EQUITY RESEARCH REPORT (HUL) FMCG SECTOR INDIA OUTLOOK The burgeoning middle class Indian population, as well as the rural sector, present a huge potential for this sector. The FMCG sector in India is at present, the fourth largest sector with a total market size in excess of USD 13 billion as of 2012. This sector is expected to grow to a USD 33 billion industry by 2015 and to a whooping USD 100 billion by the year 2025. This sector is characterized by strong MNC presence and a well established distribution network. In India the easy availability of raw materials as well as cheap labour makes it an ideal destination for this sector.
There is also intense competition between the organised and unorganised segments and the fight to keep operational costs low. CHALLENGES TO FMCG SECTOR * Increasing rate of inflation, which is likely to lead to higher cost of raw materials. * The standardization of packaging norms that is likely to be implemented by the Government by Jan 2013 is expected to increase cost of beverages, cereals, edible oil, detergent, flour, salt, aerated drinks and mineral water. * Steadily rising fuel costs, leading to increased distribution costs. The present slow-down in the economy may lower demand of FMCG products, particularly in the premium sector, leading to reduced volumes. * The declining value of rupee against other currencies may reduce margins of many companies, as Marico, Godrej Consumer Products, Colgate, Dabur, etc who import raw materials. HIGH GROWTH DRIVING FACTOR * Increasing rate of urbanization, expected to see major growth in coming years. * Rise in disposable incomes, resulting in premium brands having faster growth and deeper penetration. * Innovative and stronger channels of distribution to the rural segment, leading to deeper penetration into this segment. Increase in rural non-agricultural income and benefits from government welfare programmes. * Investment in stock markets of FMCG companies, which are expected to grow constantly. This sector will continue to see growth as it depends on an ever-increasing internal market for consumption, and demand for these goods remains more or less constant, irrespective of recession or inflation. Hence this sector will grow, though it may not be a smooth growth path, due to the present world-wide economic slowdown, rising inflation and fall of the rupee.
This sector will see good growth in the long run and hiring will continue to remain robust DEMAND FOR FMCG SECTOR Confidence of consumer product makers is waning as a delayed monsoon and lingering weakness in the economy threaten to subdue revenue growth for the sector in the next two quarters. Several marketers, including Dabur, Marico, Godrej Consumer Products Ltd (GCPL), ITC and Emami, fear pressure on premium products and rural demand – two important growth drivers – in the coming months as sustained high inflation and a hold-up in monsoon could prompt buyers to tighten purse strings. While the high-end, super-premium segment does not get impacted by inflation, demand in the mass premium segment could contract if overall economic sentiment does not improve,” said Sunil Duggal, CEO ofDabur India, the maker of Real juices and Vatika shampoo. ABOUT HUL HUL is the market leader in Indian consumer products with presence in over 20 consumer categories such as soaps, tea, detergents and shampoos amongst others with over 700 million Indian consumers using its products. Seventeen of HUL’s brands featured in the ACNielsen Brand Equity list of 100 Most Trusted Brands Annual Survey (2011).
