Corporate finance pROJECT

ON

HINDUSTAN UNILIVER Pvt Ltd

SUBMITTED TO:- SUBMITTED BY:-

Prof. T.V.RAO AANCHAL SETHI (02)

ABHIJIT CHOWDHURY (03)

ABHISHEK SHARMA (05)

SHUCHI BHARGAVA (84)

Table of contentsChapter 1: Introduction

Chapter 2:Qualitative analysis using CRISIL

2.1 CRISIL criteria for rating FMCG companies

2.2 HUL new growth strategy

2.3 Distribution Network

2.4 Supply chain management

2.5 Brand equity

2.6 Price protection

Chapter 3: Ratio Analysis

3.1 Introduction

3.2 Objective

3.3 Importance

3.4 Limitations

3.5 Classification

3.6 Ratio Analysis of HUL

Chapter 4: Cost of Capital

4.1 Components of cost of capital

Chapter 5: Bibliography

CHAPTER-1

INTRODUCTION :

The FMCG market in India is set to treble from US$ 11.6 billion in 2003 to US$ 33.4 billion in

2015. Penetration level as well as per capita consumption in most product categories like jams,

toothpaste, skin care, hair wash etc in India is low indicating the untapped market potential.

Burgeoning Indian population, particularly the middle class and the rural segments, presents an

opportunity to makers of branded products to convert consumers to branded products. HUL's

brands, spread across 20 distinct consumer categories, touch the lives of two out of three Indians.

They endow the company with a scale of combined volumes of about 4 million tonnes and sales

of Rs. 13,718 crores. The mission that inspires HUL's over 15,000 employees is to "add vitality

to life". With 35 Power Brands, HUL meets every day needs for nutrition, hygiene, and personal

care with brands that help people feel good, look good and get more out of life.

HUL is India's largest FMCG Company. It is a 52.11 per cent (as on March 31, 2008) subsidiary

of Unilever, an Anglo-Dutch international marketer of leading brands in food products, home

care, and personal care segments. HUL’s key brands include Wheel, Lux, Lifebuoy, Surf, Fair &

Lovely, Ponds, Clinic, and Sunsilk. For 2007, HUL reported a consolidated net profit of

Rs.19.25 billion on sales of Rs.137.18 billion, as against a net profit of Rs.18.55 billion and sales

of Rs.121.03 billion, the previous year. For the three months ended March 31, 2008, HUL

reported a standalone profit after tax of Rs.3.81 billion (Rs.3.93 billion in the corresponding

period of 2007) and net sales of Rs.37.94 billion (Rs.31.84 billion).

CHAPTER-2

QULATITIVE ANALYSIS ON “HUL”

CRISIL’S CRITERIA FOR RATING FMCG COMPANIES :

1) PRODUCT MIX :

HUL’s business activities are divided into four broad areas : Home and personal care

Personal wash : Lux. Lifebuoy, Liril , Hamam, Breeze, Moti , Dove, Pears and Rexona

Laundry : Surf Excel, sun light, Rin ,Wheel & Ala bleech

Dishwasher : Vim

Dis-infectants : Domex, cif

Beauty Products : Fair & Lovely, Lakme, Ponds, Vaseline and Aviance

Hair-Care : Sunsilk naturals, Clinic , Dove and Lifebouy

Oral-Care : Pepsodent and Close-up

Deo spray : Axe and Rexona

2) FOODS :

Kissan(Jam,Ketchup,Squashes), Annapurna(Aata and salt), Knorr Soups, Modern Bread

Ice-cream:Kwality Wall's

Bewerages :

Tea:- Brooke bond, Lipton, taj mahal Coffee:- Brooke bond bru.

3 ) New Ventures

Hindustan Lever Network, Ayush ayurvedic products and

services, Sangam, Pureit water purifiers.

4) Exports

HPC, beverages, marine products,

HUL s brands are household names across the country. They

include:

Lifebuoy, Lux, Surf Excel, Rin, Wheel, Fair & Lovely, Pond s, Sunsilk,Clinic,

Pepsodent, Close-up, Lakme, Brooke Bond, Kissan, Knorr-Annapurna and Kwality

Walls.

B) HUL’S NEW GROWTH STRATEGY/INNOVATION TRACK RECORD

After having fought a bitter price battle for market share with its rivals, Hindustan Unilever Ltd

(HUL), Indian subsidiary of the Anglo-Dutch consumer goods company Unilever Plc, is now

working on anew growth strategy for its laundry business.

“Price cut or hike is not a long-term growth strategy. Pricing, infact, is now pass,” insists

Sudhanshu Vats, category head, homecare.

“Our strategy for growth, now is focused on product innovation, new consumer and retail trends

and aggressive marketing and promotions,” he said.

