The project is associated with Corporate Bridge Pvt. Ltd. on “Objective” The aim of the project to develop a Financial Model of Dabur Pvt. Ltd.
For the purpose of this project it is suggested to take in consideration the Webinar of Corporate Bridge where they help the student learning through videos. There are 700+ Videos on the Website of Corporate Bridge to which only subscribers can access.
The lessons learnt from Corporate Bridge evaluation and of Dabur India Pvt Ltd Performance which are helped in studying their Financial Position and can estimate the Future risk and Potential through Ratio Analysis.
Awareness of Financial Modeling and Ratio Analysis were the key learning through this project.
2.1 Introduction to the Ratio Analysis
Financial statement analysis is the process of reviewing and evaluating a company’s financial statements thereby gaining an understanding the financial health of the company and enabling Effective decision making for owners and managers, prospective and present investors, financial institutions, government entities etc. It involves analysis of past, current and projected Performance of the company.
Financial Statements are released by companies not only for acceding to the norms set up by the exchanges on which they are listed and to follow the rules put down by the regulator of that country but also to provide prospective investors and financial institutions a brief insight into the company. It helps them take decision to make investment or give loan, both long term and short term to the company.
Financial statements are normally available in company’s website, prospectus as also the Annual and the quarterly results declared by the company. These statements by themselves contain a lot of numbers which are in comprehensible unless a proper analysis of such documents is carried out to arrive at a conclusion on the company's financial health. The pages that follow, aim to provide a simplified explanation of some of the basic analysis company for different objectives of the investor/lender. The objectives include Short term and long term investment, short term and long term lending and future strategy.
Classification of Ratios
Accounting Ratios are classified on the basis of the different parties interested in
making use of the ratios. A very large number of accounting ratios are used for
the purpose of determining the financial position of a concern for different
purposes. Ratios may be broadly classified in to:
Classification of Ratios on the basis of Balance Sheet.
Classification of Ratios on the basis of Profit and Loss Account.
Classification of Ratios on the basis of Mixed Statement.
This classification further grouped in to:
A. Liquidity Ratio
B. Profitability Ratios
C. Turnover Ratios
D. Solvency Ratios
E. Overall Profitability Ratios
A chart for classification of ratios by statement is given below showing clearly
the types of ratios may be broadly classified on the basis of Income Statement
1. Liquidity Ratios
Liquidity Ratios are also termed as Short-Term Solvency Ratios. The term liquidity means the extent of quick convertibility of assets in to money for paying obligation of short-term nature. Accordingly, liquidity ratios are useful in obtaining an indication of a firm's ability to meet its current liabilities, but it does not reveal h0w effectively the cash resources can be managed. To measure the liquidity of a firm, the following ratios are commonly used:
a) Current Ratio.
b) Quick Ratio (or) Acid Test or Liquid Ratio.
c) Absolute Liquid Ratio (or) Cash Position Ratio.
a) Current Ratio
Current Ratio establishes the relationship between current Assets and current Liabilities. It attempts to measure the ability of a firm to meet its current obligations. In order to compute this ratio, the following Formula is used:
Current ratio= ----------------------------------
The two basic components of this ratio are current assets and current liabilities. Current asset normally means assets which can be easily converted in to cash within a year's time. On the other hand, current liabilities represent those liabilities which are payable within a year.
b) Quick Ratio
Quick Ratio also termed as Acid Test or Liquid Ratio. The acid test ratio is a more severe and stringent test of a firm's ability to pay its short-term obligations 'as and when they become due. Quick Ratio establishes the relationship between the quick assets and current liabilities. In order to compute this ratio, the below presented formula is used:
Liquid Ratio = --------------------------
Current liabilities represent those liabilities which are payable within a year. The ideal Quick Ratio of 1: 1 is considered to be satisfactory. High Acid Test Ratio is an indication that the firm has relatively better position to meet its current obligation in time. On the other hand, a low value of quick ratio exhibiting that the firm's liquidity position is not good.
c) Absolute Liquid Ratio
Absolute Liquid Ratio is also called as Cash Position Ratio (or) Over Due Liability Ratio. This ratio established the relationship between the absolute liquid assets and current inabilities. Absolute Liquid Assets include cash in hand, cash at bank, and marketable securities or temporary investments. The optimum value for this ratio should be one, i.e., 1: 2. It indicates that 50% worth absolute liquid assets are considered adequate to pay the 100% worth current liabilities in time. If the ratio is relatively lower than one, it represents that the company's day-to-day cash management is poor. If the ratio is considerably more than one, the absolute liquid ratio represents enough funds in the form of cash to meet its short-term obligations in time. The Absolute Liquid ratio Can be calculated by dividing the total of the Absolute Liquid Assets by Total Current Liabilities.
Absolute Liquid Assets = ----------------------------
2. Profitability Ratio
The term profitability means the profit earning capacity of any business activity. Thus, profit earning may be judged on the volume of profit margin of any activity and is calculated by subtracting costs from the total revenue accruing to a firm during a particular period. Profitability Ratio is used to measure the overall efficiency or performance of a business. Generally, a large number of ratios can also be used for determining the profitability as the same is related to sales or investments. The following important profitability ratios are:
a) Gross Profit Ratio
Gross Profit Ratio established the relationship between gross profit and net sales. This ratio is calculated by dividing the Gross Profit by Sales. It is usually indicated as percentage.
