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Financial Analysis of HUL and GCPL

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  • 1. Financial Analysis of HUL and GCPL (FMCG Sector) Management Accounting – I Project 12P139 – Ishpreet Singh 12P140 – J Abhinav 12P141 – Karan Jaidka 12P142 – Kshitij Agrawal 12P143 – Kshitij Ahuja 12P144 – Ladlee Rathore Group 4 – Section C –PGPM 2012-14Section C – Group 4 Page | 1
  • 2. Table of ContentsTitle Page No.Acknowledgements 1Introduction 2Snapshot of the FMCG sector 3Companies under study 4Comparative financial analysis 5Short term investment 6Long term investment 12Short term lending 19Long term lending 23Strategy 29Altman Model 42Appendix 46Section C – Group 4 Page | 2
  • 3. AcknowledgementsWe, as Group 4 of Section C, would collectively like to thank Prof. S.K Rai, who for his in-depthanalysis of various topics in Management Accounting I, arise in all of us a genuine curiosity andinterest in the subject. His guidance during the course helped us in the financial analysis of theFMCG industry. Lastly, we thank the Almighty for guiding us through the implementation of thisproject.Section C – Group 4 Page | 3
  • 4. IntroductionFinancial statement analysis is the process of reviewing and evaluating a company’s financialstatements thereby gaining an understanding the financial health of the company and enablingeffective decision making for owners and managers, prospective and present investors,financial institutions, government entities etc. It involves analysis of past, current and projectedperformance of the company.Financial Statements are released by companies not only for acceding to the norms set up bythe exchanges on which they are listed and to follow the rules put down by the regulator ofthat country but also to provide prospective investors and financial institutions a brief insightinto the company. It helps them take decision to make investment or give loan, both long termand short term to the company.Financial statements are normally available in company’s website, prospectus as also theannual and the quarterly results declared by the company. These statements by themselvescontain a lot of numbers which are in comprehensible unless a proper analysis of suchdocuments is carried out to arrive at a conclusion on the companys financial health. The pagesthat follow, aim to provide a simplified explanation of some of the basic analysis company fordifferent objectives of the investor/lender. The objectives include Short term and long terminvestment, short term and long term lending and future strategy.For executing this project, we selected two companiesa. Hindustan Unilever Limitedb. Godrej Consumer Products LimitedWe took one Large Cap Company and a Mid Cap Company and compared the two.Section C – Group 4 Page | 4
  • 5. Snapshot of the FMCG SectorFast Moving Consumer Goods (FMCG) – These are products that are sold quickly and atrelatively low. Examples include non-durable goods such as soft drinks, toiletries, and groceryitems. Though the absolute profit made on FMCG products is relatively small, they generally sellin large quantities, so the cumulative profit on such products can be substantial.The term FMCGs refers to those retail goods that are generally replaced or fully used up over ashort period of days, weeks, or months, and within one year. This contrasts withdurable or major appliances such as kitchen appliances, which are generally replaced over aperiod of several years.FMCG have a short shelf life, either as a result of high consumer demand or because theproduct deteriorates rapidly. Some FMCGs – such as meat, fruits and vegetables, dairy productsand baked goods – are highly perishable. Other goods such as alcohol, toiletries, pre-packagedfoods, soft drinks and cleaning products have high turnover rates. The following are the maincharacteristics of FMCGs: From the consumers perspective: Frequent purchase Low involvement (little or no effort to choose the item – products with strongbrand loyalty are exceptions to this rule) Low price From the marketers angle: High volumes Low contribution margins Extensive distribution networks High stock turnoverSection C – Group 4 Page | 5
  • 6. Companies under StudyHindustan Unilever Limited (HUL) - It is Indias largest consumer goods company basedin Mumbai, Maharashtra. It is owned by the British-Dutch company Unilever which controls52% majority stake in HUL. Its products include foods, beverages, cleaning agents and personalcare products.HUL was formed in 1933 as Lever Brothers India Limited and came into being in 1956 asHindustan Lever Limited through a merger of Lever, Hindustan Vanaspati Mfg. Co. Ltd. andUnited Traders Ltd. It is headquartered in Mumbai, India and has employee strength of over16,500 employees and contributes to indirect employment of over 65,000 people. Thecompany was renamed in June 2007 as “Hindustan Unilever Limited”.Lever Brothers started its actual operations in India in the summer of 1888, when crates full ofSunlight soap bars, embossed with the words "Made in