Hindustan Unilever Limited (HUL) | Valuation of Goodwill

1. 1 HINDUSTAN UNILEVER LIMITED BY : ANSH SHAH JESS JOHN PRAGIDIYA M SHARON SHAJI Valuation of Goodwill (2211405) (2211419) (2211424) (2211459) TO : DEPARTMENT OF COMMERCE

2. 2 Contents Company Description: .................................................................................................................. 3 Appendix..................................................................................................................................... 4 Goodwill Valuation ...................................................................................................................... 6 Average Method:...................................................................................................................... 6 Simple Average:.................................................................................................................... 6 Weighted Average:................................................................................................................ 8 Super Profit Method:............................................................................................................... 10 Number of years of purchase:............................................................................................... 10 Annuity Method:................................................................................................................. 12 Capitalisation Method:............................................................................................................ 15 Capitalisation of Average Profit ........................................................................................... 15 Capitalisation of Super Profit ............................................................................................... 17 Conclusion................................................................................................................................. 20 Bibliography .............................................................................................................................. 21

3. 3 HINDUSTAN UNILEVER LIMITED Company Description: Hindustan Unilever Limited (HUL) is an Indian consumer goods company headquartered in Mumbai. It is a subsidiary of the British company Unilever. Its products include foods, beverages, cleaning agents, personal care products, water purifiers and other fast-moving consumer goods (FMCGs). With nearly 90 years of heritage in India, Hindustan Unilever Limited (HUL) is India’s largest fast-moving consumer goods company.HUL works to create a better future every day and helps people feel good, look good and get more out of life with brands and services that are good for them and good for others. HUL was established in 1931 as Hindustan Vanaspati Manufacturing Co. Following a merger of constituent groups in 1956, it was renamed Hindustan Lever Limited. The company was renamed again in June 2007 as Hindustan Unilever Limited. With 50+ brands spanning categories such as fabric solutions, home and hygiene, life essentials, skin cleansing, skincare, hair care, colour cosmetics, oral care, deodorants, tea, coffee, ice cream & frozen desserts, foods and health food drinks, 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, Glow & Lovely, Pond’s, Vaseline, Lakmé, Dove, Clinic Plus, Sunsilk, Pepsodent, Closeup, Axe, Horlicks, etc. The Company has about 21,000 employees and has sales of INR 50,000+ crores (financial year 2021-22). HUL is a subsidiary of Unilever, one of the world’s leading suppliers of Food, Home Care, Personal Care and Refreshment products with sales in over 190 countries. Forbes rated HUL as the most innovative company in India and #8 globally. Aon Hewitt recognised HUL as one of the best companies to work for and we continue to be the ‘Employer of Choice’ across industries. HUL became a listed company in 1999, and it’s shares opened at 166.00 INR. 24 years down the line, they are being traded at a whopping 2607.55 INR as on January 30th,2023. HUL brands exist in 90% of households in the Indian economy and remarkably one of the most successful Indian consumer goods company.

4. 4 Appendix (Sources of the below data is mentioned in the Bibliography) Table 1: Balance Sheet

5. 5 Table 2: Profit & Loss Account Table 3: Normal Rate of Return

6. 6 Goodwill Valuation Average Method: This method is divided into two sub-division. Simple Average: In this process, goodwill evaluation is done by calculating the average profit by the number of years it is called years purchase. It can be calculated by using the formula. Goodwill = Average Profit x No. of years of purchase. Question Hindustan Unilever Limited’s profits is based on last 5 years profit. Profits after Tax for the year ending, Years Amount (in Rs. Cr) March 31st 2018 5237 March 31st 2019 6036 March 31st 2020 6738 March 31st 2021 7954 March 31st 2022 8818 (a) During the year ending 31st March 2019 , an asset was sold at a gain of 1000 (b) During the year 2021 a machine got destroyed in an accident and 2400 was written off as loss (c) Profits of year ending March 31st 2022 included a non-recurring income of 1500. Calculate goodwill based on 2 years purchase of average profit.

7. 7 Answer 1. Calculation of Final Profits Adjustments 2018 2019 2020 2021 2022 Profits after Tax 5273 6036 6738 7954 8818 Add: 2400 (Abnormal loss) Less: (1000) (Abnormal gain) (1500) (Non-recurring gain) Final Profits after all Adjustments 5273 5036 6738 10354 7318 2. Calculation of Adjusted Average Profits Adding profits of consecutive years = 5273+5036+6738+10354+7318/5 = 34,719/5 = 6,943.8 (in Rs. Cr) 3. Calculation of Goodwill Goodwill on purchase of 2 years= 6,943.8 x 2 = 13,888 (in Rs Cr)

8. 8 Weighted Average: Here, last year’s profit is calculated by a specific number of weights. This technique is used when there is a change in profits and giving high importance to the present year’s profit. Goodwill = Weighted Average Profit x No. of years’ of purchase, where Weighted Average Profit = Sum of Profits multiplied by weights/ Sum of weight Question Hindustan Unilever Limited’s profits is based on last 5 years profit. Profits after Tax for the year ending, Years Amount (in Rs. Cr) Weights Assigned March 31st 2018 5237 1 March 31st 2019 6036 2 March 31st 2020 6738 3 March 31st 2021 7954 4 March 31st 2022 8818 5 (a) During the year ending 31st March 2019 , an asset was sold at a gain of 1000/- (b) During the year 2021 a machine got destroyed in an accident and 2400/- was written off as loss (c) Profits of year ending March 31st 2022 included a non-recurring income of 1500/- Calculate goodwill based on 2 years purchase of weighted average profit.

