Financial Analysis of HUL and GCPL (FMCG Sector)

Management Accounting I Project

12P139 Ishpreet Singh 12P140 J Abhinav 12P141 Karan Jaidka 12P142 Kshitij Agrawal 12P143 Kshitij Ahuja 12P144 Ladlee Rathore Group 4 Section C PGPM 2012-14

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Table of Contents
Title Page No.

Acknowledgements Introduction Snapshot of the FMCG sector Companies under study Comparative financial analysis Short term investment Long term investment Short term lending Long term lending Strategy Altman Model Appendix

1 2 3 4 5 6 12 19 23 29 42 46

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Acknowledgements
We, as Group 4 of Section C, would collectively like to thank Prof. S.K Rai, who for his in-depth analysis of various topics in Management Accounting I, arise in all of us a genuine curiosity and interest in the subject. His guidance during the course helped us in the financial analysis of the FMCG industry. Lastly, we thank the Almighty for guiding us through the implementation of this project.

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Introduction
Financial statement analysis is the process of reviewing and evaluating a c ompanys 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 companys 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. For executing this project, we selected two companies a. Hindustan Unilever Limited b. Godrej Consumer Products Limited We took one Large Cap Company and a Mid Cap Company and compared the two.

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Snapshot of the FMCG Sector

Fast Moving Consumer Goods (FMCG) These are products that are sold quickly and at relatively low. Examples include non-durable goods such as soft drinks, toiletries, and grocery items. Though the absolute profit made on FMCG products is relatively small, they generally sell in large quantities, so the cumulative profit on such products can be substantial. The term FMCGs refers to those retail goods that are generally replaced or fully used up over a short period of days, weeks, or months, and within one year. This contrasts with durable or major appliances such as kitchen appliances, which are generally replaced over a period of several years. FMCG have a short shelf life, either as a result of high consumer demand or because the product deteriorates rapidly. Some FMCGs such as meat, fruits and vegetables, dairy products and baked goods are highly perishable. Other goods such as alcohol, toiletries, pre-packaged foods, soft drinks and cleaning products have high turnover rates. The following are the main characteristics of FMCGs:

From the consumers' perspective: Frequent purchase

Low involvement (little or no effort to choose the item products with strong brand loyalty are exceptions to this rule)

Low price From the marketers' angle: High volumes Low contribution margins Extensive distribution networks High stock turnover

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Companies under Study

Hindustan Unilever Limited (HUL) - It is India's largest consumer goods company based in Mumbai, Maharashtra. It is owned by the British-Dutch company Unilever which controls 52% majority stake in HUL. Its products include foods, beverages, cleaning agents and personal care products. HUL was formed in 1933 as Lever Brothers India Limited and came into being in 1956 as Hindustan Lever Limited through a merger of Lever, Hindustan Vanaspati Mfg. Co. Ltd. and United Traders Ltd. It is headquartered in Mumbai, India and has employee strength of over 16,500 employees and contributes to indirect employment of over 65,000 people. The company was renamed in June 2007 as Hindustan Unilever Limited. Lever Brothers started its actual operations in India in the summer of 1888, when crates full of Sunlight soap bars, embossed with the words "Made in England by Lever Brothers" were shipped to the Kolkata harbor and it began an era of marketing branded Fast Moving Consumer Goods (FMCG). Hindustan Unilever's distribution covers over 2 million retail outlets across India directly and its products are available in over 6.4 million outlets in the country. As per Nielsen market research data, two out of three Indians use HUL products. Godrej Consumer Products Limited (GCPL) It is an Indian consumer goods company based in Mumbai, India. GCPLs product range includes soaps, hair colorants, toile tries and liquid detergents. Some of the leading brands are Cinthol, Godrej Fair Glow, Godrej No.1 and Godrej Shikakai in soaps, Godrej Powder Hair Dye, Renew, ColourSoft in hair colorants and Ezee liquid detergent. GCPL has five manufacturing facilities in India at Malanpur (Madhya Pradesh), Guwahati (Assam), Baddi- Thana (Himachal Pradesh), Baddi- Katha (Himachal Pradesh) and Sikkim. The Consumer Products business was part of the erstwhile Godrej Soaps Limited (GSL) and was demerged into Godrej Consumer Products Limited in April 2001, pursuant to a scheme of demerger approved by the Honble High Court of Judicature, Mumbai, dated March 14, 2001.

