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FUNDAMENTAL VIEW 17 th Aug 2011 INTRODUCTION OF FMCG SECTOR FMCG sector also called as Consumer Packaged Goods. It deals with production , distribution , and marketing of Fast Moving Consumer Goods. Fast Moving Consumer Goods are quickly sold and at the lower cost due to low cost the profit is relatively less. Frequently used consumer products are soaps, detergent, teeth cleaning products. FMCG sector dominated by multinational companies with strong distribution skills. The major player of FMCG sector is Hindustan Unilever, Nestle, Proctor and Gamble, Wipro consumer products. Indian Consumer Market:- from Total Income Indians spend 40% on grocery iteams and 8% on personal care so India is a largest market for fmcg sector. Large growing youth population. India is amongst the World’s youngest nation with median age of 25 years as compared to 43 in Japan and 36 is the US. Development of real estate development in a country such as shopping mall construction , supermarkets which are opening new business for FMCG sector. Economic Overview:- The Indian FMCG sector is an important contributor to the country’s GDP. The FMCG sector is the forth largest sector in Indian Economy. Inflation led price hike and contribution from acquisitions is expected sales growth and strong growth for fast moving consumer goods. Inflation:- AS inflationary pressure are quite high and high input cost are likely affect the growth prospect. Its good time to Invest in FMCG sector as this sector is less volatile than any other sector. It is generally believe that high inflation in the economy leading to the high prices of Raw Material. but this is not true due to margin cost is not more than 40 to 45 % and raw material cost by 20 to 25% . so when inflationary pressure their in the economy the company needs to increase their prices by 2 to 4 % to ensure that inflation doesnot affect the profit of the company. And the business runs on its brand value which is strong. While several companies within the FMCG sector can offer a good hedge against inflation. Although Volume growth in a Major FMCG categories has remained unaffected. a Nielsen report throws up some surprise on certain essential food categories that have been impacted. There is no explanation as why customers shifted out from essential products to non essential products. Marketers believe that advertising small discount packages , promotional activities , has done the trick which help in a growth of sales eg. Cadbury Dairy milk has increased their cost for advertising and promotional activities by 40% it resulted in 27% rising in profit. HINDUSTAN UNILEVER LIMITED Hindustan Unilever Limited is India’s largest fast moving consumer goods company, with leadership in Home and Personal care products and Food & Beverages. HUL brands touch the lives of two out of three Indians. They endow the company 19400 crores. Company and products:- Hindustan Unilever Limited:- Hindustan Unilever Limited is India’s oldest FMCG company owned by European Unilever group incorporated in 1933. The Company Deals in food and nutrition, personal and home care brands. Annapurna, Brooke Bond Taza, Bru, kissan Knnor, Kwality Walls, Lipton, Lux, pears, Red lable, Taj Mahal, Clinic plus, Dove, Fair and lovely, Hamam Lakme, Pepsodent, Domex , surf excel, rexona soap. COMPITITORS OF HUL Colgate-Palmolive Limited – The Company has acquired popularity among the consumers for their oral, skin care and home care products. It is specialized mainly in manufacturing the daily consumed products. Dabur India Limited – The DIL is one of the famous companies in the country which produce the ayuvedic products and health care products. They also manufacture various other products for oral care, skin care, home care, hair care and foods. The company has experience in this field for more than 125 years. Cadbury India Limited – The CIL is the popular company in the country which manufactures the high demand products like confectionery, quick meals and snacks. It has operation centers in 70 countries and serves the consumers in more than 160 countries in the world. They deliver the products under various brand names. MARKET