This comes even as Unilever is scouting for a potential buyer for its

laundry business in the US.

HUL says it is quite upbeat about the segment and says the

laundry segment is one of its “key growth areas. “We have done key innovations across the

product portfolio and itis working for us,” says Vats. “We successfully migrated from Rin

Supreme to Surf Excel and Wheel Smart Srimati—which was rolled out in 2006—is also on the

right track.”

HUL’s market share in the laundry segment grew to around 37.8%in the quarter ended June from

35.5% in the same period last year, according the market research firm ACNielsen. However,

this time, the increase was not at the expense of price war with it multinational rival Procter &

Gamble Co. P&G also gained 0.5percentage points, up to a 7.6% share. Nirma Ltd, the

Ahmedabad-based manufacturer, however, saw its market share dip by 1.7%percentage points to

13.5%.

Wheel, a value brand that, according to Vats contributes around50% of HUL’s laundry segment

revenues, increased its market share by 2 percentage points in the same period, with a total share

of about 18%.

According to ACNielsen, the laundry industry in India was worth

Rs7,908 crore in 2006 and rose 8.4% over 2005. HUL doesn’t

” “We have done key innovations across the product portfolio and it is working for us,” says

Vats. “We successfully migrated from Rin Supreme to Surf Excel and Wheel Smart Srimati—

which was rolled out in 2006—is also on the right track.”

HUL’s market share in the laundry segment grew to around 37.8%in the quarter ended June from

35.5% in the same period last year, according the market research firm ACNielsen. However,

this time, the increase was not at the expense of price war with its multinational rival Procter &

Gamble Co. P&G also gained 0.5percentage points, up to a 7.6% share. Nirma Ltd, the

Ahmedabad-based manufacturer, however, saw its market share dip by 1.7%percentage points to

13.5%.

Wheel, a value brand that, according to Vats contributes around50% of HUL’s laundry segment

revenues, increased its market share by 2 percentage points in the same period, with a total share

of about 18%.

According to ACNielsen, the laundry industry in India was worth

Rs7,908 crore in 2006 and rose 8.4% over 2005. HUL doesn’t

report its laundry revenues separately but puts them under the

soaps and detergent category.

In 2006, HUL’s soaps and detergents segment contributed around

Rs5,596 crore to the company’s total sales of Rs12,103 crore.

“Laundry has been an attractive segment in the past and is likely to keep growing in the near

future. The recent price war between companies led to erosion in their profitability but now, the

industry is stabilizing,” says Unmesh Sharma, an analyst at MacquarieSecurities here.

According to Vats, the laundry business is witnessing a surge in demand from cities and HUL is

focusing on Tier I and II cities to tap that demand

C) DISTRIBUTION NETWORK,,,

HLL

CARRYING AND FORWARD AGENT

REDISTRIBUTION NETWORK

WHOLESELLER

URBAN AND RURAL RETAILER

CONSUMER

Hindustan Unilever's distribution network is recognised as one of its key strengths. Its focus is

not only to enable easy access to our brands, but also to touch consumers with a three-way

convergence - of product availability, brand communication, and higher levels of brand

experience.

HUL's products, manufactured across the country, are distributed through a network of about

7,000 redistribution stockists covering about one million retail outlets. The distribution network

directly covers the entire urban population.

The general trade comprises grocery stores, chemists, wholesale, kiosks and general stores.

Hindustan Unilever services each with a tailor-made mix of services. The emphasis is equally on

using stores for direct contact with consumers, as much as is possible through in-store

facilitators.

Hindustan Unilever, which once pioneered distribution in India, is today reinventing distribution

- creating new channels, and redefining the way current channels are serviced. In the process it is

converging product availability, with brand communication and brand experience

D) Supply Chain Management

This is the most important factor that drives the sales and promote customer loyalty. It is the

ability of any industry to offer a new product whenever customer wants.

At the supermarkets: To service modern retailing outlets in the metros, HUL has set up a full-

scale sales organisation, exclusively for this channel. The business system delivers excellent

customer service, while driving growth for the company and the store. At the same time,

innovative marketing initiatives are taken to provide consumers with experience of our brands at

the store itself, through product tests and in-store sampling

In the villages: The company, to fully meet the emerging needs and increased purchasing power

of the rural population has brought all markets with populations of below 50,000 under one rural

sales organisation. The sales teams are formed, dedicated leaders are assigned to build the brand

availability and enabling brand building in the deepest sections. HUL's distribution network in

rural India already directly covers about 50,000 villages, reaching about 250 million consumers,

through about 6000 sub-stockists

E) Brand Equity

It is the degree of consumer loyalty that a company product enjoys. HUL has various brands in

the Indian market with the highest market share. The main challenge was to reverse the down

trading the categories and reestablish the relevance of their brands in the minds of the customers.