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Comparative Financial Analysis

The following are various analysis metrics considered to compare the performance of HUL and GCPL:-

Short Term Investment

Long Term Investment

Short Term Lending

Long Term Lending

Strategies for the Future

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Short Term Investment

Short term investment can be considered as the continual buying and selling of stock of companies, in an effort to have one's money grow faster than the general level of stock prices. Normally investments are done for less than a year. The main aim of Short term investment is to protect the capital by investing in low risk instruments and simultaneously get a return which beats the benchmark. Short term investment includes investment in stocks and other short term debt. They are commonly used by investors to temporarily store funds while arranging for their transfer to another investment vehicle that provides higher returns. The various ratios and factors to be taken into consideration are:1. P/E ratio 2. P/BV ratio 3. EPS 4. Beta Value 5. Share price Though there is no fixed definition for short term we are considering a period of six months here. Observation of the two firms Hindustan Unilever Ltd. and Godrej Consumer Products Ltd. for Short Term Investment is depicted in the table below:-

Company

FY12 41.15

FY11 26.65 27.18 7.71 86.33 10.68 13.44

FY10 24.77 32.48 9.74 226.79 10.09 8.05

FY09 24.44 21.13 6.36 28.87 11.47 6.29

FY08 26.72 21.60 18.96 25 8.12 6.56

P/E Ratio

40.53 6.47 44.17 12.45

P/BV Ratio

EPS 17.76

1)

P/E ratio

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The P/E ratio expresses the relationship between the price per share and the amount of earnings attributable to a single share. i.e., the P/E ratio tells us how much an investor in common stock pays per rupee of current earnings. PE Ratio = Market Value per share / Earning per share What does P/E ratio say? A higher P/E ratio means that investors are paying more for each unit of net income, so the stock is more expensive, that is overvalued, compared to one with a lower P/E ratio.

45 40 35 32.48 30 25 20 15 10 5 0 2008 2009 2010 2011 21.6 26.72 24.44 24.77 21.13 26.65 27.18

40.53 41.15

HUL GCPL

2012

Trend analysis P/E ratios for both the companies are increasing with almost equal rate and the absolute values are also more or less equal. Hence, we cant conclude anything on the basis of this ratio alone.

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2)

P/BV ratio

A ratio used to compare a stock's market value to its book value; it is calculated by dividing the market price of share by the book value per share. Price to Book Value = Market price per share / book value per share What does P/BV say? A lower P/BV ratio could mean that the stock is undervalued. However, it could also mean that something is fundamentally wrong with the company. As with most ratios, be aware that this varies by industry. This ratio also gives some idea of whether you're paying too much for what would be left if the company went bankrupt immediately.
35 32.5 30 25 20 15 9.74 10 5 0 2008 2009 2010 2011 2012 6.36 7.71 6.47 18.96 25.25 20.16 HUL GCPL 23.12 25.22

Trend analysis P/BV ratio of GCPL is 6.46 and it is decreasing but for HUL, it is 25.22 and increasing. So, we can say that GCPL share is under-valued as compared to HUL. This ratio for GPCL is not too low to get tense about returns from investment

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3)

EPS

The earnings per share is a good measure of profitability and when compared with EPS of similar companies, it gives a view of the comparative earnings or earnings power of the firm. EPS ratio calculated for a number of years indicates whether or not the earning power of the company has increased. Earnings per share (EPS) Ratio = (Net profit after tax Preference dividend) / No. of equity shares (common shares)
20 18 16 14 12 10 8 6 4 2 0 2008 2009 2010 2011 2012 8.12 6.29 6.56 8.05 11.47 10.09 13.44 12.45 10.68 HUL GCPL 17.76

Trend Analysis EPS has been increasing for both the companies but GCPL is at a better position since the percentage increase in EPS and the absolute value of EPS is much better as compared to HUL

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4)

Beta Value

Beta () of a stock or portfolio is a number describing the correlated volatility of an asset in relation to the volatility of the benchmark that said asset is being compared to, the benchmark being considered to be financial market. Beta can be estimated for individual companies using regression analysis against a stock market index. It describes how much risk that one can take to get a desirable return or vice versa. What does beta value say? 1. Negative beta, is a rare condition where the price of the stock moves in reverse direction to the market movement. 2. Zero beta, is another rarity, where the price of stock stays same over time irrespective of market movement. This can sometimes happen in sideways moving markets, where no major economic/industry/company news is coming up. 3. A beta of less than 1 means that the security will be less volatile than the market. This is when the stock price moves less in comparison of market. It makes them qualify for low-risk investments, but is not so suitable for short-term trading. 4. A beta of 1 indicates that the security's price will move with the market. This is true for many index-linked stocks and funds. 5. A beta of greater than 1 indicates that the security's price will be more volatile than the market. This is when the stock price movement surpass market movement. These stocks tend to offer better return for high-risk taken, but many of them are less suitable for long-term investing. Very high beta levels may indicate low liquidity causing increase in volatility. Trend analysis Beta value for HUL is 0.389 and for GCPL is 0.27. Since, both of them are less, we cant conclude much on the basis of beta values of two companies.