The company also happens to have the highest number of brands in this list, with six brands featuring in the top 15 list. The company has a distribution channel of 6. 3 million outlets and owns 35 major Indian brands. Its brands include LABOR COST IN INDIA IS THE LOWEST AMONG THE EMERGING ASIAN COUNTRIES HUL RATIOS RATIO| 2012| 2011| 2010| 2009| 2008| Current Ratio| 0. 8954| 0. 9000| 0. 81268| 0. 9834| 0. 65823| Quick Ratio| 0. 4978| 0. 4711| 0. 48604| 0. 5436| 0. 27253| Cash Flow Liquidity ratio| 0. 6038| 0. 5519| 0. 80573| 0. 6679| 0. 38392| Average Collection Period| 13. 343| 17. 560| 14. 0918| 10. 01| 12. 2710| Days Inventory Held| 48. 957| 59. 526| 53. 1215| 51. 365| 60. 4530| Days Payable Outstanding| 73. 481| 81. 979| 104. 886| 66. 724| 87. 8556| Account Receivable turnover| 27. 355| 20. 785| 25. 9014| 36. 494| 29. 7448| Accounts Payable Turnover| 3. 6017| 3. 0947| 2. 43856| 3. 9712| 3. 01573| Inventory Turnover| 5. 4059| 4. 2619| 4. 81485| 5. 1589| 4. 38272| Fixed assets turnover| 10. 36| 9. 01| 8. 01| 12. 34| 8. 87| Total Assets Turnover| 4. 9807| 5. 4970| 6. 59332| 7. 9313| 8. 55871| Debt Ratio| 0| 0| 0. 00402| 0. 1683| 0. 06321| LONG TERM DEBT TO CAPITAL EMPLOYED| 0| 0| 0. 00402| 0. 683| 0. 06321| gross profit ratio| 16. 449| 40. 107| 41. 4842| 49. 423| 51. 688| Operating Profit Ratio| 16. 456| 15. 911| 16. 8758| 15. 909| 18. 0540| Net Profit Ratio| 11. 947| 11. 520| 12. 2033| 12. 268| 13. 8754| Return on Investments| 59. 509| 63. 326| 80. 4618| 97. 307| 118. 755| Return on Equity| 76. 068| 84. 339| 81. 1040| 117. 42| 127. 232| Cash Return on Assets| 0. 4351| 0. 5281| 1. 29341| 0. 7963| 1. 07195| Price to Earning| 18. 569| 26. 227| 30. 0113| 37. 728| 56. 8245| Peer comparison s. no. | Name | Market capitalisation| Sales turnover| Net profit | Total assets| 1| GODREJ| 22933. 3| 2980. 08| 604. 39| 2761. 43| 2| DABUR| 22448. 83| 3759. 33| 463. 24| 1576. 54| 3| MARICO| 13361. 56| 2970. 30| 336. 58| 1677. 27| 4| EMAMI| 9101. 40| 1389. 82| 256. 81| 804. 23| 5| P&G| 8103. 50| 1297. 41| 181. 29| 600. 62| 6| GILLETTE| 7130. 13| 1232. 90| 75. 73| 600. 33| 7| JYOTHY LABS| 2860. 82| 662. 97| 83. 52| 1226. 42| 8| BAJAJ CORP. | 2926. 40| 473. 31| 120. 09| 427. 86| 9| HUL| 118139| 22116. 37| 2691. 40| 3512. 93| BALANCE SHEET OF HUL| ——————- in Rs. Cr. ——————-| | Mar ’12| Mar ’11| Mar ’10| Mar ’09| Dec ’07| | | 12 mths| 12 mths| 12 mths| 15 mths| 12 mths| | | | | | |
Sources Of Funds| | | | | | | | | | Total Share Capital| 216. 15| 215. 95| 218. 17| 217. 99| | | | | | | Equity Share Capital| 216. 15| 215. 95| 218. 17| 217. 99| 217. 75| | | | | | Share Application Money| 0. 00| 0. 00| 0. 00| 0. 00| 0. 00| | | | | | Preference Share Capital| 0. 00| 0. 00| 0. 00| 0. 00| | | | | | | Reserves| 3,296. 11| 2,417. 30| 2,364. 68| 1,842. 85| 217. 75| | | | | | Revaluation Reserves| 0. 67| 0. 67| 0. 67| 0. 67| 0. 67| | | | | | Networth| 3,512. 93| 2,633. 92| 2,583. 52| 2,061. 51| 1,439. 24| | | | | | Secured Loans| 0. 00| 0. 00| 0. 00| 144. 65| 25. 2| | | | | | Unsecured Loans| 0. 00| 0. 00| 0. 00| 277. 30| 63. 01| | | | | | Total Debt| 0. 00| 0. 00| 0. 00| 421. 95| 88. 53| | | | | | Total Liabilities| 3,512. 93| 2,633. 92| 2,583. 52| 2,483. 46| 1,527. 77| | | | | | | Mar ’12| Mar ’11| Mar ’10| Mar ’09| Dec ’07| | | | | | | | 12 mths| 12 mths| 12 mths| 15 mths| 12 mths| | | | | | | Application Of Funds| | | | | | | | | | Gross Block| 3,574. 