ENHANCING INVESTMENT DECISIONS

IN-DEPTH ANALYSIS OF FUNDAMENTALS AND VALUATION

GROUP 6 RINI RAJAN PRIYANKA KANWAR ASHISH SHARMA PRATEEK JAIN JEEVAN JOSHI [Pick the date]

EQUITY VALUATION

CORPORATE

GOVERNANCE

MANAGEMENT

EVALUATION

FINANCIAL

PERFORMANCE

BUSINESS PROSPECTS

2

Global economic growth should increase over the next two years with continuing signs of improvement, according to the United Nations World Economic Situation and Prospects 2014 (WESP) report. The global economy is expected to grow at a pace of 3.0 per cent in 2014 and 3.3 per cent in 2015, compared with an estimated growth of 2.1 per cent for 2013.

The world economy experienced subdued growth for a second year in 2013, but some improvements in the last quarter have led to the UN’s more positive forecast. The euro area has finally ended a protracted recession. Growth in the United States strengthened somewhat. A few large emerging economies, including China and India, managed to backstop the deceleration they experienced in the past two years and veered upwards moderately. These factors point to increasing global growth.

While growth in international trade flows is expected to pick up moderately to 4.7 per cent in 2014, the prices of most primary commodities are projected to be flat, although any unexpected supply-side shocks, including geo-political tensions, could push some of these prices higher.

Developed economies

In the United States, fiscal tightening and a series of political gridlocks over budgetary issues weighed heavily on growth; however, quantitative monetary easing boosted equity prices. The U.S. labor market and housing sector continued to recover. Gross Domestic Product (GDP) in the U.S. is expected to increase 2.5 per cent in 2014.

Western Europe emerged from recession in 2013, but growth prospects remain weak, as fiscal austerity will continue and the unemployment rates remain elevated. GDP in Western Europe is expected to grow by 1.5 per cent in 2014.

Developing countries and economies in transition

Growth prospects among large developing countries and economies in transition are mixed. Growth in Brazil has been hampered by weak external demand, volatility in international capital flows and tightening monetary policy, but growth is expected to rebound to 3 per cent in 2014. A slowdown in China has been stabilized and growth is expected to maintain at a pace of about 7.5 per cent in the next few years. India experienced its lowest growth in two decades, along with large current account and government budget deficits plus high inflation, but growth is forecast to improve to above 5 per cent in 2014. In the Russian Federation growth weakened further in 2013, as industrial output and investment faltered, and is expected to recover modestly to 2.9 per cent in 2014. Whereas growth prospects in Africa is robust estimated at 4.7% in 2014.

GLOBAL ECONOMIC PROSPECTS

COUNTRIES

•USA

•China

•India

S&P

•AA+/A-1+

•AA-

•BBB-

MOODY'S

•Aaa

•Aa3

•Baa3

CREDIT RATINGS

012345678

2010 2011 2012 2013 2014

Global GDP

World

Advancedeconomies

Developingcountries

3

Over the past one year, in the financial year 2014, the Indian economy is

anticipated to grow at 4.9% as compared to 4.6% in FY 2013 with higher

output in both industrial & agriculture sector and a rebound exports.

However, sluggish growth in consumption and investment weaker the

domestic demand. Main macroeconomic indicators influences the overall

economic conditions of India are as follows: GDP, IIP, WPI and CPI, CAD,

Foreign Trade, FDI

Gross Domestic Product

The Indian economy expanded at a slower rate in Q3 to 4.7% from 4.8%

in Q2 of 2013 due to contraction in growth of manufacturing (1.9%) &

mining (1.6%) sector. The Indian economy will grow by 5.2% in the second

half of fiscal 2014. The economy has grown by 4.6% in the first half and

full year 2013-14 growth estimate is 4.9%. GDP growth for the first two

quarters of fiscal 2013-14 was 4.4% and 4.8%. GDP growth for fiscal 2012-

13 was 4.5%.

Index of Industrial Production

Manufacturing sector mainly contributes to the GDP growth of an economy, however, services sector replacing the manufacturing position in terms of contribution in the growth. Finance Minister in his budget speech mentioned, “Manufacturing is the Achilles heel of the Indian economy. The deceleration in investment in manufacturing is particularly worrying. Consequently, there is no uptick yet in manufacturing.” Inflation

Wholesale price index and Consumer price index are on decreasing side

from November 2013 onwards, leaves the near term expectations slightly

low, however, core inflation is continue to be a concern

Foreign Trade

Exports declined in H1 2013 due to sluggish global demand. However, it

registered a double digit growth in July (11.64%) and October (13.47%) as

sharp depreciation of rupee supported the growth. Lower Gold demand

declined the total imports of the economy. On the lower imports and

healthy exports, trade deficit got narrowed, helped curb CAD.