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5)

Share price

Share price of HUL has increased by almost 35% in the past one year and the present market value of its share is 518.25 while the increase in price of GCPL is by almost 55% with present market value being 690.6. But, in the last 3 months the percentage increase in price is almost the same at 20%. So, for short term nothing significant can be concluded by share price.

Overall Analysis In short term, based on EPS and P/BV, we can conclude that investment is better in GCPL as compared to HUL since returns will be high from GCPL

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Long Term Investment

Long Term Investing refers to the fact that investment is made for a period greater than 1 year. The various factors to be considered are:1. Fixed asset turnover ratio 2. Return on Equity 3. Return on capital employed 4. Operating profit margin 5. Dividend yield ratio 6. Dividend payout ratio Each of these factors has a role to play in the selection of the company for investment. However, the degrees to which they affect the returns vary in response to the other factors as well. Hence, for arriving at a decision for the investment, the entire basket needs to be considered. Following is a brief discussion for each of them:Company FY12 0 D/E Ratio Interest Coverage Ratio 0.09 2796.6 44.17 76.62% ROE 23.94% Dividend per share 7.5 4.75 25.22 P/BV Ratio 6.47 7.71 9.74 6.36 18.96 28.36% 6.5 4.5 23.12 29.98% 6.5 4.25 20.16 30.08% 7.5 4 25.25 98.47% 9 4 32.5 FY11 0 0.18 12238.54 86.33 87.54% FY10 0 0.01 404.94 226.79 85.25% FY09 0.2 0.12 119.5 28.87 121.27% FY08 0.06 0.89 92.3 25 122.91%

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1)

Fixed-asset Turnover Ratio:

The fixed-asset turnover ratio measures a company's ability to generate net sales from fixedasset investments - specifically property, plant and equipment (PP&E) - net of depreciation.

What does FA Turnover ratio say? A higher fixed-asset turnover ratio shows that the company has been more effective in using the investment in fixed assets to generate revenues.
12

10

9.8

7.81 6.09 5.63

7.49 6.26 HUL GCPL

6 4.6 4 4.18 5.35 4.73

0 2008 2009 2010 2011 2012

Trend analysis The ratio is increasing for both the companies but for GCPL, it is increasing at a higher rate as compared to HUL, also, the absolute value for GCPL is higher than HUL. So, GCPL is more efficient of the two

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2)

Return on Equity

It is the amount of net income as a percentage of shareholders equity. Return on Equity = Net Income/Shareholder's Equity What does it say? Return on equity measures a corporation's profitability by revealing how much profit a company generates with the money shareholders have invested. So higher the ROE, better is the performance of the company

140.00% 122.91% 120.00% 100.00% 80.00% 60.00% 40.00% 20.00% 0.00% 2008 2009 2010 2011 2012 30.08% 29.98% 98.47% 121.27%

85.25%

87.54% 76.62% HUL GCPL

28.36% 23.94%

Trend analysis ROE for both the companies are decreasing but for HUL the absolute value is much higher as compared to GCPL. Hence, of the two, HUL is a better option.

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3)

ROCE

It is the ratio that indicates the efficiency and profitability of a company's capital investments. ROCE = EBIT / (Total asset current liabilities) What does ROCE say? ROCE measures a corporation's profitability by revealing how much profit a company generates with respect to the total investment made. So higher the ROCE, better is the performance of the company
160 140 120 100 80 60 40 32.65 20 0 2008 2009 2010 2011 2012 66.03 138.72 118.59 106.78 102.47 93.08 HUL GCPL

35.73

28.43

21.42

Trend analysis ROCE has been decreasing for both the companies but the absolute value of ROCE for HUL is more than 4 times than GCPL, which shows that HUL is performing much better and hence, it is a better option

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4)