9. 9 Answer 1. Calculation of Final Profits Adjustments 2018 2019 2020 2021 2022 Profits after Tax 5273 6036 6738 7954 8818 Add: 2400 (abnormal loss) Less: (1000) (abnormal gain) (1500) (non- recurring gain) Final Profits after all Adjustments (assigning weights) 5273x1= 5273 5036x2= 10,072 6738x3= 20,214 10,354x4= 41,416 7,318x5= 36,590 2. Calculation of Weighted Average Profit 5273+10072+20214+41416+36590/15 = 1,13,565/15 = 7,571 (in Rs. Cr) 3. Calculation of Goodwill Goodwill on purchase of 2 years = 7,571*2= 15,142 ( in Rs. Cr)

10. 10 Super Profit Method: It is a surplus of expected future maintainable profits over normal profits. The two methods of these methods are. Number of years of purchase: The goodwill is established by evaluating super-profits by a specific number of the purchase year. It can be estimated by applying the below formula. Super Profit = Average profit – Normal Profit Question Hindustan Unilever Limited’s profits is based on last 5 years profit. Normal Rate of return is 20.19. Profits after Tax for the year ending, Years Amount (in Rs. Cr) March 31st 2018 5237 March 31st 2019 6036 March 31st 2020 6738 March 31st 2021 7954 March 31st 2022 8818 (a) During the year ending 31st March 2019 , assets were sold at a gain of 1000. (b) During the year 2021 machines got destroyed in a fire accident and 2400 was written off as loss. (c) Profits of year ending March 31st 2022 included a non-recurring income of 1500. (d) Rent received from land annually is 3000. (e) Profits of 2018 and 2022 is reduced by 800 and 1720 respectively due to stock destroyed by fire. Calculate Goodwill at 3 years purchase of Super Profit method.

11. 11 Answer 1. Calculation of Final Profits Adjustments 2018 2019 2020 2021 2022 Profits after Tax 5273 6036 6738 7954 8818 Add: 3000 (Rent received) 3000 (Rent received) 3000 (Rent received) 3000 (Rent received) 3000 (Rent received) Add: 800 (Stock destroyed by fire) 2400 (abnormal loss) 1720 (Stock destroyed by fire) Less: (1000) (abnormal gain) (1500) (non- recurring gain) Final Profits after all Adjustments 9073 8036 9738 13354 12,038 2. Calculation of Adjusted Average Profit 9,073+8,036+9,738+13,354+12,038/5= 52239/5=10,448 ( in Rs. Cr) 3. Calculation of Average Capital Employed Average Capital Employed= Total Assets- Outsiders Liability- ½ of Current Years’ Profit Average Capital Employed= 69737- 14124- 4409= 51,204( in Rs. Cr) 4. Calculation of Normal Profit Normal Profit= Average Capital Employed x Normal rate of Return Normal Profit= 51,204 x 20.19%= 10,338( in Rs. Cr)

12. 12 5. Calculation of Super Profit Super Profit= Adjusted Average Profit- Normal Profit Super Profit= 10,448-10,338= 110 ( in Rs. Cr) 6. Calculation of Goodwill Goodwill on purchase of 3 years = 110 x 3 = 330 ( in Rs. Cr) Annuity Method: The average super profit is taken as an annuity value over a definite number of years. A discounted amount of super profit calculates the current value of an annuity at the given rate of interest. Question Hindustan Unilever Limited’s profits is based on last 5 years profit. Normal Rate of return is 20.19. Profits after Tax for the year ending, Years Amount (in Rs. Cr) March 31st 2018 5237 March 31st 2019 6036 March 31st 2020 6738 March 31st 2021 7954 March 31st 2022 8818 (a) During the year ending 31st March 2019 , assets were sold at a gain of 1000. (b) During the year 2021 machines got destroyed in a fire accident and 2400 was written off as loss. (c) Profits of year ending March 31st 2022 included a non-recurring income of 1500. (d) Rent received from land annually is 3000. (e) Profits of 2018 and 2022 is reduced by 800 and 1720 respectively due to stock destroyed by fire. Calculate Goodwill at 3 years purchase of Super Profit method.

