100050 1.56% 98.43%

Conclusion
In conclusion I would like to say that both the company have a large part of equity then debt in their capital structure, which can be because of the recession, so that the companies didnt want to take so much of debt it wanted to have more of equity. Both the companies almost have similar corporate governance, their ultimate aim is to being transparent and provide as much profit as they can for their shareholders.