Operating Profit Margins

A ratio used to measure a company's pricing strategy and operating efficiency. Operating Profit Margin = Operating Income / Net Sales What does it say? Operating margin gives analysts an idea of how much a company makes (before interest and taxes) on each dollar of sales. When looking at operating margin to determine the quality of a company, it is best to look at the change in operating margin over time and to compare the company's yearly or quarterly figures to those of its competitors. If a company's margin is increasing, it is earning more per dollar of sales. Higher the operating profit margin, the better the performance of the company.
0.2 0.18 0.16 0.14 0.12 0.1 0.08 0.06 0.04 0.02 0 2008 2009 2010 2011 2012 0.127 0.122 0.118 0.136 0.131 0.142 0.128 0.12 0.111 0.175

HUL GCPL

Trend analysis HUL is a better option as its operating margin is high as well as it is increasing from the last year which is not the case with GCPL

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5)

Dividend Yield

A financial ratio that shows how much a company pays out in dividends each year relative to its share price. In the absence of any capital gains, the dividend yield is the return on investment for a stock. Dividend yield is calculated as follows: Dividend Yield = Annual Dividends per share / price per share What does it say? Dividend yield is a way to measure how much cash flow you are getting for each dollar invested in an equity position - in other words, how much "bang for your buck" you are getting from dividends. Investors who require a minimum stream of cash flow from their investment portfolio can secure this cash flow by investing in stocks paying relatively high, stable dividend yields.
4.5 4 3.5 3 2.5 2 1.5 1 0.5 0 2008 2009 2010 2011 2012 1.62 1.23 0.99 3.2 3.1 3.01 4.2

2.7 2.2 1.8 HUL GCPL

Trend analysis HUL is better option since the absolute value of Dividend yield is greater than GCPL but for both the companies dividend yield is decreasing.

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6)

Dividend Payout Ratio

The percentage of earnings paid to shareholders in dividends. Dividend Payout Ratio = Dividends / Net Income What does it say? The payout ratio provides an idea of how well earnings support the dividend payments. More mature companies tend to have a higher payout ratio. This is because they do not retain the earnings for re investing in business.
140 131.8 120 100 80 73.26 60 40 20 0 2008 2009 2010 2011 2012

76.47 74.58

75.2 59.34

71.2

69.99

HUL GCPL

45.19 30.11

Trend analysis HUL is a better option since it doesnt retain much of its earnings for the purpose of expansion as compared to GCPL

Overall Analysis
After considering all the parameters, we can say that HUL is better for long term investment since it provides better dividends as compared to GCPL. Not only that, in terms of ROE, ROCL and operating profit margin, HUL is a better company to invest for the long term.

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Short Term Lending

The analysis of short term will depend on how much returns our investment will give us in the short run. A bank will thus lend only to the company, which is more efficient in running business, and will have higher sales in the near future that will ensure that the loan will be repaid on time. Thus we must analyze why the company is borrowing money and what will be the application of funds. We must find out whether the company will apply the funds to pay back loans (principal or interest) or to raise fixed assets or to increase current assets. For short term lending the primary concern for any bank are the liquidity ratios of the company(s) concerned. So the parameters that we will take into consideration are:1. Current Ratio 2. Receivables Turnover Ratio 3. Inventory Turnover Ratio Company FY12 FY11 FY10 FY09 FY08 0.86 Current Ratio Receivables Turnover Ratio Inventory Turnover Ratio 1.20 27.27 30.17 9.93 7.16 0.88 0.74 24.28 35.1 7.91 8.2 1.01 1.46 29.24 59.25 8.99 7.93 1.32 2.23 41.83 99.37 9.26 9.25 0.85 0.95 31.41 81.10 7.2 5.7

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1)

Current Ratio

A liquidity ratio that measures a company's ability to pay short-term obligations. The Current Ratio formula is:

What does current ratio say?

The higher the current ratio, the more capable the company is of paying its obligations. A ratio under 1 suggests that the company would be unable to pay off its obligations if they came due at that point. While this shows the company is not in good financial health, it does not necessarily mean that it will go bankrupt - as there are many ways to access financing - but it is definitely not a good sign.
2.5 2.23 2

1.5 0.95 1 0.85 0.5

1.32

1.46 1.2 0.88 1.01 0.86 0.74 HUL GCPL

0 2008 2009 2010 2011 2012

Trend Analysis
When we compare the ratios for both the companies, HUL has a lower current ratio as compared to GCPL. The current ratio for HUL is decreasing as well unlike GCPL. This means that GCPL is a better company in paying off its obligations

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2)

Receivables Turnover Ratio

This ratio shows how efficiently the company is making its credit sales and thereby making use of its assets. Receivable Turnover ratio = Sales / Average account receivable What does receivable turnover ratio say? A high ratio indicates the company is doing well at lending credit and collecting debts. A low ratio indicates that company has to look back its credit policies.