Current Account Deficit

Gold imports and crude imports are major factors influencing the current

account deficit in the Indian economy. Three times hike in gold import

duty to 10% in 2013 and other import restrictions curb gold import have

contributed to the improvement in CAD, dropped to 0.9% in Q3 from

OVERVIEW OF INDIAN ECONOMY

FY 2013

0

2

4

6

8

10

2010 2011 2012 2013 2014

GDP

2010

2011

2012

2013

2014

4

4.9% in Q1 of 2013. Further, tighter lending norms, weak domestic

demand and an increase in exports have improved current account deficit

in 2013 to its lowest in three years at -2.6% of GDP from -5.0% in 2012.

Fiscal Deficit

India's fiscal deficit has grown almost four-fold in the last five years.

Government finances are in disarray largely because of a mounting

subsidy and interest payment burden. Fiscal deficit, the gap between

government's expenditure and revenue, stood at 4.5 per cent in FY14,

lower than 4.9 per cent in FY13. To sustainably reduce fiscal deficit from

current levels, the government will have to rely on raising revenues as a

share of GDP. The government has to implement structural tax reforms

such as the goods and services tax (GST), which will lift the government's

tax revenues, lower the cost of doing business and boost growth which

would help in attaining the fiscal deficit of 4.1% in FY15.

Demographics

Demographics of India Population 1,236,344,631 (July 2014 est.) (2nd)

Growth rate 1.51% (2009 est.) (93rd)

Birth rate 20.22 births/1,000 population (2013 est.)

Death rate 7.4 deaths/1,000 population (2013 est.)

Life expectancy 68.89 years (2009 est.)

• male 67.46 years (2009 est.)

• female 72.61 years (2009 est.)

Fertility rate 2.44 children born/woman (SRS 2011)

Infant mortality rate 44 deaths/1,000 live births (2011 est.)

India’s Growth Prospects

The infrastructure, consumer products, industrials, technology, media

and telecom (TMT), and life-sciences sectors are set to drive India’s

growth over the next two years. Investors are considering India for both

their services and manufacturing supply chain. With the services sector

forming the backbone of India’s economy, the Indian Government is

placing more weight on strengthening the country’s manufacturing

ecosystem. The global investors are starting to recognize relevant efforts,

with the vast majority expecting India to be a leading manufacturing hub

by 2020. But for that to happen, the environment must be more enabling

and measures on other competitive issues, including currency stability

and ease of doing business, must be implemented.

0

2

4

6

8

2010 2011 2012 2013 2014

Fiscal Deficit

FiscalDefecit

3.2

3.4

3.6

3.8

4

20

10

20

11

20

12

20

13

20

14

Unemployment Rate

UnemploymentRate

5

Fast Moving Consumer Goods (FMCGs) are goods that are consumed in a short span of time and are most often consumed daily. FMCGs are one of the most important sectors of an economy and are often referred to as defensives as they comprise the basic day to day needs of the citizens. The overall fast moving consumer goods (FMCG) market is expected to increase at a compound annual growth rate (CAGR) of 14.7 per cent to US$ 110.4 billion during 2012–2020, with the rural FMCG market expected to increase at a CAGR of 17.7 per cent to US$ 100 billion during 2011–2025. Rising incomes and growing youth population have been key growth drivers for the sector. Brand consciousness has also aided demand. It is estimated that First Time Modern Trade Shoppers (FTMTS) spend will reach US$ 1 billion by 2015. The industry has witnessed healthy foreign direct investment (FDI) inflow, as the sector accounted for 3 per cent of the country’s total FDI inflow in the period April 2000 to October 2013. Organized retail share is expected to double to 14–18 per cent of the overall retail market by 2015.

The Government of India has approved 51 per cent FDI in multi-brand retail, which will boost the nascent organized retail market in the country. It has also allowed 100 per cent FDI in the cash and carry segment and in single-brand retail. The government has also amended the Sugarcane Control Order, 1966, and replaced the Statutory Minimum Price (SMP) of sugarcane with Fair and Remunerative Price (FRP) and the State Advised Price (SAP). The rural India’s FMCG market will touch US$ 100 billion by 2025.