67| 3,759. 62| 3,581. 96| 2,881. 73| 2,669. 08| | | | | | Less: Accum. Depreciation| 1,416. 88| 1,590. 46| 1,419. 85| 1,274. 95| 1,146. 57| | | | | | Net Block| 2,157. 79| 2,169. 16| 2,162. 11| 1,606. 8| 1,522. 51| | | | | | Capital Work in Progress| 210. 89| 299. 08| 273. 96| 472. 07| 185. 64| | | | | | Investments| 2,438. 21| 1,260. 68| 1,264. 08| 332. 62| 1,440. 81| | | | | | Inventories| 2,516. 65| 2,811. 26| 2,179. 93| 2,528. 86| 1,953. 60| | | | | | Sundry Debtors| 678. 99| 943. 20| 678. 44| 536. 89| 443. 37| | | | | | Cash and Bank Balance| 510. 05| 281. 91| 231. 37| 190. 59| 200. 11| | | | | | Total Current Assets| 3,705. 69| 4,036. 37| 3,089. 74| 3,256. 34| 2,597. 08| | | | | | Loans and Advances| 1,314. 72| 1,099. 72| 1,068. 31| 1,196. 95| 1,083. 28| | | | | | Fixed Deposits| 1,319. 9| 1,358. 10| 1,660. 84| 1,586. 76| 0. 75| | | | | | Total CA, Loans & Advances| 6,340. 40| 6,494. 19| 5,818. 89| 6,040. 05| 3,681. 11| | | | | | Deffered Credit| 0. 00| 0. 00| 0. 00| 0. 00| 0. 00| | | | | | Current Liabilities| 5,688. 44| 6,264. 21| 5,493. 97| 4,440. 08| 4,028. 41| | | | | | Provisions| 1,945. 92| 1,324. 98| 1,441. 55| 1,527. 98| 1,273. 90| | | | | | Total CL & Provisions| 7,634. 36| 7,589. 19| 6,935. 52| 5,968. 06| 5,302. 31| | | | | | Net Current Assets| -1,293. 96| -1,095. 00| -1,116. 63| 71. 99| -1,621. 20| | | | | | Miscellaneous Expenses| 0. 00| 0. 00| 0. 00| 0. 0| 0. 00| | | | | | Total Assets| 3,512. 93| 2,633. 92| 2,583. 52| 2,483. 46| 1,527. 76| | | | | | CAPITAL ASSET PRICING METHOD 1. REQUIRED RATE OF RETURN = Risk free return +? (Risk premium) Ri = Rf + ? (Rm – Rf) = 8. 1 +0. 27 (6. 5) Ri = 9. 855% 2. ZERO GROWTH MODEL Where, dividend = Rs. 7. 5 Po = d/r = 7. 5/9. 855% Po = 76. 10 3. CONSTANT GROWTH MODEL (GORDON MODEL) PO = DO(1+g) r-g d1 r-g Where , growth rate = historical growth of average dividend paid of last 5 years g = 6. 75% = 7. 5(1+6. 75%) (9. 855-6. 75)% PO = 258. 266 4. Implicit growth P0 = d1 R – g Where, po = 534. 25, d1=8. 006 , r= 9. 855% P0 = d1 R – g 534. 25= 8. 006/ (0. 098-g) G= 0. 083 or 8. 3% Cash flow model Ri = 9. 855% Calculation of growth rate of cash flows =(1. 69*1. 51*. 54)1/3 -1 = . 1128 =11. 28% Assuming the abnormal growth of (11. 8%) is for 2 years, and after this the company is back to normal growth trajectory of 6% growth rate Cash flow from operation = 2884. 24 crore Vc = 2884. 24(1+. 1128)/(1+. 09) + 2884. 24(1+. 1128)2/(1+. 09)2 + 2884. 24(1+. 1128)2(1+. 06) (9. 855-6)% (1. 09)2 Vc = 88605 Vp = 0 Vd = 1000 Therefore, Ve = Vc – Vp – Vd = 88605-1000 = 85605 crore Total no. of shares outstanding = 216. 15 crore Po = Ve Total no. of shares outstanding = 85605/216. 15 Po = 396. 04 MULTIPLE MODEL p/e of company=32. 95 p/e of industry = 44. 0 price of company’s share = 534. 25 earnings for the company’s stock = price of co. stock p/e of the co. =534. 25/32. 95 Earnings for the company’s stock = 16. 21 Po = Earning’s of company*P/E of industry =16. 21*44. 50 Po = 721. 345 Analysis: The current market price of the stock is Rs.. 534. 25 , as per the valuation of stock under distinct method , it is assessed that the stock is overvalued therefore new buyers should not invest at this point, whereas, those who are invested in share are advised to sell the share and enjoy the profits Performance of stock in last 1 year
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