Gross Profit= ------------------------ x 100
Higher Gross Profit Ratio is an indication that the firm has higher profitability. It also reflects the effective standard of performance of firm's business.
b) Operating Ratio Operating Ratio is calculated to measure the relationship between total operating expenses and sales. The total operating expenses is the sum total of cost of goods sold, office and administrative expenses and selling and distribution expenses. In other words, this ratio indicates a firm's ability to cover total operating expenses. In order to compute this ratio, the following formula is used:
Operating Ratio = -------------------- *100
Operating Cost = Cost of goods sold + Administrative Expenses+ Selling and Distribution Expenses.
c) Operating Profit Ratio
Operating Profit Ratio indicates the operational efficiency of the firm and is a measure of the firm's ability to cover the total operating expenses. Operating Profit Ratio can be calculated as:
Operating Profit Ratio = --------------------------- x 100
d) Net Profit Ratio
Net Profit Ratio is also termed as Sales Margin Ratio (or) Profit Margin Ratio (or) Net Profit to Sales Ratio. This ratio reveals the firm's overall efficiency in operating the business. Net profit Ratio is used to measure the relationship between net profit (either before or after taxes) and sales. This ratio can be calculated by the following formula:
Net Profit after Tax
Net Profit Ratio = -------------------------- X 100
Net profit includes non-operating incomes and profits. Non-Operating Incomes such as dividend received, interest on investment, profit on sales of fixed assets, commission received, discount received etc. Profit or Sale Margin indicates margin available after deduction cost of production, other operating expenses, and income tax from the sales revenue. Higher Net Profit Ratio indicates the standard performance of the business concern..
e) Return on Investment Ratio.
This ratio is also called as ROL This ratio measures a return on the owner's or shareholders’ investment. This ratio establishes the relationship between net profit after interest and taxes and the owner's investment. Usually this is calculated in percentage. This ratio can be calculated as :
Net Profit (after interest and tax
Return on Investment Ratio = ------------------------------------------ X l00
f) Return on Capital Employed Ratio.
Return on Capital Employed Ratio measures a relationship between profit and capital employed. This ratio is also called as Return on Investment Ratio. The term return means Profits or Net Profits. The term Capital Employed refers to total investments made in the business. The concept of capital employed can be considered further into the following ways:
(1) Gross Capital Employed
(2) Net Capital Employed
(3) Average Capital Employed
(4) Proprietor's Net Capital Employed
Return on Capital Employed Ratio= ------------------------------------ Proprietors Fund
g) Earnings Per Share Ratio
Earnings per Share Ratio (EPS) measures the earning capacity of the concern from the owner's point of view and it is helpful in determining the price of the equity share in the market place. Earnings Per Share Ratio can be calculated as:
Net Profit after Tax and Preference Dividend
Earnings per Share Ratio = ---------------------------------------------------------
No. of Equity Shares
h) Dividend Pay-out Ratio.
This ratio highlights the relationship between payment of dividend on equity share capital and the profits available after meeting tax and preference dividend. This ratio indicates the dividend policy adopted by the top management about utilization of divisible profit to pay dividend or to retain or both. The ratio, thus, can be calculated as:
Dividend Pay-out Ratio = --------------------------------------------------------
Net Profit after Tax and Preference Dividend
i) Dividend Yield Ratio
Dividend Yield Ratio indicates the relationship is established between dividend per share and market value per share. This ratio is a major factor that determines the dividend income from the investors' point of view. It can be calculated by the following formula:
Dividend Per Share
Dividend Yield Ratio = -------------------------------- X 100
Market Value per Share
j) Price Earnings Ratio.
This ratio highlights the earning per share reflected by market share. Price Earnings Ratio establishes the relationship between the market price of an equity share and the earning per equity share. This ratio helps to find out whether the equity shares of a company are undervalued or not. This ratio is also useful in financial forecasting. This ratio is calculated as:
Market Price Per Equity Share
Price Earnings Ratio = ----------------------------------------------
k) Net Profit to Net worth Ratio.
This ratio measures the profit return on investment. This ratio indicates the established relationship between net profit and shareholders' net worth. It is a reward for the assumption of ownership risk. This ratio is calculated as:
Net Profit after Taxes
Net Profit to Net Worth = ------------------------------------------------- X 100
Shareholders' Net Worth
3. Turnover Ratio
Turnover Ratios may be also termed as Efficiency Ratios or Performance Ratios or Activity Ratios. Turnover Ratios highlight the different aspect of financial statement to satisfy the requirements of different parties interested in the business. It also indicates the effectiveness with which different assets are vitalized in a business. Turnover means the number of times assets are converted or turned over into sales. The activity ratios indicate the rate at which different assets are turned over. Depending upon the purpose, the following activities or turnover ratios can be calculated:
a) Inventory Ratio This ratio is also called as Inventory Ratio or Stock Velocity Ratio. Inventory means stock of raw materials, working in progress and finished goods. This ratio is used to measure whether the investment in stock in trade is effectively utilized or not. It reveals the relationship between sales and cost of goods sold or average inventory at selling price. Stock Turnover Ratio indicates the number of times the stock has been turned over in business during a particular period. Supply condition etc. In order to compute this ratio, the following formulae are used:
Cost of Goods Sold
Stock Turnover Ratio = ------------------------------------------
Average Inventory at Cost
b) Debtor's Turnover Ratio or Receivable Turnover Ratio