120

100 81.1 80

99.37

60

59.25 35.1 41.83 31.41 30.17

HUL GCPL

40

20

29.24

24.28

27.27

0 2008 2009 2010 2011 2012

Trend analysis In the last 5 years, the ratio has decreased for both the companies but it is decreasing at a much faster rate for GCPL as compared to HUL. The absolute value of GCPL is, however, marginally more than HUL. But, according to the trend HUL is doing better at lending credit and collecting debts.

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3)

Inventory Turnover Ratio

This ratio gives number of times inventory is sold i.e. for it is sales to inventory ratio. Inventory turnover ratio= sales/inventory What does Inventory turnover ratio say? High value of this ratio indicates that a lot of inventory is either being sold or there is ineffective buying because of low prices. Low value indicates high inventory which is not good. It shows that sales are not happening.

12

10

9.25 9.26

8.99 8.2 7.93 7.91 7.16

9.93

7.2 HUL GCPL

5.7

0 2008 2009 2010 2011 2012

Trend analysis Inventory turnover ratio of GCPL is low and decreasing from last year but for HUL, it is increasing which shows that HUL is more efficient in utilising inventory Overall Analysis HUL is better at Receivable turnover ratio and Inventory turnover ratio signifying that for providing short term loans, HUL is a better company as compared to GCPL

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Long Term Lending

The main purpose of long term lending is a. Steady return for a long period of time b. Reduce risk The lender generally looks at four ratios apart from the above analysis 1. Debt equity ratio 2. Interest coverage ratio 3. Fixed asset turnover ratio 4. ROCE 5. Gross block

Company

FY12 0

FY11 0 0.17 12238.54 86.33 5.63 6.09 102.47 28.43 3759.62 1461.06

FY10 0 0 404.94 226.79 5.35 4.73 106.78 35.73 3581.76 273.81

FY09 0 0.10 119.5 28.87 7.81 4.18 118.59 32.65 2881.73 266.54

FY08 0 0.83 92.3 25 9.8 4.6 138.72 66.03 2669.08 265.56

D/E Ratio Interest Coverage Ratio Fixed Assets Turnover Ratio ROCE

0.09 2796.6 44.17 6.26 7.49 93.08 21.42

Gross Block

3574.67 1363.43

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1)

D/E Ratio

It is a measure of a company's financial leverage. It indicates what proportion of equity and debt the company is using to finance its assets. D/E = Total liabilities / Net worth What does D/E ratio says? While a lower total debt to equity ratio generally reflects conservative financial policies and mean diluted earnings for equity investors as it probably suggests that the company is not leveraging itself optimally to achieve growth in return on equity funds. A high debt/equity ratio generally means that a company has been aggressive in financing its growth with debt. This can result in volatile earnings as a result of the additional interest expense.
0.9 0.8 0.7 0.6 0.5 0.4 0.3 0.2 0.1 0.1 0 0 2008 0 2009 0 2010 0 2011 0.17 0.09 0 2012 HUL GCPL 0.83

Trend analysis
D/E ratio is low for both the companies and it is decreasing further for GCPL. Since, this ratio is lower for

HUL, so, this company is a better option for long term lending.

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2)

Interest Coverage Ratio

A ratio used to determine how easily a company can pay interest on outstanding debt. The interest coverage ratio is calculated by dividing a company's earnings before interest and taxes (EBIT) of one period by the company's interest expenses of the same period:

What does interest coverage ratio say? The lower the ratio, the more the company is burdened by debt expense. When a company's interest coverage ratio is 1.5 or lower, its ability to meet interest expenses may be questionable. An interest coverage ratio below 1 indicates the company is not generating sufficient revenues to satisfy interest expenses.
14000 12000 10000 8000 HUL 6000 4000 2796.6 2000 92.3 0 2008 25 119.5 2009 28.87 2010 404.94 226.79 2011 2012 86.33 44.17 GCPL 12238.54

Trend analysis Interest coverage ratio of HUL is higher than GCPL and it has increased by almost 3000% and for GCPL, it has increased by almost 90% which clearly tells that HUL will be in better condition to repay interest on loans.

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3)

Fixed Asset Turnover Ratio

The fixed-asset turnover ratio measures a company's ability to generate net sales from fixedasset investments - specifically property, plant and equipment (PP&E) - net of depreciation.

What does FA Turnover ratio say? A higher fixed-asset turnover ratio shows that the company has been more effective in using the investment in fixed assets to generate revenues.