England by Lever Brothers" wereshipped to the Kolkata harbor and it began an era of marketing branded Fast Moving ConsumerGoods (FMCG).Hindustan Unilevers distribution covers over 2 million retail outlets across India directly and itsproducts are available in over 6.4 million outlets in the country. As per Nielsen market researchdata, two out of three Indians use HUL products.Godrej Consumer Products Limited (GCPL) – It is an Indian consumer goods company based inMumbai, India. GCPL’s product range includes soaps, hair colorants, toiletries and liquiddetergents. Some of the leading brands are ‘Cinthol’, ‘Godrej Fair Glow’, ‘Godrej No.1’ and‘Godrej Shikakai’ in soaps, ‘Godrej Powder Hair Dye’, ‘Renew’, ‘ColourSoft’ in hair colorants and‘Ezee’ liquid detergent. GCPL has five manufacturing facilities in India at Malanpur (MadhyaPradesh), Guwahati (Assam), Baddi- Thana (Himachal Pradesh), Baddi- Katha (HimachalPradesh) and Sikkim.The Consumer Products business was part of the erstwhile Godrej Soaps Limited (GSL) and wasdemerged into Godrej Consumer Products Limited in April 2001, pursuant to a scheme ofdemerger approved by the Hon’ble High Court of Judicature, Mumbai, dated March 14, 2001.Section C – Group 4 Page | 6
  • 7. Comparative Financial AnalysisThe following are various analysis metrics considered to compare the performance of HUL andGCPL:- Short Term Investment Long Term Investment Short Term Lending Long Term Lending Strategies for the FutureSection C – Group 4 Page | 7
  • 8. Short Term InvestmentShort term investment can be considered as the continual buying and selling of stock ofcompanies, in an effort to have ones money grow faster than the general level of stock prices.Normally investments are done for less than a year.The main aim of Short term investment is to protect the capital by investing in low riskinstruments and simultaneously get a return which beats the benchmark.Short term investment includes investment in stocks and other short term debt. They arecommonly used by investors to temporarily store funds while arranging for their transfer toanother investment vehicle that provides higher returns. The various ratios and factors to betaken into consideration are:-1. P/E ratio2. P/BV ratio3. EPS4. Beta Value5. Share priceThough there is no fixed definition for short term we are considering a period of six monthshere.Observation of the two firms Hindustan Unilever Ltd. and Godrej Consumer Products Ltd. forShort Term Investment is depicted in the table below:- Company FY12 FY11 FY10 FY09 FY08 41.15 26.65 24.77 24.44 26.72P/E Ratio 40.53 27.18 32.48 21.13 21.60 P/BV 6.47 7.71 9.74 6.36 18.96 Ratio 44.17 86.33 226.79 28.87 25 12.45 10.68 10.09 11.47 8.12 EPS 17.76 13.44 8.05 6.29 6.561) P/E ratioSection C – Group 4 Page | 8
  • 9. The P/E ratio expresses the relationship between the price per share and the amount ofearnings attributable to a single share. i.e., the P/E ratio tells us how much an investor incommon stock pays per rupee of current earnings. PE Ratio = Market Value per share / Earning per shareWhat does P/E ratio say?A higher P/E ratio means that investors are paying more for each unit of net income, so thestock is more expensive, that is overvalued, compared to one with a lower P/E ratio. 45 40.53 40 41.15 35 32.48 30 27.18 26.72 24.44 25 26.65 24.77 HUL 20 21.6 GCPL 21.13 15 10 5 0 2008 2009 2010 2011 2012Trend analysisP/E ratios for both the companies are increasing with almost equal rate and the absolute valuesare also more or less equal. Hence, we can’t conclude anything on the basis of this ratio alone.Section C – Group 4 Page | 9
  • 10. 2) P/BV ratioA ratio used to compare a stocks market value to its book value; it is calculated by dividing themarket price of share by the book value per share. Price to Book Value = Market price per share / book value per shareWhat does P/BV say?A lower P/BV ratio could mean that the stock is undervalued. However, it could also mean thatsomething is fundamentally wrong with the company. As with most ratios, be aware that thisvaries by industry.This ratio also gives some idea of whether youre paying too much for what would be left if thecompany went bankrupt immediately. 35 32.5 30 25.25 23.12 25 25.22 20.16 20 18.96 HUL 15 GCPL 9.74 10 6.36 7.71 6.47 5 0 2008 2009 2010 2011 2012Trend analysisP/BV ratio of GCPL is 6.46 and it is decreasing but for HUL, it is 25.22 and increasing. So, we cansay that GCPL share is under-valued as compared to HUL. This ratio for GPCL is not too low toget tense about returns from investmentSection C – Group 4 Page | 10
  • 11. 3) EPSThe earnings per share is a good measure of profitability and when compared with EPS ofsimilar companies, it gives a view of the comparative earnings or earnings power of the firm.EPS ratio calculated for a number of years indicates whether or not the earning power of thecompany has increased. Earnings per share (EPS) Ratio = (Net profit after tax − Preference dividend) / No. of equity shares (common shares) 20 18 17.76 16 14 13.44 12 12.45 11.47 10.09 10.68 HUL 10 8.12 GCPL 8 8.05 6 6.29 6.56 4 2 0 2008 2009 2010 2011 2012Trend AnalysisEPS has been increasing for both the companies but GCPL is at a better position since thepercentage increase in EPS and the absolute value of EPS is much better as compared to HULSection C – Group 4 Page | 11