FMCG INDUSTRY

6

The FMCG sector in India generated revenues worth US$ 34.8 billion in 2011, a growth of 15.2 per cent as compared to the previous year. Over 2006-11, the sector's revenues posted a compound annual growth rate (CAGR) of 17.3 per cent. Food products are the leading segment, accounting for 43 per cent of the overall market. Personal care (22 per cent) and fabric care (12 per cent) are the other leading segments. Growing awareness, easier access, and changing lifestyles have been the key growth drivers for the sector. Rural demand is set to rise with rising incomes and greater awareness of brands. The Government of India has been supporting the rural population with higher minimum support prices (MSPs), loan waivers, and disbursements through the National Rural Employment Guarantee Act (NREGA) programme. These measures have helped in reducing poverty in rural India and have thus propped up rural purchasing power. With rise in disposable incomes, mid- and high-income consumers in urban areas have shifted their purchasing

trend from essential to premium products. In response, firms have started enhancing their premium products

portfolio. Indian and multinational FMCG players are leveraging India as a strategic sourcing hub for cost-

competitive product development and manufacturing to cater to international markets

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Porter’s Five Forces

COMPETITIVE RIVALRY

High Rivalry

Intense price competition

Low exit barriers

Advertisement &

promotional stuff

BARGAINING POWER OF SUPPLIERS

Low bargaining power

Concentration of suppliers

is more

Raw materials readily

available

BARGAINING POWER OF BUYERS

High bargaining power

Availability of substitutes

Concentration and available

Information is more

SUBSTITUTES AVAILABLE

More substitutes available

Low switching cost

THREAT OF NEW ENTRANTS

Threat of entry is high

Easy availability of capital

and raw material

8

Marico Limited is an India-based company founded in the year 1987,

engaged in the business of branded consumer products and services. It’s

one of India's leading consumer products companies operating in the

beauty and wellness space. Empowered with freedom and opportunity,

we work to make a difference to the lives of all our stakeholders -

members, associates, consumers, investors and the society at large.

Currently present in 25 countries across emerging markets of Asia and

Africa.

The Company operates in two segments: Consumer Products and Others.

Its Consumer Products include Coconut oils, other edible oils, hair oils and

other hair care products, male grooming products, fabric care products,

healthy foods, soaps, health care products and female beauty care

products. Others segment is engaged in skin care. In India, Marico Limited

manufactures and markets products under the brands such as Parachute,

Nihar, Saffola, Hair & Care, Revive, Mediker, Livon and Set-wet. Marico’s

international portfolio includes brands such as Fiancee, HairCode,

Camelia, Aromatic, Caivil, Hercules, Black Chic, Ingwe, Code 10, X-men,

L’Ovite and Thuan Phat that are localized to fulfill the lifestyle needs of

our international consumers. Charting an annual turnover of Rs. 46 billion

(Financial Year 2012 - 2013) across our portfolio, Marico's sustainable

growth story rests on an empowering work culture that encourages our

members to take complete ownership and make a difference to the

entire business ecosystem.

It is present in Skin Care solutions business under the brand name Kaya in

India and international markets and the brand Derma Rx in Singapore and

Malaysia.

BOARD OF DIRECTORS

Harsh Mariwala, Chairman (w.e.f. April 1, 2014) Saugata Gupta, Managing Director & CEO (w.e.f. April 1, 2014) Nikhil Khattau, Chairman of Audit Committee Hema Ravichandar, Chairman of Corporate Governance