12 9.8

10

7.81 5.35 6.09 5.63

7.49 6.26 HUL GCPL

4.6

4.18

4.73

0 2008 2009 2010 2011 2012

Trend Analysis From the last 3 years, the ratio is increasing for both the companies but the increase in percentage of GCPL as well as absolute value is greater as compared to HUL and hence, GCPL is a better option

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4)

Return on Capital Employed

It is a ratio that indicates the efficiency and profitability of a company's capital investments. ROCE = EBIT / (Total asset current liabilities) What does ROCE say? ROCE measures a corporation's profitability by revealing how much profit a company generates with respect to the total investment made. So higher the ROCE, better is the performance of the company
160 140 120 100 80 60 40 20 0 2008 2009 2010 2011 2012 32.65 66.03 35.73 28.43 21.42 138.72 118.59 106.78 102.47 93.08 HUL GCPL

Trend Analysis ROCE has been decreasing for both the companies but the absolute value of ROCE for HUL is more than 4 times than GCPL, which shows that HUL is performing much better and hence, it is a better option

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5)

Gross Block

The total value of all of the assets that a company owns. Value is determined by the amount it cost to acquire these assets, and it is not decreased to take into account the effects of depreciation.
4000 3500 3000 2500 2000 1500 1000 500 265.56 0 2008 2009 2010 2011 2012 266.54 273.8 1461.06 2669.08 HUL GCPL 1363.43 2881.73 3581.16 3759.62 3574.67

Trend Analysis Gross block for both the companies has decreased between 2011 and 2012. It increased significantly for GCPL in 2010-11 implying that the company has expanded rapidly. But, for now, both the companies seem to be stable. Overall analysis While comparing the two companies, we can see that HUL is better than GCPL for long term lending on parameters like ROCE, Interest coverage which signify that HUL is doing well in business

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Strategy
Short term operations 1) Inventory turnover ratio

This ratio gives number of times inventory is sold i.e. for it is sales to inventory ratio. Inventory turnover ratio= sales/inventory What does Inventory turnover ratio say? High value of this ratio indicates that a lot of inventory is either being sold or there is ineffective buying because of low prices. Low value indicates high inventory which is not good. It shows that sales are not happening.
12 10 8 7.2 6 4 2 0 2008 2009 2010 2011 2012 5.7

9.26 8.99 9.25 7.93 8.2 7.91

9.93

7.16 HUL GCPL

Trend Analysis The inventory turnover ratio is higher for GCPL which shows the high amount of sales are happening in the company and the company is able to sell its inventory at a much faster rate as compared to HUL showing better short term operational efficiency. Over the last 5 years, we notice that both companies have followed a similar trend maintaining inventory. We see that both companies are efficiently their inventory over time and their operational strategy based on inventory is sound.

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2) Days of Inventory: 365/turnover ratio

A financial measure of a company's performance that gives investors an idea of how long it takes a company to turn its inventory (including goods that are work in progress, if applicable) into sales. Days of Inventory = 365/turnover ratio What does it Say? Generally, the lower (shorter) the DSI the better, but it is important to note that the average DSI varies from one industry to another.
140 120 100 80 60 40 20 0 2008 2009 2010 2011 2012 85.8 73.63 69.5 87.17 80.04 89.57 82.84 91.46 71.76 HUL GCPL 122.49

Trend analysis
The days of inventory of HUL are substantially lower as compared to GCPL, which shows that HUL takes lesser time to turn its inventory (including goods that are work in progress, if applicable) into sales, and hence is more operationally efficient than GCPL.

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Long Term Operational Strategy

1) Return on Assets/Assets Turnover Ratio
Return on Assets: An indicator of how profitable a company is relative to its total assets. It is calculated as:

Asset Turnover is the amount of sales generated for every dollar's worth of assets. It is calculated by dividing sales in dollars by assets in dollars. Formula:

What does it say? A high value of ROA or Assets Turnover Ratio measures how efficiently the assets are used in making a profit. ROA
80 74.17 70 60 50 40 30 20 10 0 2008 2009 2010 2011 2012 20.9 16.25 6.61 6.54 9.46 11.84 12.2 47.4 HUL GCPL 26.85

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Asset Turnover
9 8 7 6 5 4.6 4 3 2 1 0 2008 2009 2010 2011 2012 4.18 5.64 6.09 5.63 6.26 7.81

7.49

5.35 4.73

HUL GCPL

Trend Analysis The return on assets as well as the asset turnover ratio is substantially higher in case of GCPL, which shows that the company is able to use its assets more efficiently as compared to the other company i.e, HUL and hence is able to generate more revenues per unit of assets. HULs Return on Assets is marginally increasing over the years, but it is not a significant increase, hence the company should try and utilize its assets more efficiently.