  • 12. 4) Beta ValueBeta (β) of a stock or portfolio is a number describing the correlated volatility of an asset inrelation to the volatility of the benchmark that said asset is being compared to, the benchmarkbeing considered to be financial market.Beta can be estimated for individual companies using regression analysis against a stock marketindex. It describes how much risk that one can take to get a desirable return or vice versa.What does beta value say?1. Negative beta, is a rare condition where the price of the stock moves in reversedirection to the market movement.2. Zero beta, is another rarity, where the price of stock stays same over time irrespectiveof market movement. This can sometimes happen in sideways moving markets, where no majoreconomic/industry/company news is coming up.3. A beta of less than 1 means that the security will be less volatile than the market. This iswhen the stock price moves less in comparison of market. It makes them qualify for low-riskinvestments, but is not so suitable for short-term trading.4. A beta of 1 indicates that the securitys price will move with the market. This is true formany index-linked stocks and funds.5. A beta of greater than 1 indicates that the securitys price will be more volatile than themarket. This is when the stock price movement surpass market movement. These stocks tendto offer better return for high-risk taken, but many of them are less suitable for long-terminvesting. Very high beta levels may indicate low liquidity causing increase in volatility.Trend analysisBeta value for HUL is 0.389 and for GCPL is 0.27. Since, both of them are less, we can’t concludemuch on the basis of beta values of two companies.Section C – Group 4 Page | 12
  • 13. 5) Share priceShare price of HUL has increased by almost 35% in the past one year and the present market value of itsshare is 518.25 while the increase in price of GCPL is by almost 55% with present market value being690.6. But, in the last 3 months the percentage increase in price is almost the same at 20%.So, for short term nothing significant can be concluded by share price.Overall AnalysisIn short term, based on EPS and P/BV, we can conclude that investment is better in GCPL ascompared to HUL since returns will be high from GCPLSection C – Group 4 Page | 13
  • 14. Long Term InvestmentLong Term Investing refers to the fact that investment is made for a period greater than 1 year.The various factors to be considered are:-1. Fixed asset turnover ratio2. Return on Equity3. Return on capital employed4. Operating profit margin5. Dividend yield ratio6. Dividend payout ratioEach of these factors has a role to play in the selection of the company for investment.However, the degrees to which they affect the returns vary in response to the other factors aswell. Hence, for arriving at a decision for the investment, the entire basket needs to beconsidered. Following is a brief discussion for each of them:- Company FY12 FY11 FY10 FY09 FY08 0 0 0 0.2 0.06D/E Ratio 0.09 0.18 0.01 0.12 0.89 Interest 2796.6 12238.54 404.94 119.5 92.3Coverage Ratio 44.17 86.33 226.79 28.87 25 76.62% 87.54% 85.25% 121.27% 122.91% ROE 23.94% 28.36% 29.98% 30.08% 98.47%Dividend 7.5 6.5 6.5 7.5 9per share 4.75 4.5 4.25 4 4 25.22 23.12 20.16 25.25 32.5P/BV Ratio 6.47 7.71 9.74 6.36 18.96Section C – Group 4 Page | 14
  • 15. 1) Fixed-asset Turnover Ratio:The fixed-asset turnover ratio measures a companys ability to generate net sales from fixed-asset investments - specifically property, plant and equipment (PP&E) - net of depreciation.What does FA Turnover ratio say?A higher fixed-asset turnover ratio shows that the company has been more effective in usingthe investment in fixed assets to generate revenues. 12 10 9.8 8 7.81 7.49 6 6.09 6.26 HUL 5.63 5.35 GCPL 4.6 4.73 4 4.18 2 0 2008 2009 2010 2011 2012Trend analysisThe ratio is increasing for both the companies but for GCPL, it is increasing at a higher rate ascompared to HUL, also, the absolute value for GCPL is higher than HUL. So, GCPL is moreefficient of the twoSection C – Group 4 Page | 15
  • 16. 2) Return on EquityIt is the amount of net income as a percentage of shareholders equity. Return on Equity = Net Income/Shareholders EquityWhat does it say?Return on equity measures a corporations profitability by revealing how much profit acompany generates with the money shareholders have invested. So higher the ROE, better isthe performance of the company 140.00% 122.91% 120.00% 121.27% 100.00% 98.47% 85.25% 87.54% 76.62% 80.00% HUL 60.00% GCPL 40.00% 30.08% 29.98% 28.36% 23.94% 20.00% 0.00% 2008 2009 2010 2011 2012Trend analysisROE for both the companies are decreasing but for HUL the absolute value is much higher ascompared to GCPL. Hence, of the two, HUL is a better option.Section C – Group 4 Page | 16