Debtor's Turnover Ratio is also termed as Receivable Turnover Ratio. Receivables and Debtors represent the uncollected portion of credit sales. Debtor's Velocity indicates the number of times the receivables are turned over in business during a particular period. In other words, it represents how quickly the debtors are converted into cash. It is used to measure the liquidity position of a concern. This ratio establishes the relationship between receivables and sales. Two kinds of ratios can be used to judge a firm's liquidity position on the basis of efficiency of credit collection and credit policy. They are Debtor's Turnover Ratio and Debt Collection Period. These ratios may be computed as:
Net Credit Sales
Debtor's Turnover Ratio = -------------------------------------
Months (or) Days in a year
Debt Collection Period Ratio = --------------------------------------
c) Creditor's Turnover Ratio
Creditor's Turnover Ratio is also called as Payable Turnover Ratio or Creditor's Velocity. The credit purchases are recorded in the accounts of the buying companies as Creditors to Accounts Payable. The Term Accounts Payable or Trade Creditors include sundry creditors and bills payable. This ratio establishes the relationship between the net credit purchases and the average trade creditors. Creditor's velocity ratio indicates the number of times with which the payment is made to the supplier in respect of credit purchases. Two kinds of ratios can be used for measuring the efficiency of payable of a business concern relating to credit purchases. They are: (1) Creditor's Turnover Ratio (2) Creditor's Payment, Period or Average Payment Period. The ratios can be calculated by the following formulas
Credit Purchases Net
Creditors turnover ratio= -------------------------------------
Average Account Payable
d) Working Capital Turnover Ratio
This ratio highlights the effective utilization of working capital with regard to sales. This ratio represents the firm's liquidity position. It establishes relationship between cost of sales and networking capital. This ratio is calculated as follows:
Working Capital Turnover Ratio = ----------------------------
e) Fixed Assets Turnover Ratio
This ratio indicates the efficiency of assets management. Fixed Assets Turnover Ratio is used to measure the utilization of fixed assets. This ratio establishes the relationship between cost of goods sold and total fixed assets. Higher the ratio highlights a firm has successfully utilized the fixed assets. If the ratio is depressed, it indicates the underutilization of fixed assets. The ratio may also be calculated as
Cost of Goods Sold
Fixed Assets Turnover Ratio = ---------------------------------------
Total Fixed Assets
f) Capital Turnover Ratio.
This ratio measures the efficiency of capital utilization in the business. This ratio establishes the relationship between cost of sales or sales and capital employed or shareholders' fund. This ratio may also be calculated as:
Cost of Sale
Capital Turnover Ratio= ---------------------------------
4. Solvency Ratio
The term 'Solvency' generally refers to the capacity of the business to meet its short-term and long term obligations. Short-term obligations include cre++ditors, bank loans and bills payable etc. A long-term obligation consists of debenture, long-term loans and long-term creditors etc. Solvency Ratio indicates the sound financial position of a concern to carry on its business smoothly and meet its all obligations. Liquidity Ratios and Turnover Ratios concentrate on evaluating the short-term solvency of the concern have already been explained. Now under this part of the chapter only the long- term solvency ratios are dealt with. Some of the important ratios which are given below in order to determine the solvency of the Concern:
a) Debt - Equity Ratio
This ratio also termed as External - Internal Equity Ratio. This ratio is calculated to ascertain the firm's obligations to creditors in relation to funds invested by the owners. The ideal Debt Equity Ratio is 2:1. This ratio also indicates all external liabilities to owner recorded claims. It may be calculated as
Debt - Equity Ratio= ------------------------------
b) Proprietary Ratio
Proprietary Ratio is also known as Capital Ratio or Net Worth to Total Asset Ratio. This is one of the variant of Debt-Equity Ratio. The term proprietary fund is called Net Worth. This ratio shows the relationship between shareholders' fund and total assets. It may be calculated as:
Proprietary Ratio =--------------------------------------
c) Capital Gearing Ratio
This ratio also called as Capitalization or Leverage Ratio. This is one of the Solvency Ratios. The term capital gearing refers to describe the relationship between fixed interest and/or fixed dividend bearing securities and the equity shareholders' fund. It can be calculated as shown below:
Equity Share Capital
Capital Gearing Ratio = -----------------------------------------
Fixed Interest Bearing Funds
d) Debt Service Ratio or Interest Coverage Ratio
Debt Service Ratio is also termed as Interest Coverage Ratio or Fixed Charges Cover Ratio. This ratio establishes the relationship between the amount of net profit before deduction of interest and tax and the fixed interest charges. It is used as a yardstick for the lenders to know the business concern will be able to pay its interest periodically. Debt Service Ratio is calculated with the help of the following formula:
Net Profit before Interest and Income Tax
Interest Coverage Ratio= --------------------------------------------
Fixed Interest Charges
2.2 Introduction to the Industry: Fast Moving Consumer Goodsin India (FMCG)
Products which have a quick turnover, and relatively low cost are known as Fast Moving Consumer Goods (FMCG). FMCG products are those that get replaced within a year. These products are purchased by the customers in small quantity as per the need of individual or family. These items are purchased repeatedly as these are daily use products. The price or value of the products is not very high. These products are having short life also. It may include perishable and non- perishable products, durable and non-durable goods. Examples of FMCG generally include a wide range of frequently purchased consumer products such as toiletries, soap, cosmetics, tooth cleaning products, shaving products and detergents, as well as other non-durables such as glassware, bulbs, batteries, paper products, and plastic goods. FMCG may also include pharmaceuticals; consumer electronics, packaged food products, soft drinks, tissue paper, and chocolate bars. Subsets of FMCGs are Fast Moving Consumer Electronics which include innovative electronic products such as mobile phones, MP3 players, digital cameras, GPS Systems and Laptops. These are replaced more frequently than other electronic products. White goods in FMCG refer to household electronic items such as Refrigerators, T.Vs, Music Systems, etc.