SALES NET TOTAL COMPANY CAP TURNOVER PROFIT ASSETS HUL 70070.97 19333.3 2305.97 2633.92 DABUR INDIA 18967.39 3287.67 471.43 1354.51 GODREJ CONSUMER 13818.92 2442.64 434.96 1806.18 COLGATE 13187.22 2296.66 402.58 384.09 MARICO 9972.1 2353.71 315.33 1425.61 EMAMI 7503.55 1221.15 227.49 912.39 GILLETTE India 7387.07 852.48 137.1 570.99 GODREJ IND 7003.63 1145.84 133.43 1644.38 P AND G 6255.18 904.46 179.76 534.65 JYOTHY LABS 1862.6 608.02 80.27 399.1 MARKET CAP HUL DABUR INDIA GODREJ CONSUMER COLGATE MARICO EMAMI GILLETTE India GODREJ IND P AND G JYOTHY LABS 5% 1% 5% 4% 5% 6% 45% 8% 9% 12% 3000 2500 2000 1500 NET PROFIT 1000 TOTAL ASSETS 500 0 SHARE HOLDING PATTERN OF HUL No. Of Category Folio Shares held % of holding Unilever and its Associate 9 1134849460 52.55 Mutual fund & Unit trust of India 212 65092620 3.01 Financial Institution / Banks 157 8497806 0.39 Insurance company 22 372806669 8.94 Foreign Institutional Investor 427 372806669 17.27 Bodies Corporate 2951 55603214 2.58 NRI/ Foreign Bodies 4131 7180228 0.33 Director and their relatives 22 134848 0.01 Resident Indiviual and others 335994 322195514 14.92 % of holding Unilever and its Associate Mutual fund & Unit trust of India Financial Institution / Banks Insurance company Foreign Institutional Investor Bodies Corporate NRI/ Foreign Bodies Director and their relatives Resident Indiviual and others 3% 0% 15% 0% 17% 53% 9% 0% 3% FINANCIAL ANALYSIS FOR HUL Balancesheet - Hindustan Unilever Ltd. Particulars Mar'11 Mar'10 Mar'09 12 12 Liabilities Months 12 Months Months Share Capital 215.95 218.17 217.99 Reserves & Surplus 2,417.30 2,364.68 1,842.85 Net Worth 2,633.92 2,583.52 2,061.51 Secured Loans 0 0 144.65 Unsecured Loans 0 0 277.3 TOTAL LIABILITIES 2,633.92 2,583.52 2,483.45 Assets Gross Block 3,759.62 3,581.96 2,881.73 (-) Acc. Depreciation 1,590.46 1,419.85 1,274.95 Net Block 2,168.49 2,161.44 1,606.11 Capital Work in Progress. 299.08 273.96 472.07 Investments. 1,260.68 1,264.08 332.62 Inventories 2,811.26 2,179.93 2,528.86 Sundry Debtors 943.2 678.44 536.89 Cash And Bank 1,640.01 1,892.21 1,777.35 Loans And Advances 1,099.72 1,068.31 1,196.95 Total Current Assets 6,494.19 5,818.89 6,040.04 Current Liabilities 6,264.21 5,493.97 4,440.08 Provisions 1,324.98 1,441.55 1,527.98 Total Current Liabilities 7,589.19 6,935.52 5,968.06 NET CURRENT ASSETS -1,095.00 -1,116.63 71.98 Misc. Expenses 0 0 0 TOTAL ASSETS (A+B+C+D+E) 2,633.92 2,583.52 2,483.45 Particulars March'11 March'10 March'09 Profit Before Tax 2,730.18 2,707.07 3,025.12 Net Cash Flows from Operating Activity 1,890.57 3,432.37 2,028.65 Net Cash Used in Investing Activity 134.99 -1,137.46 878.19 Net Cash Used in Financing Activity -2,277.75 -2,180.32 -1,330.36 Net Inc/Dec in Cash and Cash Equivalent -252.19 114.59 1,576.49 Cash and Cash Equivalent - Beginning of the Year 1,892.20 1,777.62 200.86 Cash and Equivalent - End of the Year 1,640.01 1,892.21 1,777.35 P & L A/C Particulars March'11 March'10 March'09 12 12 months 12 months months INCOMES Sales turneover 20,598.89 18,462.34 21,927.23 Excise Duty 908.98 693.22 1,422.95 Net Sales 19,689.91 17,769.12 20,504.28 Other Income 0.00 0.00 0.00 Total Income 19,944.72 17,913.48 20,679.22 EXPENDITURE: Manufacturing Expenses 825.99 656.53 598.71 Material Consumed 10,199.25 8,984.50 10,945.71 Personal Expenses 961.27 936.3 1,152.12 Selling Expenses 3,811.55 3,262.12 3,277.74 Administrative Expenses 1,227.36 1,131.97 1,565.05 Expenses Capitalised 0 0 0 Provisions Made 0 0 0 TOTAL EXPENDITURE 17,025.42 14,971.42 17,539.33 Operating Profit 2,664.49 2,797.70 2,964.95 EBITDA 2,919.30 2,942.06 3,139.89 Depreciation 220.83 184.03 195.3 Other Write-offs 0 0 0 EBIT 2,698.47 2,758.03 2,944.58 Interest 0.24 6.98 25.32 EBT 2,698.23 2,751.05 2,919.26 Taxes 573.87 648.36 572.94 Profit and Loss for the Year 2,124.36 2,102.69 2,346.32 Non Recurring Items 184.67 55.37 101.6 Other Adjustments 0 0 4.26 REPORTED PAT 2,305.97 2,202.03 2,500.71 KEY ITEMS Preference Dividend 0 0 0 Equity Dividend 1,410.60 1,417.94 1,634.51 Equity Dividend (%) 653.2 649.92 749.81 Shares in Issue (Lakhs) 21,594.72 21,816.87 21,798.76 EPS - Annualised (Rs) 10.68 10.09 9.18 Key financial ratio of Hindustan Unilever Investment Valuation