  • 17. 3) ROCEIt is the ratio that indicates the efficiency and profitability of a companys capital investments. ROCE = EBIT / (Total asset – current liabilities)What does ROCE say?ROCE measures a corporations profitability by revealing how much profit a company generateswith respect to the total investment made. So higher the ROCE, better is the performance ofthe company 160 140 138.72 120 118.59 106.78 100 102.47 93.08 80 HUL 66.03 GCPL 60 40 32.65 35.73 28.43 20 21.42 0 2008 2009 2010 2011 2012Trend analysisROCE has been decreasing for both the companies but the absolute value of ROCE for HUL ismore than 4 times than GCPL, which shows that HUL is performing much better and hence, it isa better optionSection C – Group 4 Page | 17
  • 18. 4) Operating Profit MarginsA ratio used to measure a companys pricing strategy and operating efficiency. Operating Profit Margin = Operating Income / Net SalesWhat does it say?Operating margin gives analysts an idea of how much a company makes (before interest andtaxes) on each dollar of sales. When looking at operating margin to determine the quality of acompany, it is best to look at the change in operating margin over time and to compare thecompanys yearly or quarterly figures to those of its competitors. If a companys margin isincreasing, it is earning more per dollar of sales. Higher the operating profit margin, the betterthe performance of the company. 0.2 0.18 0.175 0.16 0.14 0.142 0.136 0.127 0.131 0.128 0.12 0.122 0.12 0.118 0.111 0.1 HUL GCPL 0.08 0.06 0.04 0.02 0 2008 2009 2010 2011 2012Trend analysisHUL is a better option as its operating margin is high as well as it is increasing from the last yearwhich is not the case with GCPLSection C – Group 4 Page | 18
  • 19. 5) Dividend YieldA financial ratio that shows how much a company pays out in dividends each year relative to itsshare price. In the absence of any capital gains, the dividend yield is the return on investmentfor a stock. Dividend yield is calculated as follows: Dividend Yield = Annual Dividends per share / price per shareWhat does it say?Dividend yield is a way to measure how much cash flow you are getting for each dollar investedin an equity position - in other words, how much "bang for your buck" you are getting fromdividends. Investors who require a minimum stream of cash flow from their investmentportfolio can secure this cash flow by investing in stocks paying relatively high, stable dividendyields. 4.5 4.2 4 3.5 3.2 3.1 3 3.01 2.7 2.5 HUL 2.2 2 GCPL 1.8 1.62 1.5 1.23 1 0.99 0.5 0 2008 2009 2010 2011 2012Trend analysisHUL is better option since the absolute value of Dividend yield is greater than GCPL but for boththe companies dividend yield is decreasing.Section C – Group 4 Page | 19
  • 20. 6) Dividend Payout RatioThe percentage of earnings paid to shareholders in dividends. Dividend Payout Ratio = Dividends / Net IncomeWhat does it say?The payout ratio provides an idea of how well earnings support the dividend payments. Moremature companies tend to have a higher payout ratio. This is because they do not retain theearnings for re investing in business. 140 131.8 120 100 80 73.26 76.47 75.2 74.58 71.2 69.99 HUL 60 59.34 GCPL 45.19 40 30.11 20 0 2008 2009 2010 2011 2012Trend analysisHUL is a better option since it doesn’t retain much of its earnings for the purpose of expansionas compared to GCPLOverall AnalysisAfter considering all the parameters, we can say that HUL is better for long term investmentsince it provides better dividends as compared to GCPL. Not only that, in terms of ROE, ROCLand operating profit margin, HUL is a better company to invest for the long term.Section C – Group 4 Page | 20
  • 21. Short Term LendingThe analysis of short term will depend on how much returns our investment will give us in the short run.A bank will thus lend only to the company, which is more efficient in running business, and will havehigher sales in the near future that will ensure that the loan will be repaid on time. Thus we mustanalyze why the company is borrowing money and what will be the application of funds. We must findout whether the company will apply the funds to pay back loans (principal or interest) or to raise fixedassets or to increase current assets. For short term lending the primary concern for any bank are theliquidity ratios of the company(s) concerned. So the parameters that we will take into considerationare:-1. Current Ratio2. Receivables Turnover Ratio3. Inventory Turnover Ratio Company FY12 FY11 FY10 FY09 FY08 0.86 0.88 1.01 1.32 0.85 Current Ratio 1.20 0.74 1.46 2.23 0.95Receivables 27.27 24.28 29.24 41.83 31.41 Turnover Ratio 30.17 35.1 59.25 99.37 81.10 Inventory 9.93 7.91 8.99 9.26 7.2 Turnover Ratio 7.16 8.2 7.93 9.25 5.7Section C – Group 4 Page | 21