The Indian FMCG sector is explained below in detail:
A. Fast Growing Sector
In 2005, the Rs. 48,000-crore FMCG segment was one of the fast growing industries in India. According to the AC Nielsen India study, the industry grew 5.3% in value between 2004 and 2005. The Indian FMCG sector is the fourth largest in the economy and has a market size of US$13.1 billion. Well-established distribution networks, as well as intense competition between the organized and unorganized segments are the characteristics of this sector. FMCG in India has a strong and competitive MNC presence across the entire value chain. The middle class and the rural segments of the Indian population are the most promising market for FMCG, and give brand makers the opportunity to convert them to branded products.
Most of the product categories like jams, toothpaste, skin care, shampoos, etc, in India, have low per capita consumption as well as low penetration level, but the potential for growth is huge.
The Indian Economy is surging ahead by leaps and bounds, keeping pace with rapid urbanization, increased literacy levels, and rising per capita income. The big firms are growing bigger and small-time companies are catching up as well. According to the study conducted by AC Nielsen, 62 of the top 100 brands are owned by MNCs, and the balance by Indian companies. Fifteen companies own these 62 brands, and 27 of these are owned by Hindustan Lever. Pepsi is at number three followed by Thumps Up. Britannia takes the fifth place, followed by Colgate,Nirma, Coca-Cola and Parle. These are figures the soft drink and cigarette companies have always shied away from revealing. Personal care, cigarettes, and soft drinks are the three biggest categories in FMCG. Between them, they account for 35 of the top 100 brands.
Top 10 Companies in FMCG Sector
A. Hindustan Unilever Ltd.
B. ITC (Indian Tobacco Company)
C. Nestle India
D. GCMMF (AMUL)
E. Dabur India
F. Asian Paints (India)
G. Cadbury India
H. Britannia Industries
I. Procter & Gamble Hygiene and Health Care
J. Marico Industries
The companies mentioned in Exhibit I, are the leaders in their respective sectors. The personal care category has the largest number of brands, i.e., 21, inclusive of Lux, Lifebuoy, Fair and Lovely, Vicks, and Ponds. There are 11 HUL brands in the 21, aggregating Rs. 3,799 core or 54% of the personal care category. Cigarettes account for 17% of the top 100 FMCG sales, and just below the personal care category. ITC alone accounts for 60% volume market share and 70% by value of all filter cigarettes in India.
The foods category in FMCG is gaining popularity with a swing of launches by HUL, ITC, Godrej, and others. This category has 18 major brands, aggregating Rs. 4,637 crore.
Nestle and Amul slug it out in the powders segment. The food category has also seen innovations like softies in ice creams, Chapattis by HUL, ready-to-eat rice by HUL and pizzas by both GCMMF and Godrej Pillsbury. This category seems to have faster development than the Stagnating personal care category. Amul, India's largest foods company has a good presence in the food category with its ice-creams, curd, milk, butter, cheese, and soon. Britannia also ranks in the top 100 FMCG brands, dominates the biscuits category and has launched a series of products at various prices.
In the household care category (like mosquito repellents), Godrej and Reckitt are two players. Good knight from Godrej is worth above Rs 217 crore, followed by Reckitt's Mortein at Rs 149 crore. In the shampoo category, HUL's Clinic and Sunsilk make it to the top 100, although P&G's Head and Shoulders and Pantene are also trying hard to be positioned on top. Clinic is nearly double the size of Sunsilk. Dabur is among the top five FMCG companies in India and is a herbal specialist. With a turnover of Rs. 19 billion (approx. US$ 420 million) in 2005-2006, Dabur has brands like Dabur Amul, Dabur Chyawanprash, Vatika, Hajmola and Real. Asian Paints is enjoying a formidable presence in the Indian sub-continent, Southeast Asia, Far East, Middle East, South Pacific Caribbean, Africa and Europe. Asian Paints is India's largest paint company, with a turnover of Rs.22.6 billion (around USD 513 million). Forbes Global magazine, USA, ranked Asian Paints among the 200 Best Small Companies in the World. Cadbury India is the market leader in the chocolate confectionery market with a 70% market share and is ranked number two in the total food drinks market. Its popular brands include Cadbury's Dairy Milk, 5 Star, Eclairs, and Gems. The Rs.15.6 billion (USD 380 Million) Marico is a leading Indian group in consumer products and services in the Global Beauty and Wellness space.
There is a huge growth potential for all the FMCG companies as the per capita consumption of almost all products in the country is amongst the lowest in the world. Again the demand or prospect could be increased further if these companies can change the consumer's mindset and offer new generation products.
Earlier, consumers were using non-branded apparel, but today, clothes of different brands are available and the same consumers are willing to pay more.
B. Scope of the Sector
The Indian FMCG sector with a market size of US$13.1 billion is the fourth largest sector in the economy. A well-established distribution network, intense competition between the organized and unorganized segments characterizes the sector. FMCG Sector is expected to grow by over 60% by 2010. That will translate into an annual growth of 10% over a 5-year period. It has been estimated that FMCG sector will rise from around Rs 56,500 crore in 2005 to Rs 92,100 crores in 2010. Hair care, household care, male grooming, female hygiene, and the chocolates and confectionery categories are estimated to be the fastest growing segments, says an HSBC report. Though the sector witnessed a slower growth in 2002-2004, it has been able to make a fine recovery since then. For example, Hindustan Unilever Limited (HUL) has shown a healthy growth in the last quarter.