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2) Fixed Assets
A long-term tangible piece of property that a firm owns and uses in the production of its income and is not expected to be consumed or converted into cash any sooner than at least one year's time.
4500 4000 3500 3000 2500 2000 1500 1000 500 0 2008 2009 2010 2011 2012 389.28 550.2 726.74 2727.26 HUL GCPL 2959.14 3667.24 3854.15 3455.14 4185.74 4061.16

Trend Analysis We see that both companies have been increasing their assets over the last 5 years. However, between 2010 and 2011, GCPL increased their assets approximately 5 times. One of the major reasons for the sharp increase in fixed assets between 2010 and 2011 was GCPLs extensive expansion of operations in countries in Africa and Latin America during this period.

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Financial Efficiency
Short Term Financial Strategy
1) Working Capital
Working Capital measures a company's efficiency in its short term financial health. Working capital = Current Assets - Current Liabilities What does it say? A positive working capital denotes that the company is able to pay off its short term liabilities while a negative value means that the company is unable to pay off its short term liabilities.
500 0 -500 -1000 -1183.74 -1500 -2000 -2227.84 -2500 -3000 -2404.23 -1431.33 HUL GCPL -1982.75 104.83 -58.95 2008 -84.47 2009 2010-127.05 -96.67 2011 2012

Trend Analysis The working capital in case of GCPL has been substantially increasing over the years as compared to HUL which shows that the company is able to pay its short term liabilities over time. HULs working capital is negative indicating that company is not able to pay off short term liabilities.

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2) Interest Coverage Ratio

This ratio signifies how easily a company can pay interest on outstanding debt.

What does it say? The lower the ratio, the more the company is burdened by the debt expense. For example, an ICR of less than one signifies that the company is unable to generate sufficient revenues to satisfy interest expenses.
12000 11243.63

10000

8000 HUL GCPL 4000 2636.53 2000 23.07 0 83.09 2008 26.89 116.28 2009 395.13 216.85 2010 82.78 2011 44.17 2012

6000

Trend analysis Interest coverage ratio of HUL is higher than GCPL and it has increased by almost 3000% and for GCPL, it has increased by almost 90% which clearly tells that HUL will be in better condition to repay interest on loans. In case of HUL we see a sharp increase in the ICR from 2010 to 2011. This is due to the steep drop in the interest paid which falls from 6.98 crore to 0.24 crore during this period. From 2011 to 2012 the interest increases from 0.24 crore to 1.24 crore which explains the steep decrease in the ICR.
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Long Term Financial Strategy

1) Sales Growth
Sales Growth of a company is used to find out the rate at which sales grows as compared to the industry. Sales for the Companies
30000

25000 21912.02 20000 18461.08 15000 14912.06 20939.38

24506.4

HUL GCPL

10000

5000 1134.43 2008 1438.9 2009 2084.27 2010

3775.89

4986.61

2011

2012

Trend Analysis As it can be inferred from the graph, the sales for HUL has been rising at a faster rate as compared to GCPL which shows a strong order book and hence higher expectations of growth in the near future.

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2) Long Term Loan

Long-term loan is debt due in one year or more. It appears on a company's balance sheet. For example many banks have term-loan programs that can offer small businesses the cash they need to operate from month to month. Often a small business will use the cash from a term loan to purchase fixed assets such as equipment used in its production process.
450 421.95 400 350 300 272.49 250 200 150 100 50 0 2008 2009 134.59 88.53 62.89 12.4 0 2010 0 2011 0 2012 237.51 HUL GCPL

Trend Analysis

The long term loans in case of HUL have been negligible, whereas in case of GCPL have been fluctuating. GCPL should therefore try and reduce its secured loans. One of the major reasons for the sharp increase in secured loans between 2010 and 2011 was GCPLs extensive expansion of operations in countries in Africa and Latin America during this period.

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3) Unsecured Loan
These are loans that are not backed by any underlying asset. It is high risk for the lenders since there is a chance of default. This generally comes at a high interest rate.
300 277.3 250 262.43 235.24 200 HUL GCPL 100 94 63.01 48 0 2010 0 2011 0 2012

150

50

0 2008 2009

Trend Analysis The unsecured loans in case of GCPL have been significantly higher as compared to HUL which show that the company has to pay huge amounts of unsecured loans which attract a higher amount of interest and hence would affect its profits in the long run. GCPL should therefore try and reduce its unsecured loans. One of the major reasons for the sharp increase in unsecured loans between 2010 and 2011 was GCPLs extensive expansion of operations in countries in Africa and Latin America during this period.