  • 22. 1) Current RatioA liquidity ratio that measures a companys ability to pay short-term obligations.The Current Ratio formula is:What does current ratio say?The higher the current ratio, the more capable the company is of paying its obligations. A ratiounder 1 suggests that the company would be unable to pay off its obligations if they came due atthat point. While this shows the company is not in good financial health, it does not necessarilymean that it will go bankrupt - as there are many ways to access financing - but it is definitelynot a good sign. 2.5 2.23 2 1.5 1.46 1.32 HUL 1.2 0.95 GCPL 1 0.88 0.85 1.01 0.86 0.74 0.5 0 2008 2009 2010 2011 2012Trend AnalysisWhen we compare the ratios for both the companies, HUL has a lower current ratio as compared toGCPL. The current ratio for HUL is decreasing as well unlike GCPL. This means that GCPL is a bettercompany in paying off its obligationsSection C – Group 4 Page | 22
  • 23. 2) Receivables Turnover RatioThis ratio shows how efficiently the company is making its credit sales and thereby making useof its assets. Receivable Turnover ratio = Sales / Average account receivableWhat does receivable turnover ratio say?A high ratio indicates the company is doing well at lending credit and collecting debts. A lowratio indicates that company has to look back its credit policies. 120 100 99.37 81.1 80 60 59.25 HUL GCPL 40 35.1 30.17 41.83 31.41 20 29.24 27.27 24.28 0 2008 2009 2010 2011 2012Trend analysisIn the last 5 years, the ratio has decreased for both the companies but it is decreasing at amuch faster rate for GCPL as compared to HUL. The absolute value of GCPL is, however,marginally more than HUL. But, according to the trend HUL is doing better at lending credit andcollecting debts.Section C – Group 4 Page | 23
  • 24. 3) Inventory Turnover RatioThis ratio gives number of times inventory is sold i.e. for it is sales to inventory ratio. Inventory turnover ratio= sales/inventoryWhat does Inventory turnover ratio say?High value of this ratio indicates that a lot of inventory is either being sold or there is ineffectivebuying because of low prices. Low value indicates high inventory which is not good. It showsthat sales are not happening. 12 10 9.25 8.99 9.93 9.26 8.2 8 7.2 7.93 7.91 7.16 6 HUL 5.7 GCPL 4 2 0 2008 2009 2010 2011 2012Trend analysisInventory turnover ratio of GCPL is low and decreasing from last year but for HUL, it isincreasing which shows that HUL is more efficient in utilising inventoryOverall AnalysisHUL is better at Receivable turnover ratio and Inventory turnover ratio signifying that forproviding short term loans, HUL is a better company as compared to GCPLSection C – Group 4 Page | 24
  • 25. Long Term LendingThe main purpose of long term lending is a. Steady return for a long period of time b. Reduce riskThe lender generally looks at four ratios apart from the above analysis 1. Debt equity ratio 2. Interest coverage ratio 3. Fixed asset turnover ratio 4. ROCE 5. Gross block Company FY12 FY11 FY10 FY09 FY08 0 0 0 0 0D/E Ratio 0.09 0.17 0 0.10 0.83 Interest 2796.6 12238.54 404.94 119.5 92.3Coverage Ratio 44.17 86.33 226.79 28.87 25 Fixed Assets 6.26 5.63 5.35 7.81 9.8 Turnover Ratio 7.49 6.09 4.73 4.18 4.6 93.08 102.47 106.78 118.59 138.72 ROCE 21.42 28.43 35.73 32.65 66.03 Gross 3574.67 3759.62 3581.76 2881.73 2669.08 Block 1363.43 1461.06 273.81 266.54 265.56Section C – Group 4 Page | 25
  • 26. 1) D/E RatioIt is a measure of a companys financial leverage. It indicates what proportion of equity anddebt the company is using to finance its assets. D/E = Total liabilities / Net worthWhat does D/E ratio says?While a lower total debt to equity ratio generally reflects conservative financial policies andmean diluted earnings for equity investors as it probably suggests that the company is notleveraging itself optimally to achieve growth in return on equity funds.A high debt/equity ratio generally means that a company has been aggressive in financing itsgrowth with debt. This can result in volatile earnings as a result of the additional interestexpense. 0.9 0.83 0.8 0.7 0.6 0.5 HUL 0.4 GCPL 0.3 0.2 0.1 0.17 0.1 0.09 0 0 0 0 0 0 2008 2009 2010 2011 2012Trend analysisD/E ratio is low for both the companies and it is decreasing further for GCPL. Since, this ratio is lower forHUL, so, this company is a better option for long term lending.Section C – Group 4 Page | 26
  • 27. 2) Interest Coverage RatioA ratio used to determine how easily a company can pay interest on outstanding debt. Theinterest coverage ratio is calculated by dividing a companys earnings before interest and taxes(EBIT) of one period by the companys interest expenses of the same period:What does interest coverage ratio say?The lower the ratio, the more the company is burdened by debt expense. When a companysinterest coverage ratio is 1.5 or lower, its ability to meet interest expenses may bequestionable. An interest coverage ratio below 1 indicates the company is not generatingsufficient revenues to satisfy interest expenses. 14000 12000 12238.54 10000 8000 HUL 6000 GCPL 4000 2796.6 2000 92.3 119.5 404.94 86.33 0 25 226.79 44.17 28.87 2008 2009 2010 2011 2012Trend analysisInterest coverage ratio of HUL is higher than GCPL and it has increased by almost 3000% and forGCPL, it has increased by almost 90% which clearly tells that HUL will be in better condition torepay interest on loans.Section C – Group 4 Page | 27