C. Growth Prospects
With the presence of 12.2% of the world population in the villages of India, the Indian rural FMCG market is something no one can overlook. Increased focus on farm sector will boost rural incomes, hence providing better growth prospects to the FMCG companies. Better infrastructure facilities will improve their supply chain. FMCG sector is also likely to benefit from growing demand in the market. Because of the low per capita consumption for almost all the products in the country, FMCG companies have immense possibilities for growth. And if the companies are able to change the mindset of the consumers, i.e. if they are able to take the consumers to branded products and offer new generation products, they would be able to generate higher growth in the near future.
It is expected that the rural income will rise in 2007, boosting purchasing power in the countryside. However, the demand in urban areas would be the key growth driver over the long term. Also, increase in the urban population, along with increase in income levels and the availability of new categories, would help the urban areas maintain their position in terms of consumption.
At present, urban India accounts for 66% of total FMCG consumption, with rural India accounting for the remaining 34%. However, rural India accounts for more than 40% consumption in major FMCG categories such as personal care, fabric care, and hot beverages. In urban areas, home and personal care category, including skin care, household care and feminine hygiene, will keep growing at relatively attractive rates.
D. Factors favoring India to Get Competitive Edge
The following factors make India a competitive player in FMCG sector
i. Availability of Raw Material: Because of the diverse agro-climatic conditions in India, there is a large raw material base suitable for food processing industries. India is the largest producer of livestock, milk, sugarcane, coconut, spices and cashew and is the second largest producer of rice, wheat and fruits & vegetables. India also produces caustic soda and soda ash, which are required for the production of soaps and detergents. The availability of these raw materials gives India the location advantage
ii. Labour Cost Comparison: Low cost labor gives India a competitive advantage. India's labor cost is amongst the lowest the world, after China & Indonesia. Low labor costs give the advantage of low cost of production. Many MNC's have established their plants in India to outsource for domestic and export markets.
iii. Presence across Value Chain: Indian companies have their presence across the value chain of FMCG sector, right from the supply of raw materials to packaged goods in the food-processing sector. This brings India a more cost competitive advantage. For example, Amul supplies milk as well as dairy products like cheese, butter, etc.
Analysis of FMCG Sector in India
The analysis of the FMCG sector of India is carried out on the basis of following:
A) Pest Analysis
Pest analysis of FMCG sector in India is carried out on political, economical, social and technological aspects. It is explained below:
• Tax exemption in sales and excise duty for small scale industries.
• Transportation and infrastructure development in rural areas helps in distribution network.
• Restrictions in import policies.
• Help for agricultural sector.
• The GDP rate of Indian economy is increasing every year. It is expected in future it would-be better only in comparison with other counters.
• Inflation rate is increasing across the world and India is also no exception. The Government and Reserve Bank of India both are trying to control the inflation rate with the help of different measures.
• Increase in disposable income has taken place due to higher GDP rate. The per capital income is increasing so the customers are having more income to spent for various reasons.
• Indian FMCG sector recorded 16% sales growth in last fiscal year and it is expected it would further improve in the forthcoming years.
• The FMCG sector is a 4th largest sector of Indian economy with market size of more than 60,000crore. The Indian Territory is very large and number of customers is also very high.
• The Indian culture, social & life styles are changing drastically. The total population is nearly 115 crores and population includes rich, poor, middle class, male, female, located in rural, urban and sub urban areas, different level of education etc.
• Technology has been simplified and available in the industry. Where technology is not available then it is brought from foreign countries to meet FMCG sector requirements.
• Foreign players help in high technological development. With research and Development facilities the new technologies are developed alone or with the help of foreign players.
B) Industry Analysis of FMCG Sector
• The FMCG sector in India is expected grow at a compound annual growth rate at 9% to assize of 1, 43,000 cars by 2010 from Rs93000 cars at present.
• The industry is growing double digit growth in last 2 yrs.
• Annual revenues of us $14.74 billion.
• Market growth rate – Rural -40%, urban -25%
C) Main Competitors
• The FMCG sector is developing fast and at present there is high level of competition in this sector. The main competitors are HUL, Britannia, Nestle, Cadbury, Colgate, Amul, ITC, Dabur, Emami, Nirma and Marico.
D) SWOT Analysis
SWOT analysis of this sector is carried as follows:
• Well-established distribution network extending to rural areas.
• Strong brands in the FMCG sector.
• Low cost operations
• Low export levels.
• Small scale sector reservations limit ability to invest in technology and achieve
• Economies of scale.
• Several "me-too’’ products.
• Large domestic market.
• Export potential
• Increasing income levels will result in faster revenue growth.
• Tax and regulatory structure
• Slowdown in rural demand
E) Factors Affecting the Growth
Over the years, demand for consumer durables has increased with rising income levels, double-income families, changing lifestyles, availability of credit, increasing consumer awareness and introduction of new models. Products like air conditioners are no longer perceived as luxury products. The biggest attraction for MNCs is the growing Indian middleclass. This market is characterized with low penetration levels. MNCs hold an edge over their Indian counterparts in terms of superior technology combined with steady flow of capital, while domestic companies compete on the basis of their well-acknowledged brands, an extensive distribution network and an insight in local market conditions.
With companies opting for information technology a reduction in inventory levels and an improvement in the working capital cycle is likely. This will benefit companies by controlling costs and improving margins.
F) Major Government Policies/Changes:
In the context of the positives and the negatives, investing in FMCG stocks is a tricky prospect. Given this, one has to be active with FMCG stocks and should book profits as soon as the targeted returns are reached. Unlike earlier times, nowadays, one cannot afford to buy an FMCG stock and forget about it for a long time.