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4) Debt Equity Ratio

A measure of a company's financial leverage calculated by dividing its total liabilities by stockholders' equity. It indicates what proportion of equity and debt the company is using to finance its assets. It is calculated as:

What does it say? A high Debt/Equity ratio generally means that the company is aggressive in financing its growth with debt. This can result in volatile earnings as a result of additional expense. If a lot of debt is used to finance operations, the company could generate more earnings than it would have without the debt. If the earnings are more than the interest on the debts then the shareholders benefit. However, the reverse - when the interest outweighs the expense could lead the company to bankruptcy.
0.9 0.8 0.7 0.6 0.5 0.4 0.3 0.2 0.1 0 0 2008 0.1 0 2009 0 2010 0 2011 0.17 0.09 0 2012 HUL GCPL 0.83

Trend Analysis We notice that over the last three years, HUL is maintaining zero debt.

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5) Interest Coverage Ratio

14000 12000 10000 8000 HUL 6000 4000 2796.6 2000 92.3 0 2008 25 119.5 2009 28.87 2010 404.94 226.79 2011 2012 86.33 44.17 GCPL 12238.54

Trend analysis Interest coverage ratio of HUL is higher than GCPL and it has increased by almost 3000% and for GCPL, it has increased by almost 90% which clearly tells that HUL will be in better condition to repay interest on loans. In case of HUL we see a sharp increase in the ICR from 2010 to 2011. This is due to the steep drop in the interest paid which falls from 6.98 crore to 0.24 crore during this period. From 2011 to 2012 the interest increases from 0.24 crore to 1.24 crore which explains the steep decrease in the ICR.

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6) Fixed Assets Turnover Ratio

A financial ratio of net sales to fixed assets. The fixed-asset turnover ratio is calculated as:

What does it Say? The fixed-asset turnover ratio measures a company's ability to generate net sales from fixedasset investments - specifically property, plant and equipment (PP&E) - net of depreciation. A higher fixed-asset turnover ratio shows that the company has been more effective in using the investment in fixed assets to generate revenues. When companies make these large purchases, prudent investors watch this ratio in following years to see how effective the investment in the fixed assets was.
12 10 8 6 4 2 0 2008 2009 2010 2011 2012 4.6 4.18 5.35 4.73 9.8 7.81 6.09 5.63 7.49 6.26 HUL GCPL

Trend Analysis We notice that the Fixed Assets Turnover Ratio of GCPL has been steadily increasing over the years, and this shows that GCPL has been utilising its fixed assets very efficiently to convert them into sales and in the long run, it will be very beneficial for investors to invest in GCPL. In the case of HUL, we notice that their Fixed Assets Turnover Ratio decreased initially and then picked up in 2011 and 2012. Both companies have very promising long term investment options.

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Altman Model
A predictive model created by Edward Altman in the 1960s. This model combines five different financial ratios to determine the likelihood of bankruptcy amongst companies.

Formula to calculate Altman's Z-Score: z-score = 1.2 a + 1.4 b + 3.3 c + d e where : a = working capital, b = retained earnings, c = operating income, d = sales, e = total assets, f = net worth and g = total debt Altman z-score definition and explanation: The Altman z-score is a bankruptcy prediction calculation. The z-score measures the probability of insolvency (inability to pay debts as they become due). 1.8 or less indicates a very high probability of insolvency. 1.8 to 2.7 indicates a high probability of insolvency. 2.7 to 3.0 indicates possible insolvency. 3.0 or higher indicates that insolvency is not likely. + .6 f g

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16 14 12 11.27 10 8 7.18 6 5.03 4 2 0 2008 2009 2010 2011 2012 5.55 4.7 4.48 HUL GCPL 14.64 13.48 12.19 11.48

Analysis Altman score for both the companies are greater than 3 which means that they both are safe in terms of bankruptcy level. Since, HULs score is much higher than GCPL signifying that it is more safe as compared to GCPL

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Appendix Hindustan Unilever Limited Balance Sheets

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Section C Group 4

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Hindustan Unilever Limited Profit and Loss Accounts

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Section C Group 4

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Godrej Consumer Products Limited Balance Sheets

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Godrej Consumer Products Limited Profit and Loss Accounts

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Source: livemint.com

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