Ratios Mar '11 Mar '10 Mar '09 Face Value 1 1 1 Dividend Per Share 6.5 6.5 7.5 Operating Profit Per Share (Rs) 12.34 12.82 13.6 Net Operating Profit Per Share (Rs) 91.18 81.45 94.06 Free Reserves Per Share (Rs) 11.04 10.7 8.3 Bonus in Equity Capital 60.98 60.36 60.4 Profitability Ratios 13.53 15.74 14.46 Operating Profit Margin(%) 13.53 15.74 14.46 Profit Before Interest And Tax Margin(%) 12.25 14.59 13.39 Gross Profit Margin(%) 12.41 14.7 13.5 Cash Profit Margin(%) 11.75 12.76 12.29 Adjusted Cash Margin(%) 11.75 12.76 12.29 Net Profit Margin(%) 11.56 12.29 12.09 Adjusted Net Profit Margin(%) 11.56 12.29 12.09 Return On Capital Employed(%) 102.47 106.78 118.59 Return On Net Worth(%) 87.57 85.25 121.34 Adjusted Return on Net Worth(%) 80.67 81.4 113.85 Return on Assets Excluding Revaluations 12.19 11.84 9.45 Return on Assets Including Revaluations 12.2 11.84 9.46 Return on Long Term Funds(%) 102.47 106.78 142.88 Liquidity And Solvency Ratios Current Ratio 0.86 0.84 0.92 Quick Ratio 0.43 0.46 0.51 Debt Equity Ratio 0.2 Long Term Debt Equity Ratio Debt Coverage Ratios Interest Cover 11,243.63 395.13 116.28 Total Debt to Owners Fund Financial Charges Coverage Ratio 12,163.75 421.5 123.99 Financial Charges Coverage Ratio Post Tax 10,529.33 342.84 107.47 Management Efficiency Ratios Inventory Turnover Ratio 7.91 8.99 9.26 Debtors Turnover Ratio 24.28 29.24 41.83 Investments Turnover Ratio 7.91 8.99 9.26 Fixed Assets Turnover Ratio 5.63 5.35 7.81 Total Assets Turnover Ratio 8.31 7.66 9.22 Asset Turnover Ratio 5.63 5.35 7.81 Average Raw Material Holding 61.54 51.08 72.27 Average Finished Goods Held 35.15 32.05 34.18 Number of Days In Working Capital -20.02 -22.62 1.58 Profit & Loss Account Ratios Material Cost Composition 53.29 50.67 55.5 Imported Composition of Raw Materials Consumed 19.2 18.61 21.65 Selling Distribution Cost Composition 19.35 18.35 15.98 Expenses as Composition of Total Sales 7.25 7.31 9.47 Cash Flow Indicator Ratios Dividend Payout Ratio Net Profit 71.2 75.2 76.47 Dividend Payout Ratio Cash Profit 64.98 69.4 70.93 Earning Retention Ratio 22.71 21.25 18.5 Cash Earning Retention Ratio 29.99 27.59 24.77 AdjustedCash Flow Times 0.17 Earnings Per Share 10.68 10.09 11.47 Book Value 12.19 11.84 9.45 Liquidity And Solvency Ratios : Current ratio of the company is less than 1 it means company has shortage of funds for meet the short term obligation. As per the balance sheet current liability increased as compared to last year figure . It means Company using long term finance for short term obligation. Quick ratio is rigorous measure of a firm ability to service short term liabilities. Acid test ratio is less than one which is not satisfactory result. Management Efficiency Ratios: Inventory turnover ratio means how fast Inventory is sold. Company has high inventory ratio but it become lower as compared to the previous balance sheet due to increase in a competition. Debt collection has become lower as compare to previous balance sheet. Profit Margin Ratio: This ratio measure how much company earns relative to its sales. A company with a higher profit margin than its competitor is more efficient. Operating profit Measures Company’s pricing strategy and operating efficiency. Operating profit margin is used to compare company with its performance. As we can see Hindustan Unilever has not been able to increase their operating profit. Company’s sales increased but at the same time company’s total expenditure also increased in same proportion. Investment Valuation Mar Mar Mar Ratios '11 '10 '09 Operating Profit Margin(%) 13.53 15.74 14.46 Net Profit Margin(%) 11.56 12.29 12.09 Operating Profit Margin(%) Net Profit Margin(%) 12.29 12.09 11.56 15.74 14.46 13.53 Mar '11 Mar '10 Mar '09 Particulars March'11 March'10 March'09 Total Income 19,944.72 17,913.48 20,679.22 TOTAL EXPENDITURE 17,025.42 14,971.42 17,539.33 25,000.00 20,000.00 15,000.00 Total Income 10,000.00 TOTAL 5,000.00 EXPENDITURE 0.00 Return on capital employed for HUL decreased from last year due to lower profit margin. Return on Net worth ratio states how much profit company earn in comparison to total amount of shareholder equity on the balance sheet of the company. as per the P&L company