It is unlikely that the government's initiatives will boost the sector overnight. The ongoing price wars mean that company earnings will continue to be volatile. Hence, in the short-term, one should look at individual companies' prospects rather than the overall sector’s prospects.
This means that it is better to leave mutual funds that concentrate on FMCG companies and instead buy shares depending upon the company. It is not necessary that an MNC will be better than an Indian company.
One should look at company’s profile and analysis its prospects before investing in its shares. It is not that you will lose out by buying FMCG stocks. But, in buying an FMCG stock, it will be ideal to cash in during short bursts of activity.
G) Major Mergers nod Acquisitions in the Past
Vijay Mallya's United Breweries Group (through Group entities Mc Dowell &Co,Phipson Distillery, United Spirits & United Breweries Holdings) acquired a controlling stake in Jumbo Group's Shaw Wallace & Company for a total deal value of Rs 16.2billion ($371.6 million).
The other Jumbo Group Company to be sold was Shaw Wallace Breweries. SAB Miller increased its stake by 50 percentage points to 99 per cent in the company through its Indian subsidiary, Mysore Breweries. The stake was held by Shaw Wallace & Company and, hence, had SAB Miller not undertaken this acquisition, Shaw Wallace Breweries would effectively have been a joint venture between two rivals — UB and SAB Miller.
H) Expected Future Trends
Following trends are expected in future:
Huge investments in promoting brands, setting up distribution networks and intense competition are what FMCG companies face. Creating strong brands is important formic companies and they will have to devote considerable money and effort in developing brands. Given the fragmented nature of the Indian retailing industry and the problems of Infrastructure, FMCG companies also need to develop extensive distribution networks to achieve a high level of penetration in both the urban and rural markets.
This will require allot of resources. The unorganized sector has a presence in most product categories of the FMCG sector. Small companies from this sector have used their vocational advantages and regional presence to reach out to remote areas where large consumer products have only limited presence. Their low cost structure also gives them an advantage. And this will only lead to price wars, which, though good for consumers, will affect the bottom lines of companies.
Here are many domestic and MNCs in Indian FMCG sector and they are mentioned in the list:
01. Hindustan Unilever Ltd.
02. ITC (Indian Tobacco Company)
03. Nestlé India
04. GCMMF (AMUL)
05. Dabur India Ltd.
06. Asian Paints (India)
07. Cadbury India
08. Britannia Industries
09. Procter & Gamble Hygiene and Health Care
10. Marico Industries
11. Britannia Industries Ltd.
2.3 Introduction to the Corporate Bridge
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Dabur India Pvt. Ltd
Dabur (Dabur India Ltd. Derived from Daktar Burman) is India's largest Ayurvedik medicine manufacturer. Dabur was founded by Dr. SK Burman, a physician in West Bengal. He founded Dabur in 1884 to produce and dispense Ayurvedic medicines. His initial goal was to successfully produce and market effective medicine for ordinary villagers. Dr. Burman designed Ayurvedic medication for diseases such as cholera and malaria. Soon the news of his medicines travelled, and he came to be known as the trusted 'Daktar' or Doctor who came up with effective cures. That is how Dabur got its name - derived from the Devanagri rendition of Daktar Burman.
Dabur's Ayurvedic Specialties Division has over 260 medicines for treating a range of ailments and body conditions-from common cold to chronic paralysis. Dabur International, a fully owned subsidiary of Dabur India formerly held shares in the UAE based Weikfield International, which it disposed of on 25 June 2012.
Future Prospects of Dabur India
Favorable Economic Development: Bright Industry prospects
The Indian FMCG industry has benefitted majorly by favorable economic development and change in consumer lifestyle over the last decade. Major economic developments like growth in GDP, higher disposable income, growing urbanization, rural expansion, infrastructure development, increased participation of women in the workforce etc. have helped the industry record growth even in recessionary periods. Therefore, FMCG industry has grown by around 14% and 11% in FY 08 and FY 09 (economic slowdown period), respectively.
Considering favorable economic development and change in consumer lifestyle (willingness to spend more on better quality products), the industry is expected to grow around 12-17% in next decade. The FMCG industry has now shifted its focus to rural areas and low income groups. These segments present an enormous growth opportunity for the FMCG sector as a whole.
Strong Brand Image: A Competitive Advantage
Dabur India has created a strong brand image in Indian as well as global markets. It has five flagship brands with distinct brand identities – Dabur Chawanprash as
the master brand for natural healthcare products, Vatika for premium personal care, Hajmola for digestives, Real for fruit juices and beverages and Fem for fairness bleaches and skin care products.
With this brand image, Dabur India can pass on the increased raw material prices and would also help to successfully launch a new product in the market.
Geographical Expansion through Acquisition: A Key Growth Driver
Dabur India has made its presence across 60 countries and 4 continents (Asia, Africa, North America and Middle East). Therefore, the export contributes around 30% to total revenue of the Dabur India Pvt.Ltd. The Dabur India Pvt.Ltd has been expanding globally through acquisition in the overseas markets. In FY 11-12, Dabur India has acquired Hobi Group in Turkey and Namaste Laboratories in USA. These acquisitions have given access to a new market as well as to a wide range of high margin personal care products. Thus, overseas expansion is helping the Dabur India Pvt.Ltd to diversify its product mix as well as its global reach. Table, given below, lists the companies acquired by Dabur India.