In 2000 they had 110 brands, many undifferentiated and lacking scale. Then they focus on 35

main brands covering all consumer appeal and pricing segments.

They are already seeing the benefits . Six brands – Brooke Bond, Lifebuoy, Lux, Fair & Lovely,

Rin and Wheel – have emerge as megabrands with salary of more than Rs.500 crores.

As a corporate, HLL wants to be a leader in every one of its businesses and the strategy is to

fight on the strength of the competitive advantage arising from the possession of strong brands. It

is this strategy that is getting reflected in the development of a multitude of strong brands. If we

take the business of bathing soaps, as an example, HLL has the objective of being a national

player (not a niche or a regional marketer) and the leader therein. HLL also wants about 30 per

cent of the corporate income to come from this line.

F) Price Protection

The products of HUL enjoys the price protection in various segments of goods and services

provided by the company. They have increased the prices of several main products and reduced

on those products consumed by mass population

CHAPTER-3

RATIO ANALYSIS

INTRODUCTION

Ratio Analysis is a widely used tool of financial analysis. The ratio analysis and

industry analysis tools below are very useful for individuals to instantly assess a company or

industry by making two basic types of comparisons.

OBJECTIVES

1. To allow comparisons to be made which assist in predicting the future.

2. To investigate the reason for changes.

3. To construct a simple explanation of a coplicated financial statement by its expression in

one figure.

4. To permit the charting of a firm’s history and the evaluation of its present position.

5. To provide indicators of a firm’s past performance in terms of its operational activity and

profitability; and near-present financial condition.

IMPORTANCE/ADVANTAGES

Aid to the management

Aid in business forecasting

Aid in cost control

To know efficiency

To know liquidity and solvency position

Useful for decision making

Investment decision

Aid in comparision and Trend Analysis

LIMITATIONS/DISADVANTAGES

Lack of proper standard

Different methods

Lack of qualitative analysis also various Accounting limitation

CLASSIFICATION OF RATIOS

Ratios are classifibd according to the need of different interested

groups(e.g., shareholders, lenders, investors, management, etc.). these ratios are as follows:-

(A) PROFITABILITY RATIOS

1. GROSS PROFIT RATIO.

2. NET PROFIT RATIO.

3. OPERATING PROFIT RATIO.

4. OPERATING RATIO.

(B) LEAVERAGE RATIOS:-

1. DEBT-EQUITY RATIO.

2. CAPITAL EMPLOYEED TO NET WORTH RATIO.

(C) LIQUIDITY RATIOS:-

1. CURRENT RATIO.

2. QUICK RATIO ( Acid test ratio).

(D) TURN OVER RATIOS:-

1. INVENTORY TURN OVER RATIO.

2. FIXED ASSETS TURNOVER RATIO.

3. WORKING CAPITAL TURNOVER RATIO.

4. TOTAL ASSETS TURNOVER RATIO.

(E) VALUATION RATIOS:-

1. DIVIDEND YEILD RATIO.

2. DIVIDEND PAY OUT RATIO.

3. PRICE-EARNING RATIO.

4. EARNING PER SHARE..

RATIO ANALYSIS OF HUL

1. Debt equity Ratio

The Debt equity ratio of (HUL)is {0.09} means that debts are 9 % of the

equity in the company. Means, the position is quite safe and there is very less chance that

there will be any kind of debt problem i.e. the company can raise the loans very easily if

required in future while that of Industry: is {0.06} This ratio is very close to HUL. And

that of Competitor: (Colgate-Palm.)is {0.02} The ratio of the competitor is only 2%. The

too low ratio can be harmful for the company. There may be a lot of power in the hands

of equity-holders if the ratio remained to be too low at this level.

IndustryColgate-Palm.

HUL

00.010.020.030.040.050.060.070.080.09

Debt-Equity Ratio

Debt-Equity Ratio

2. Interest coverage Ratio

The (HUL) has interest coverage of404.94 and is in position to

give interest as much as 400 times. It means that the profitability is so high that HUL can

give interest 400 times than t what actual interest is while that of Industry is 107.52, so

the position of company is 3.893% more than the capacity of the industry and that of

Competitor: (Colgate-Palm. ) is 324.0 which is also good and is generating sufficient

revenue to satisfy interest expenses.

IndustryColgate-Palm.

HUL

050

100150200250300350400450

Interest Cover Ratio

Interest Cover Ratio

3. CURRENT RATIO

The Current Ratio of HUL is 0.89 while that of the industry is 0.93 and that of

Colgate –Palm is 1.05. As a convention the minimum of ‘two to one ratio’ is referred to as a

banker’s rule of thumb. Current Ratio of HUL is 0.89 is matter of concern. As there is more

investment in the FMCG but current assets also to be increased accordingly to improve the

current ratio.