14. 14 5. Calculation of Super Profit Super Profit= Adjusted Average Profit- Normal Profit Super Profit= 10,448-10,338= 110 ( in Rs. Cr) 6. Calculation of Annuity Factor Rate of Return = 20.19% No of Years = 5 years Year PvF Annuity Factor 1. 1/(1+0.2019)1 = 0.832 2. 1/(1+0.2019)2 = 0.692 3. 1/(1+0.2019)3 = 0.576 4. 1/(1+0.2019)4 = 0.479 5. 1/(1+0.2019)5 = 0.399 Total = 2.978 :. The present value of an annuity of Rs. 1 for 5 years at 20.19% NRR is Rs. 2.978 7. Valuation of Goodwill Value of Goodwill = Super Profit x Value of Annuity = 110 x 2.978 = 327.58 ( in Rs. Cr)

15. 15 Capitalisation Method: Under this method, goodwill can be evaluated by two methods. Capitalisation of Average Profit In this process, goodwill is measured by subtracting the original capital applied from the capitalised amount of the average profits based on the average return rate. Question Hindustan Unilever Limited’s profits is based on last 5 years profit. The Capital employed in the business is 29200 Cr (assumption) and the normal rate of return is 20.19%. Profits after Tax for the year ending, Years Amount (in Rs. Cr) March 31st 2018 5237 March 31st 2019 6036 March 31st 2020 6738 March 31st 2021 7954 March 31st 2022 8818 (d) During the year ending 31st March 2019 , an asset was sold at a gain of 1000 (e) During the year 2021 a machine got destroyed in an accident and 2400 was written off as loss (f) Profits of year ending March 31st 2022 included a non-recurring income of 1500. Calculate goodwill using Capitalisation of Average Profit Method

16. 16 Answer 1. Calculation of Final Profits Adjustments 2018 2019 2020 2021 2022 Profits after Tax 5273 6036 6738 7954 8818 Add: 2400 (Abnormal loss) Less: (1000) (Abnormal gain) (1500) (Non-recurring gain) Final Profits after all Adjustments 5273 5036 6738 10354 7318 2. Calculation of Adjusted Average Profits Adding profits of consecutive years = 5273+5036+6738+10354+7318/5 = 34,719/5 = 6,943.8 (in Rs. Cr) 3. Calculation of Value of Firm Value of Firm= (Average Profit/ Normal Rate of Return) x 100 = (6943.80/20.19) x 100 = 34300.00 (in Rs. Cr) 4. Calculation of Goodwill Goodwill= Value of Firm – Capital Employed Goodwill= 34300- 29200 = 5100(in Rs. Cr)

17. 17 Capitalisation of Super Profit Here, the super profit is capitalised, and the goodwill is calculated. The formula applied is. Goodwill = Super Profits x (100/ Normal Rate of Return) Question Hindustan Unilever Limited’s profits is based on last 5 years profit. Normal Rate of return is 20.19% Profits after Tax for the year ending, Years Amount (in Rs. Cr) March 31st 2018 5237 March 31st 2019 6036 March 31st 2020 6738 March 31st 2021 7954 March 31st 2022 8818 (a) During the year ending 31st March 2019 , assets were sold at a gain of 1000. (b) During the year 2021 machines got destroyed in a fire accident and 2400 was written off as loss. (c) Profits of year ending March 31st 2022 included a non-recurring income of 1500. (d) Rent received from land annually is 3000. (e) Profits of 2018 and 2022 is reduced by 800 and 1720 respectively due to stock destroyed by fire. Calculate goodwill using Capitalisation of Super Profit Method.

19. 19 5. Calculation of Super Profit Super Profit= Adjusted Average Profit- Normal Profit Super Profit= 10,448-10,338= 110 ( in Rs. Cr) 6. Calculation of Goodwill Goodwill= Super Profits x (100/ Normal Rate of Return) Goodwill= 110 x (100/20.19) Goodwill= 544 ( in Rs. Cr)

20. 20 Conclusion It is frequently necessary to value goodwill for a variety of reasons, including sales and business acquisitions. Although other approaches have been suggested for figuring out goodwill, the annuity method produces reliable findings. It takes into account every variable that could affect goodwill. This approach is efficient, simple to understand, and justifiable. Big corporations all around the world regard the strategy to be viable since it takes into account your future aspirations. Hindustan Unilever Limited (HUL) being one of the most vital corporation in the Indian Consumer Industry, having been established in the country since 1933 and having transactions in tens of thousands of crores , annuity method is, therefore, the best method for goodwill calculation of the above company.

21. 21 Bibliography • Moneycontrol.com. (n.d.). Hindustan Unilever Balance Sheet, Hindustan Unilever Financial Statement & Accounts. English. Retrieved January 30, 2023, from https://www.moneycontrol.com/financials/hindustanunilever/balance- sheetVI/HU#HU • Moneycontrol.com. (n.d.). Hindustan Unilever Profit & Loss Account, Hindustan Unilever Financial Statement & Accounts. English. Retrieved January 30, 2023, from https://www.moneycontrol.com/financials/hindustanunilever/profit-lossVI/HU#HU • Moneycontrol.com. (n.d.). Hindustan Unilever Key Financial Ratios, Hindustan Unilever Financial Statement & Accounts. English. Retrieved January 30, 2023, from https://www.moneycontrol.com/financials/hindustanunilever/ratiosVI/HU#HU • Unilever PLC. (2022, May 30). Introduction to hul. Unilever. Retrieved January 30, 2023, from https://www.hul.co.in/our-company/introduction-to-hul/

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