Entering into High Margin Products category: Strong Product-mix
Dabur’s core product portfolio comprises categories like Ayurvedic tonics and oral care which are mature categories and hence the growth has been stagnant over the last few years. Therefore, it has been increasing its presence in other traditional categories like hair care, household care and foods. For example- Dabur's acquisition of Fem Care in June 2009 has given it a strategic presence in the high potential and high margin skin-care segment. Fem Care has helped Dabur to become the third largest player in the skincare market. The growth in these high-margin categories will increase its revenue as well as earnings of the Dabur India Pvt.Ltd.
Intense Competition in Domestic market: A key Cause for Concern
Dabur India will continue to face tough competition in some of its key products category such as toothpaste, hair oil, shampoo and skin care. This is because of the entry of MNCs (like P&G entering into toothpaste), aggressive marketing by leaders (like Marico in hair oil and HUL in shampoo) and innovative launches by major competitors (like Garnier in skin care). Considering the increasing competition, we feel that it might slow down margins in future.
2.4 Introduction to the Financial Statement Analysis
Financial statement analysis is defined as the process of identifying financial strengths and weaknesses of the firm by properly establishing relationship between the items of the balance sheet and the profit and loss account. There are various methods or techniques that are used in analyzing financial statements, such as comparative statements, schedule of changes in working capital, common size percentages, funds analysis, trend analysis, and ratios analysis.
The objective of financial statements is to provide information about the financial position, performance and changes in financial position of an enterprise that is useful to a wide range of users in making economic decisions. Financial statements should be understandable, relevant , reliable and comparable. Reported assets, liabilities and equity are directly related to an organization's financial position. Reported income and expenses are directly related to an organization's financial performance
Financial statement analysis helps the business owners and with other interested people to analyze the data in financial statement to provide them with better information about such key factors for decision making and ultimate business survival. Financial statement analysis involves analyzing the information provided in financial statement to provides information about the organization past performance , it’s present condition & how the organization will perform in its future. It also helps to access the organization earnings in term of power , persistence , quality &growth along with its solvency.
Types of Financial Statements
There are three types of financial statement:
1. Income Statement
The income statement shows all items of income and expense of any business. It reflects a specific time period. So, an income statement for the quarter ending March 31, shows revenue and expenses for January, February and March; if the income statement is for the calendar year ending December 31, it would contain all your information from January 1 to December 31.Income statements are also known as statements of profit and loss or P&Ls. The bottom line on an income statement is income less expenses. If income is more than expense, then there happen to be a net profit. And if Expense more than income then there is a net loss.
2. Balance Sheet
Accounting is based upon a double entry system - for every entry into the books there has to be an opposite and equal entry. The net effect of the entries is zero, which results your books being balanced. The proof of this balancing act is shown in the balance sheet when Assets =Liabilities + Equity. The balance sheet shows the health of a business from day one to the date on the balance sheet. Balance Sheets are always dated on the late day of the reporting period. If you’ve been in business since 2009and the balance sheet is dated as on December 31 of the current year, the balance sheet will show the results of your operations from 2009 to December 31
3. Statement of Cash Flows
The statement of cash flows shows the ins and outs of cash during the reporting period. The statement of cash flows takes aspects of the income statement and balance sheet and kind of crams them together to show cash sources and uses for the period.
To evaluate the liquidity, Solvency & profitability position of Dabur India Pvt Ltd
3.2 Study Methodology
To carry out the present study, Dabur India limited has been selected purposively based on secondary data. It is one of the leading companies in India.
The data required for the study has been collected from the published annual reports of the selected company.
The study period ranges from 2009 to 2013.
Tools & Techniques of Data Analysis
The data collected from the published annual reports of the selected company for the five years period have been suitably arranged, classified and tabulated as per requirement for the study.
Secondary Data: Internet, Books, videos and Data of Dabur India Pvt. Ltd
Sample Frame: Oone company ( Dabur India Pvt. Ltd)
3.3 Limitations of the Report
1. The study has been conducted over a limited period of five years only which doesn’t forecast the vital valuation of firm.
2. The study is mainly based on secondary data which limits the information collects by others so there is a lack of evidence for the data.
3. The study is based on consolidated financial statement, which may lead to some errors and assumptions.
4. The present study is limited to a single Dabur India Pvt.Ltd and based on many assumptions.
Analysis & Findings
A. Solvency Ratios
A1. Current Ratio
Current Ratio = Current Asset/Current Liability
Cash and Bank Balance
Total Current Assets
The above chart indicates that current ratio is higher in the mar 12 as 1.46:1 followed by the mar 13 as 1.13:1.
From the above it clears that the current ratios are below the standard ratio hence liquidity position Dabur India ltd is lower. It may find difficult to meet its obligation as and hence they become due, though its working capital may be higher.
A2. Quick Ratio
Quick Ratio = Quick Asset/Quick Liability
Quick ratio indicates immediate ability of as Dabur India Pvt. Ltd to pay off its current obligation.
From the above chart it is clear that in past five year the liquidity are not satisfactory since they are below the standard ratio i.e. 1:1.
Step should be taken to improve their liquidity position.
Cash & bank balance
Total quick assets
A3. Cash Ratio
Cash Ratio = Cash &Bank Balance/Current Liability
Cash & Bank Balance
From the above chart indicates that:
In the year 2013 the cash ratio was higher as compare to others.
The position of the Dabur India Pvt. Ltd is unsatisfactory it means the Dabur India Pvt. Ltd having low cash and cash equivalents to pay its short term debt.