Committee Rajeev Bakshi Atul Choksey Anand Kripalu Rajen Mariwala B. S. Nagesh

MARICO LIMITED- Make a Difference

9

FINANCIAL ANALYSIS OF MARICO

TOOL - RATIO ANALYSIS

*Note: Other ratios are shown in the annexure 2

0

0.5

1

1.5

2

2.5

Mar'09

Mar'10

Mar'11

Mar'12

Mar'13

FY2009-FY2013

Current Ratio

MARICO

INDUSTRY

0

0.2

0.4

0.6

0.8

1

Mar'09

Mar'10

Mar'11

Mar'12

Mar'13

FY2009-FY2013

Debt/Equity Ratio

MARICO

INDUSTRY

01234567

Mar'09

Mar'10

Mar'11

Mar'12

Mar'13

FY2009-FY2013

Fixed Assets Turnover Ratio

MARICO

INDUSTRY

0

10

20

30

40

50

Mar'09

Mar'10

Mar'11

Mar'12

Mar'13

FY2009-FY2013

P/E Ratio

MARICO

INDUSTRY

ITC

HUL

NESTLE

DABUR

MARICO

TOP PLAYERS 284,094.61

1,54,458.63

53,705.94

38,242.32

17,180.14

MARKET CAP

10

ANALYSIS OF RATIOS

CURRENT RATIO- There has been inconsistent trend in Marico’s current ratio and mostly it was below

the standard norm i.e. 2:1 over the past 5 years but they have always been above the industry,

therefore it shows that they can meet their short term obligations easily

DEBT EQUITY RATIO- The above chart shows that there has been declining trend in the industry and

Marico which shows that they are paying off their debts and relying more on the insider’s funds

FIXED ASSET TURNOVER RATIO- The chart shows a consistent trend from FY09-FY13 and has always

been above the industry which shows their efficiency in management as well as in operations

P/E RATIO- There has been a substantial increase in the trend of Marico and the industry over the past

5 years which shows that they are contributing towards the wealth maximization of their shareholders.

SWOT ANALYSIS OF MARICO

SWOT

STP

Product Portfolio

11

Valuation is the process of determining the current worth of an asset or company. There are many techniques

that can be used to determine value, some are subjective and others are objective. Discounted cash flow (DCF)

is a valuation method used to estimate the attractiveness of an investment opportunity. DCF analysis uses

future free cash flow projections and discounts them to arrive at a present value, which is then used to

evaluate the potential for investment. If the value arrived at through DCF analysis is higher than the current

cost of the investment, the opportunity may be a good one.

FCFE DISCOUNT MODEL

The FCFE is a measure of what a firm can afford to pay out as dividends. Dividends paid are different from the FCFE for a number of reasons -

o Desire for Stability o Future Investment Needs o Tax Factors o Signaling Prerogatives

The various model under this are:

o The Constant Growth FCFE Model

o The Two Stage FCFE Model o The three Stage FCFE Model

We have valued Marico Ltd. using Two Stage FCFE Model. Between year 2009 and 2014 Marico has been traded at an average of 159.12 Rs. But over the last one year it has increased on an average of 224.78 Rs.

SOURCE: BSE

Valuation – Discounted Cash Flow Technique (FCFE MODEL)

12

This model is designed to value the equity in a firm with two stages of growth, an initial period of higher growth and a subsequent period of stable growth.

INPUTS TO THE MODEL Net Income 485.38 (IN INR CR.)

Capex 241.14 (IN INR CR.)

Depreciation 66.6 (IN INR CR.)

Change in non cash WC 14.92 (IN INR CR.)

Net Debt 264.82 (IN INR CR.)

Equity 1360.63 (IN INR CR.)

Dividend Payout Ratio 24.1 in %

Rf 8.76 in %

Rm-Rf 16.6222725 in %

β 0.99014579

EXTRAORDINARY GROWTH PHASE

Length of extraordinary growth period 5 (in years)

COST OF EQUITY (Ke) 25.2184732 in %

Fundamental Growth Rate 27.0759442 in %

STABLE GROWTH PHASE β 1

COST OF EQUITY (Ke) 25.3822725 in %

Growth 5 in %

FCFE CALCULATION = Net Income-(capex-dep)-(Change in non cash working capital)-(New debt Issued-Debt Repayment)

31.1 (In the year 2014)

TERMINAL VALUE

2014 2015 2016 2017 2018 2019

FCFE 39.5206186 50.22119924 63.81906307 81.09867701 103.0569095 530.9013286 108.2098

Discounting Factor (Ke) 31.5613325 32.02950828 32.5046289 32.98679737 33.47611849 172.4534122

PV today = PV of FCFE during high growth phase + PV of Terminal Price

Po=335.0117977

MARKET VALUE AT PRESENT 266.8 Undervalued 266.8 < 335

TWO STAGE FCFE DISCOUNT MODEL

The opportunity for investment seems to be attractive for this stock as it is undervalued and chances

are that it will go up in future, therefore investors should make a buy decision.