IndustryColgate-Palm.

HUL

0.8

0.85

0.9

0.95

1

1.05

Current Ratio

Current Ratio

4. INVENTORY TURNOVER RATIO

Inventory turnover ratio is concerned with the maintenance of level of inventory

of finished goods so as to be able to meet the requirements of the business. Level of

inventory should neither be too high nor too low. Of HUL it is 7.73% which means that

the inventory is replaced with new supply about 8 times in a year while that of Industry

is 9.7% which is also close to HUL while that of Competitor (Colgate-Palm. )is 20.98%

which means that the inventory is changed 21 times in a year.

It shows the good efficiency of HUL to manage their inventory.

IndustryColgate-Palm.

HUL

0

5

10

15

20

25

Inventory Turnover Ratio

Inventory Turnover Ratio

5. DEBTORS TURNOVER RATIO

Debtor Turnover Ratio indicates the number of times the debtors are turned over

during a year. Debtors turnover ratio of HUL is 29.95

AVERAGE COLLECTION PERIOD =

NO.OF WORKING DAYS/ DEBTORS TURNOVER RATIO

= 365/20.95

= 17 days

Debtors turnover ratio of HUL is higher it shows more efficient management of debtors.

While that of Industry is 25.75 but that of COMPETITOR (Colgate-Palm.)is 193.65 which is

far better than that of HUL as it covers money in just 1.5 days.

IndustryColgate-Palm.

HUL

020406080

100120140160180200

Debtors Turnover Ratio

Debtors Turnover Ratio

6. PBITM :

Since PBITM represents the amount of cash  that the companies can earn to pay

off creditors. Profit before interest and tax of HUL: 15.53, which is satisfactory while that of

INDUSTRY is 24.02 which is very good as compared to standard value while that of

COMPETITOR (Colgate-Palm.) is 14.89 which is also satisfactory and close to that of HUL.

IndustryColgate-Palm.

HUL

0

5

10

15

20

25

PBITM (%)

PBITM (%)

CHAPTER-4

COST OF CAPITAL

COMPONENTS OF CAPITAL:

a) DEBENTURES

b) PREFERENCE SHARES

c) EQUITY SHARES

d) RETAINED EARNINGS

Cost of capital is the cost at which the company acquires its funds for different operations. It

is taken from the investor’s point of view. It is the expected return of the investors on their

different type of investments in different portfolios. The cost of capital helps the company to

evaluate the financial feasibility of a venture or project. It can be done by seeing that the

minimum rate of profit should be at least equal to the expected rate of return.

1. COST OF DEBT

FORMULA:

COST OF DEBT = INTEREST (1-TAX RATE)

SALES VOLUME

Flotation cost = Nil

Corporate Tax Rate = 30%

The secured loans that are taken by the company are the irredeemable debts that are taken by

the company.

In the annual report of the company the debt taken by the company is mentioned to be

nil thus cost of debt is zero.

2. COST OF EQUITY CAPITAL

The cost of equity capital can be calculated by two methods

A) DIVIDEND APPROACH

CALCULATION OF COST OF EQUITY CAPITAL (Dividend Approach Method)

FORMULA:

= EXPECTED DIVIDEND PER SHARE + GROWTH RATE FOR CURRENT YEAR

CURRENT MARKET PRICE

Expected dividend cannot be predicted and hence we cannot calculate cost of equity using

this method, so we will calculate it using the other method i.e.

B) CAPITAL ASSET PRICING METHOD (CAPM)

FORMULA:

Ke = Rf + ß(Km-Rf)

Ke – cost of capital

Rf – risk free return on equity which is 6.9%

ß – beta of the stock

Km – market return (Calculated from average returns indicated by SENSEX index of last 10

years)

YEAR CLOSE Market return

1999 5,005.82

2000 3,972.12 -20.64%

2001 3,262.33 -17.86%

2002 3,377.28 3.52%

2003 5,838.96 72.88%

2004 6,602.69 13.07%

2005 9,397.93 42.33%

2006 13,786.91 46.7%

2007 20,286.99 51.06%

2008 9,647.31 -52.44%

2009 17,464.81 81.03%

2010 20,509.09 17.42%

Average=237.05/11= 21.55

Here β=0.5222(from capital line)

KE=6.9+ 0.522(21.55-6.9)= 14.5%

COST OF RETAINED EARNINGS

Since cost of capital for retained earnings is also the opportunity cost hence it is equivalent to

fully subscribed issue or additional shares, which is measured from cost of equity shares.

No retained earnings are mentioned in the balance sheet of the company. So cost of retained

earnings is zero.

CHAPTER-5

Bibliography

www.capitaline.com Financial Accounting by I.M pandey Corporate Finance by Prasansa Chandra

www.hul.co.in

www.bse.com