B. Solvency Ratios
B1. Capital Gearing Ratio
Capital Gearing Ratio = Interest Bearing Securities/Equity Shareholder Fund
Equity shareholder fund
The above chart indicates that:
Above ratio are below the standard ratio i.e. 0.25 hence it’s showed that:
Capital structure of the Dabur India Pvt. Ltd is low geared.
The Dabur India Pvt .Ltd depends on equity to a greater extent.
The Burdon of interest will be lower.
B2. Debt to Equity Ratio
Debt Equity Ratio = Total liabilities / Net Worth
Equity shareholder fund
The above chart it indicates that:
Above ratios are the below the standard ratio i.e. 2:1
Dabur India Pvt. Ltd has satisfactory margin of safety for its loan creditors.
Dabur India Pvt. Ltd depends on equity to greater extent.
There will be lesser burden of interest,
Dabur India Pvt. Ltd can raise additional capital without any difficulty.
B3. Interest Gearing Ratio
Interest Gearing Ratio = PBIT/ Interest
Interest Coverage Ratio
The above chart indicates that:
In March 2011 the interest coverage ratio is greater than the rest of the year, i.e. the Dabur India ltd is 50.32 times the interest is covered by earning of the Dabur India Pvt. Ltd.
The overall interest coverage ratio is greater than the standard ratio. Its shown that:
The Dabur India Pvt. Ltd has the capacity to pay interest.
Larger amount of profit is available for dividend.
There is a good scope for attraction of fresh loan.
There may be less debt and the higher equity in financing the assets.
C. Profitability Ratio
C1. Net Profit Ratio
Net Profit Ratio = Net Profit / Net Sales
The above chart indicates that:
The management is insufficient in management of all the actions.
It has unsatisfactory control on operating and non-operating coast.
It has leas margin available for appropriation.
There will be fewer increases in net worth.
C2. Earnings Per Share
Earnings per share = Net Profit / Number of Equity Shares
Shares in Issue
Earnings per share
From the above chart indicates that:
In the year 2010 the EPS was higher i.e. Rs4.99/ share. In March.
The above ratio are greater than the standard ratio i.e. 1:4 of equity shares, this showing that:
Large amount is available for dividend, and transfer to reserve etc.
These will be greater increase in net worth.
There is greater scope for fresh fund from the equity shareholders.
Overall profitability position of the Dabur India Pvt.Ltd is quite satisfactory.
C3. Operating Profit Margin
Gross profit margin (%) = (gross profit/income)*100
From the above chart indicates that:
The above ratio are lower than the standard ratio i.e. 20%
In the year 2010 the operating profits margin was higher a compare to the other.
There is decreasing trend after March 2010.
Operating efficiency of the Dabur India Pvt. Ltd is lower.
The management has the unsatisfactory control over operating cost.
Operating profitability is lower.
Small margin is available to meet the non-operating expenses.
C4. Return on Capital Employed
ROCE = EBIT / Total Capital Employed
The above chart it indicates that:
In the year 2010 the Dabur India Pvt.Ltd getting higher rate of return i.e.74%
From the past five year Dabur India Pvt.Ltd having higher overall profitability.
The rate of productivity is higher.
There will be increase in net worth.
Capital employed is used more effectively.
These are more as cope of attraction of fresh fund.
C5. Return on Proprietor’s Fund
Return in Proprietors Fund=Net Profits /Proprietary Equity Fund
From the above chart indicates that:
There is the greater scope is available for attraction of fresh capitals from proprietors.
The overall profitability position of the Dabur India Pvt.Ltd is quite as satisfactory.
Large amount is available for the payment of dividend, transfer to reserve etc.
Proprietor’s funds are utilized effectively.
Conclusions & Recommendations
In case of Long term investment, Dabur India Pvt.Ltd seems to be an attractive investment because the variables of Long Term Investment like Net Profit, Operating Profit, and EPS are in favor of Dabur India Pvt. Ltd.
The Dabur India Pvt.Ltd having low current ratio which indicates that, It may have problems in meeting its short term obligation.
In case of Long term lending, Dabur India Pvt.Ltd shows very attractive interest coverage ratio which indicates that the Dabur India Pvt.Ltd have enough cash to payout their debt holders.
Dabur India Pvt.Ltd has high EPS for over 5 years which indicates that it has ability to attract more and more investment through equity.
Dabur India ltd has a low gearing capital structure which indicates that it depends on the equity capital at a greater extent.
Dabur has insufficient cash and cash equivalents to pay its short term debt.
Dabur India Pvt. Ltd should try to maintain its net worth for having satisfactory fund for equity share holders.
Dabur India Pvt. Ltd should give more emphasis to optimum utilization of the resources and funds.
The company should improve the return on capital employed, as a source of long term fund.
The company should improve their cash ratio by recovering their outstanding amount from their debtors as early as possible.
The company needs to improve their profit margin to attract the new investors.
A. Extra Tables
A1. Vertical Profit and Loss A/c of Dabur India Pvt Ltd
Power & Fuel Cost
Selling and Admin Expenses
Other Written Off
Profit Before Tax
Reported Net Profit
Total Value Addition
Corporate Dividend Tax
Shares in issue (lakh)
Earnings Per Share (Rs)
Equity Dividend (%)
Book Value (Rs)
A2. Balance Sheet of Dabur India Pvt Ltd
Sources Of Funds
Total Share Capital
Equity Share Capital
Share Application Money
Preference Share Capital
Application Of Funds
Less: Accum. Depreciation
Capital Work in Progress
Cash and Bank Balance
Total Current Assets
Loans and Advances
Total CA, Loans & Advances
Total CL & Provisions
Net Current Assets
Book Value (Rs)
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