  • 28. 3) Fixed Asset Turnover RatioThe fixed-asset turnover ratio measures a companys ability to generate net sales from fixed-asset investments - specifically property, plant and equipment (PP&E) - net of depreciation.What does FA Turnover ratio say?A higher fixed-asset turnover ratio shows that the company has been more effective in usingthe investment in fixed assets to generate revenues. 12 9.8 10 8 7.81 7.49 6 5.35 6.09 6.26 HUL GCPL 5.63 4 4.6 4.73 4.18 2 0 2008 2009 2010 2011 2012Trend AnalysisFrom the last 3 years, the ratio is increasing for both the companies but the increase inpercentage of GCPL as well as absolute value is greater as compared to HUL and hence, GCPL isa better optionSection C – Group 4 Page | 28
  • 29. 4) Return on Capital EmployedIt is a ratio that indicates the efficiency and profitability of a companys capital investments. ROCE = EBIT / (Total asset – current liabilities)What does ROCE say?ROCE measures a corporations profitability by revealing how much profit a company generateswith respect to the total investment made. So higher the ROCE, better is the performance ofthe company 160 140 138.72 118.59 120 106.78 102.47 100 93.08 80 HUL 66.03 GCPL 60 35.73 40 28.43 20 32.65 21.42 0 2008 2009 2010 2011 2012Trend AnalysisROCE has been decreasing for both the companies but the absolute value of ROCE for HUL ismore than 4 times than GCPL, which shows that HUL is performing much better and hence, it isa better optionSection C – Group 4 Page | 29
  • 30. 5) Gross BlockThe total value of all of the assets that a company owns. Value is determined by the amount itcost to acquire these assets, and it is not decreased to take into account the effects ofdepreciation. 4000 3759.62 3500 3581.16 3574.67 3000 2881.73 2669.08 2500 2000 HUL GCPL 1500 1461.06 1363.43 1000 500 265.56 266.54 273.8 0 2008 2009 2010 2011 2012Trend AnalysisGross block for both the companies has decreased between 2011 and 2012. It increasedsignificantly for GCPL in 2010-11 implying that the company has expanded rapidly. But, for now,both the companies seem to be stable.Overall analysisWhile comparing the two companies, we can see that HUL is better than GCPL for long termlending on parameters like ROCE, Interest coverage which signify that HUL is doing well inbusinessSection C – Group 4 Page | 30
  • 31. StrategyShort term operations1) Inventory turnover ratioThis ratio gives number of times inventory is sold i.e. for it is sales to inventory ratio. Inventory turnover ratio= sales/inventoryWhat does Inventory turnover ratio say?High value of this ratio indicates that a lot of inventory is either being sold or there is ineffectivebuying because of low prices. Low value indicates high inventory which is not good. It showsthat sales are not happening. 12 10 9.26 9.93 8.99 8.2 9.25 8 7.2 7.91 7.16 7.93 6 HUL 5.7 GCPL 4 2 0 2008 2009 2010 2011 2012Trend AnalysisThe inventory turnover ratio is higher for GCPL which shows the high amount of sales are happening inthe company and the company is able to sell its inventory at a much faster rate as compared to HULshowing better short term operational efficiency. Over the last 5 years, we notice that both companieshave followed a similar trend maintaining inventory. We see that both companies are efficiently theirinventory over time and their operational strategy based on inventory is sound.Section C – Group 4 Page | 31
  • 32. 2) Days of Inventory: 365/turnover ratioA financial measure of a companys performance that gives investors an idea of how long ittakes a company to turn its inventory (including goods that are work in progress, if applicable)into sales. Days of Inventory = 365/turnover ratioWhat does it Say?Generally, the lower (shorter) the DSI the better, but it is important to note that the averageDSI varies from one industry to another. 140 120 122.49 100 89.57 91.46 85.8 87.17 80 80.04 82.84 73.63 71.76 HUL 69.5 60 GCPL 40 20 0 2008 2009 2010 2011 2012Trend analysisThe days of inventory of HUL are substantially lower as compared to GCPL, which shows that HULtakes lesser time to turn its inventory (including goods that are work in progress, if applicable) into sales,and hence is more operationally efficient than GCPL.Section C – Group 4 Page | 32
  • 33. Long Term Operational Strategy 1) Return on Assets/Assets Turnover RatioReturn on Assets: An indicator of how profitable a company is relative to its total assets. It is calculatedas:Asset Turnover is the amount of sales generated for every dollars worth of assets. It is calculated bydividing sales in dollars by assets in dollars.Formula:What does it say?A high value of ROA or Assets Turnover Ratio measures how efficiently the assets are used in making aprofit. ROA 80 74.17 70 60 50 47.4 40 HUL GCPL 30 26.85 20 20.9 16.25 11.84 12.2 10 9.46 6.61 6.54 0 2008 2009 2010 2011 2012Section C – Group 4 Page | 33