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CONSOLIDATED BALANCE SHEET

APPENDIX

ANNEXURE 1: FINANCIALS

14

CONSOLIDATED PROFIT & LOSS STATEMENT

15

00.20.40.60.8

11.21.4

Mar'09

Mar'10

Mar'11

Mar'12

Mar'13

FY2009-FY2013

Quick Ratio

MARICO

INDUSTRY

0

10

20

30

40

50

Mar'09

Mar'10

Mar'11

Mar'12

Mar'13

FY2009-FY2013

Debtors Turnover Ratio

MARICO

INDUSTRY

0

5

10

15

20

Mar'09

Mar'10

Mar'11

Mar'12

Mar'13

FY2009-FY2013

Gross Profit Ratio

MARICO

INDUSTRY

0

20

40

60

80

100

Mar'09

Mar'10

Mar'11

Mar'12

Mar'13

FY2009-FY2013

EPS

INDUSTRY

MARICO

*ANNEXURE 2: RATIOS

0100200300400500600700

Mar'09

Mar'10

Mar'11

Mar'12

Mar'13

FY2009-FY2013

Interest Coverage Ratio

MARICO

INDUSTRY

02468

10

Mar'09

Mar'10

Mar'11

Mar'12

Mar'13

FY2009-FY2013

InvestmentsTurnover Ratio

MARICO

INDUSTRY

0

5

10

15

20

25

Mar'09

Mar'10

Mar'11

Mar'12

Mar'13

FY2009-FY2013

Operating Profit Ratio

MARICO

INDUSTRY

01020304050607080

Mar'09

Mar'10

Mar'11

Mar'12

Mar'13

FY2009-FY2013

R.O.C.E

MARICO

INDUSTRY

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Regression SUMMARY

OUTPUT

REGRESSION BETA

Regression Statistics Multiple R 0.493154 R Square 0.243201 Adjusted R Square 0.23738 Standard Error 0.108611 Observations 132

ANOVA

df SS MS F Significance

F Regression 1 0.492807 0.492807 41.77618 1.88E-09 Residual 130 1.533527 0.011796

Total 131 2.026334

Coefficients Standard

Error t Stat P-value Lower 95% Upper 95%

Lower 95.0%

Upper 95.0%

Intercept -0.00125 0.009903 -0.1262 0.899771 -0.02084 0.018342 -0.02084 0.018342

X Variable 1 0.990146 0.153192 6.46345 1.88E-09 0.687075 1.293217 0.687075 1.293217

ANNEXURE 3: BETA CALCULATION

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https://www.conference-board.org/data/globaloutlook/

http://www.worldbank.org/en/publication/global-economic-prospects

http://administrator.asiapacific.edu/userfiles/Fundamental%20Analysis%20of.pdf

http://www.mbaskool.com/brandguide/fmcg/1486-marico.html

http://investorsareidiots.com/2014/02/economic-data-analysis-february-2014-can-the-economy-show-5-2-growth-in-

second-half-of-2013-14/

http://www.marketexpress.in/2014/03/overview-indian-economy-2013-2014.html

http://www.moneycontrol.com/news/economy/india39s-2011-12-fiscal-deficit-widens-to-59gdp_711525.html

http://in.reuters.com/article/2014/05/30/india-economy-deficit-idINKBN0EA11620140530

http://www.thehindu.com/business/Economy/fiscal-deficit-lower-at-489-in-201213/article4769686.ece

http://in.reuters.com/article/2011/05/31/idINIndia-57397720110531

http://www.tradingeconomics.com/india/government-budget

http://data.worldbank.org/indicator/NY.GDP.MKTP.KD.ZG

http://en.wikipedia.org/wiki/Demographics_of_India

http://timesofindia.indiatimes.com/business/india-business/Unemployment-levels-rising-in-India-experts-

say/articleshow/29403619.cms

http://www.ibef.org/industry/fmcg-presentation

https://www.edelweiss.in/Sector/sectordetails.aspx?sector=FMCG

http://in.reuters.com/finance/stocks/companyProfile?symbol=MRCO.BO

http://marico.com/india/investors/performance-at-a-glance

http://reports.dionglobal.in/Actionfinadmin/Reports/FDR0108201343.pdf

http://www.moneycontrol.com/stocks/marketstats/indexcomp.php?optex=BSE&opttopic=indexcomp&index=14

REFERENCES

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