has not a favorable situation .Its around 30% decrease in return on net worth. Successful investors like Warren Buffett always advocate the importance of investing in stocks for the long term and not just getting in and out of the stock. But more than investing and holding for a stock for the long term, it is important to zero down on the right stock. Or you might even hold a stock for more than ten years and still make very low returns. Let us take the example of Hindustan Unilever Ltd (HUL), a company which used to be the largest company as per market capitalization in India, at a certain point of time. But in the last 10 years the price of the HUL stock hasn’t gone anywhere. The stock price touched an all time high of Rs 314.123(adjusted for bonus) on February 25, 2000. This price was never beaten until September 24, 2010, when the stock closed at Rs 314.65. On November 9,2010, the stock closed at an all time high of Rs 318.9. This price was again overtaken in early January (January 5,2011) when the stock closed at an all time high of Rs 325.65. Currently the stock is moving in the range of Rs 300-310. So the point is that if you were a long term investor in HUL and had invested in the stock in Feb 2000, and held on diligently for 11 odd years, you would still not have made any money on the stock. What HUL tells us is that the buy and hold strategy may not always work. Soaps and detergents has been the main stay of the company over the years, and still contributes nearly 75% of the revenues. The company has very little pricing power in this category, given the increased competition that it has been facing. With a slowdown hitting United States, P&G has become aggressive in India. Media reports suggest that P&G is looking to launch its toothpaste brand Crest in India. That should heat up things for Close Up, HUL’s premier toothpaste brand. The cash rich ITC is gradually building businesses similar to that of HUL. Over and above that there are newer players like Ghadi detergent and older players like Nirma in the lower segment of the market, which have been giving HUL a huge run for its money. To counter this competition HUL has had to constantly resort to price cuts to keep the revenues going in this segment. This is likely to continue in the days to come leading to a very limited pricing power in its premier business. At the same time it needs to keep its advertising expenses high in order to generate a high brand awareness of its products and hope of increasing sales. During its glory days, HUL’s strategy was to constantly jack up margins. The management graduates who run the company probably forgot a basic lesson in economics. When a company makes ‘abnormal profits’, new competitors enter the arena and drive away margins. The margins also came from deteriorating the quality of their products. What did not help was the power brand strategy the company decided to follow 10 years back, where in the focus was on 30 odd ‘Power Brands’. The ‘power brand’ strategy prompted HUL to withdraw from a large number of small markets. This has given an opportunity to many small players in the market. Some of these brands like Ghadi detergent are now seriously challenging HUL. To its credit the company has tried to get into new businesses like selling water filters (Pureit). But these businesses will still take sometime to grow. Also the competition in this market has started to heat up with Tatas announcing their entry with Swach. What do the analysis say? HUL declared its results for the quarter ending March 31, 2011. While it managed to increase sales by around 14% to Rs 5,022.6 crore. But even with this increase in sales the net profit went down by 2.1% to Rs 569.2 crore. Analysts covering the company came out with reports saying that the results beat their expectations, which is basically a polite way of saying that results were not as bad as we expected them to be. Given these reasons, those investors who are still invested in HUL, its time they sold out. This stocks is an excellent example of what John Maynard Keynes, the famous economist, said a long time back, “in the long run we are all dead”.
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