  • 34. Asset Turnover 9 8 7.81 7.49 7 6.09 6.26 6 5.64 5.63 5.35 5 4.6 4.73 HUL 4 4.18 GCPL 3 2 1 0 2008 2009 2010 2011 2012Trend AnalysisThe return on assets as well as the asset turnover ratio is substantially higher in case of GCPL,which shows that the company is able to use its assets more efficiently as compared to theother company i.e, HUL and hence is able to generate more revenues per unit of assets. HUL’sReturn on Assets is marginally increasing over the years, but it is not a significant increase,hence the company should try and utilize its assets more efficiently.Section C – Group 4 Page | 34
  • 35. 2) Fixed AssetsA long-term tangible piece of property that a firm owns and uses in the production of itsincome and is not expected to be consumed or converted into cash any sooner than at least oneyears time. 4500 4185.74 4000 4061.16 3854.15 3667.24 3500 3455.14 3000 2959.14 2727.26 2500 HUL 2000 GCPL 1500 1000 726.74 500 550.2 389.28 0 2008 2009 2010 2011 2012Trend AnalysisWe see that both companies have been increasing their assets over the last 5 years. However,between 2010 and 2011, GCPL increased their assets approximately 5 times. One of the majorreasons for the sharp increase in fixed assets between 2010 and 2011 was GCPL’s extensiveexpansion of operations in countries in Africa and Latin America during this period.Section C – Group 4 Page | 35
  • 36. Financial Efficiency Short Term Financial Strategy 1) Working CapitalWorking Capital measures a companys efficiency in its short term financial health. Working capital = Current Assets - Current LiabilitiesWhat does it say?A positive working capital denotes that the company is able to pay off its short term liabilitieswhile a negative value means that the company is unable to pay off its short term liabilities. 500 104.83 0 -58.95 -84.47 -96.67 2008 2009 2010-127.05 2011 2012 -500 -1000 -1183.74 HUL -1500 -1431.33 GCPL -2000 -1982.75 -2227.84 -2404.23 -2500 -3000Trend AnalysisThe working capital in case of GCPL has been substantially increasing over the years ascompared to HUL which shows that the company is able to pay its short term liabilities overtime. HUL’s working capital is negative indicating that company is not able to pay off short termliabilities.Section C – Group 4 Page | 36
  • 37. 2) Interest Coverage RatioThis ratio signifies how easily a company can pay interest on outstanding debt.What does it say?The lower the ratio, the more the company is burdened by the debt expense. For example, anICR of less than one signifies that the company is unable to generate sufficient revenues tosatisfy interest expenses. 12000 11243.63 10000 8000 6000 HUL GCPL 4000 2636.53 2000 23.07 26.89 82.78 44.17 395.13 0 83.09 116.28 216.85 2008 2009 2010 2011 2012Trend analysisInterest coverage ratio of HUL is higher than GCPL and it has increased by almost 3000% and forGCPL, it has increased by almost 90% which clearly tells that HUL will be in better condition torepay interest on loans.In case of HUL we see a sharp increase in the ICR from 2010 to 2011. This is due to the steepdrop in the interest paid which falls from 6.98 crore to 0.24 crore during this period. From 2011to 2012 the interest increases from 0.24 crore to 1.24 crore which explains the steep decreasein the ICR.Section C – Group 4 Page | 37
  • 38. Long Term Financial Strategy 1) Sales GrowthSales Growth of a company is used to find out the rate at which sales grows as compared to theindustry.Sales for the Companies 30000 25000 24506.4 21912.02 20939.38 20000 18461.08 15000 14912.06 HUL GCPL 10000 5000 4986.61 3775.89 1438.9 2084.27 1134.43 0 2008 2009 2010 2011 2012Trend AnalysisAs it can be inferred from the graph, the sales for HUL has been rising at a faster rate ascompared to GCPL which shows a strong order book and hence higher expectations of growthin the near future.Section C – Group 4 Page | 38
  • 39. 2) Long Term LoanLong-term loan is debt due in one year or more. It appears on a companys balance sheet.For example many banks have term-loan programs that can offer small businesses thecash they need to operate from month to month. Often a small business will use the cash froma term loan to purchase fixed assets such as equipment used in its production process. 450 421.95 400 350 300 272.49 250 237.51 HUL 200 GCPL 150 134.59 100 88.53 62.89 50 12.4 0 0 0 0 2008 2009 2010 2011 2012Trend AnalysisThe long term loans in case of HUL have been negligible, whereas in case of GCPL have beenfluctuating. GCPL should therefore try and reduce its secured loans. One of the major reasonsfor the sharp increase in secured loans between 2010 and 2011 was GCPL’s extensive expansionof operations in countries in Africa and Latin America during this period.Section C – Group 4 Page | 39
  • 40. 3) Unsecured LoanThese are loans that are not backed by any underlying asset. It is high risk for the lenders sincethere is a chance of default. This generally comes at a high interest rate. 300 277.3 262.43 250 235.24 200 150 HUL GCPL 100 94 63.01 50 48 0 0 0 0 2008 2009 2010 2011 2012Trend AnalysisThe unsecured loans in case of GCPL have been significantly higher as compared to HUL whichshow that the company has to pay huge amounts of unsecured loans which attract a higheramount of interest and hence would affect its profits in the long run. GCPL should therefore tryand reduce its unsecured loans. One of the major reasons for the sharp increase in unsecuredloans between 2010 and 2011 was GCPL’s extensive expansion of operations in countries inAfrica and Latin America during this period.Section C – Group 4 Page | 40
  • 41. 4) Debt Equity RatioA measure of a companys financial leverage calculated by dividing its totalliabilities by stockholders equity. It indicates what proportion of equity and debt the companyis using to finance its assets.It is calculated as:What does it say?A high Debt/Equity ratio generally means that the company is aggressive in financing its growthwith debt. This can result in volatile earnings as a result of additional expense. If a lot of debt isused to finance operations, the company could generate more earnings than it would havewithout the debt. If the earnings are more than the interest on the debts then theshareholders benefit. However, the reverse - when the interest outweighs the expense couldlead the company to bankruptcy. 0.9 0.83 0.8 0.7 0.6 0.5 HUL 0.4 GCPL 0.3 0.2 0.17 0.1 0.1 0.09 0 0 0 0 0 0 2008 2009 2010 2011 2012Trend AnalysisWe notice that over the last three years, HUL is maintaining zero debt.Section C – Group 4 Page | 41
  • 42. 5) Interest Coverage Ratio 14000 12000 12238.54 10000 8000 HUL 6000 GCPL 4000 2796.6 2000 92.3 119.5 404.94 86.33 0 25 226.79 44.17 28.87 2008 2009 2010 2011 2012Trend analysisInterest coverage ratio of HUL is higher than GCPL and it has increased by almost 3000% and forGCPL, it has increased by almost 90% which clearly tells that HUL will be in better condition torepay interest on loans.In case of HUL we see a sharp increase in the ICR from 2010 to 2011. This is due to the steepdrop in the interest paid which falls from 6.98 crore to 0.24 crore during this period. From 2011to 2012 the interest increases from 0.24 crore to 1.24 crore which explains the steep decreasein the ICR.Section C – Group 4 Page | 42
  • 43. 6) Fixed Assets Turnover RatioA financial ratio of net sales to fixed assets. The fixed-asset turnover ratio is calculated as:What does it Say?The fixed-asset turnover ratio measures a companys ability to generate net sales from fixed-asset investments - specifically property, plant and equipment (PP&E) - net of depreciation. Ahigher fixed-asset turnover ratio shows that the company has been more effective in using theinvestment in fixed assets to generate revenues. When companies make these large purchases,prudent investors watch this ratio in following years to see how effective the investment in thefixed assets was. 12 10 9.8 8 7.81 7.49 6 6.09 6.26 HUL 5.35 5.63 4.73 GCPL 4.6 4 4.18 2 0 2008 2009 2010 2011 2012Trend AnalysisWe notice that the Fixed Assets Turnover Ratio of GCPL has been steadily increasing over theyears, and this shows that GCPL has been utilising its fixed assets very efficiently to convertthem into sales and in the long run, it will be very beneficial for investors to invest in GCPL. Inthe case of HUL, we notice that their Fixed Assets Turnover Ratio decreased initially and thenpicked up in 2011 and 2012. Both companies have very promising long term investmentoptions.Section C – Group 4 Page | 43
  • 44. Altman ModelA predictive model created by Edward Altman in the 1960s. This model combines five differentfinancial ratios to determine the likelihood of bankruptcy amongst companies.Formula to calculate Altmans Z-Score:z-score = 1.2 a + 1.4 b + 3.3 c + d + .6 f e gwhere :a = working capital,b = retained earnings,c = operating income,d = sales,e = total assets, f = net worth and g = total debtAltman z-score definition and explanation:The Altman z-score is a bankruptcy prediction calculation.The z-score measures the probability of insolvency (inability to pay debts as they become due).1.8 or less indicates a very high probability of insolvency.1.8 to 2.7 indicates a high probability of insolvency.2.7 to 3.0 indicates possible insolvency.3.0 or higher indicates that insolvency is not likely.Section C – Group 4 Page | 44
  • 45. 16 14.64 14 13.48 12 12.19 11.27 11.48 10 8 HUL 7.18 GCPL 6 5.55 5.03 4.7 4.48 4 2 0 2008 2009 2010 2011 2012AnalysisAltman score for both the companies are greater than 3 which means that they both are safe interms of bankruptcy level. Since, HUL’s score is much higher than GCPL signifying that it is moresafe as compared to GCPLSection C – Group 4 Page | 45
  • 46. AppendixHindustan Unilever Limited – Balance SheetsSection C – Group 4 Page | 46
  • 47. Section C – Group 4 Page | 47
  • 48. Hindustan Unilever Limited – Profit and Loss AccountsSection C – Group 4 Page | 48
  • 49. Section C – Group 4 Page | 49
  • 50. Godrej Consumer Products Limited – Balance SheetsSection C – Group 4 Page | 50
  • 51. Section C – Group 4 Page | 51
  • 52. Godrej Consumer Products Limited – Profit and Loss AccountsSection C – Group 4 Page | 52
  • 53. Source: livemint.comSection C – Group 4 Page | 53

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