Project Report Of Financial Accounting for Managers On

FINANCIAL ANALYSIS OF HINDUSTAN UNILEVER LIMITED (HUL) Year 2010-11

Prepared By Rupa Deepanju (2012261) Sagar Panchal (2012262) Section E Batch 2012 -14

Course Coordinator Dr. Pawan Jain

1. Overview of the firm

HUL works to create a better future every day and helps people feel good, look good and get more out of life with brands and services that are good for them and good for others. The FMCG markets in India grew in low double digits during the last quarter of 2010-11. As the price increases take effect, mix of growth is being shifted from volume driven growth to balanced growth, driven by both price and volume. The competitive environment remains intense in the FMCG market. Input cost inflation continues to be high and volatile, despite recent corrections in crude and palm oil. With over 35 brands spanning 20 distinct categories such as soaps, detergents, shampoos, skin care, toothpastes, deodorants, cosmetics, tea, coffee, packaged foods, ice cream, and water purifiers, the Company is a part of the everyday life of millions of consumers across India. Its portfolio includes leading household brands such as Lux, Lifebuoy, Surf Excel, Rin, Wheel, Fair & Lovely, Ponds, Vaseline, Lakm, Dove, Clinic Plus, Sunsilk, Pepsodent, Closeup, Axe, Brooke Bond, Bru, Knorr, Kissan, Kwality Walls and Pureit. The Company has over 16,000 employees and has an annual turnover of around Rs. 21,736 crores (financial year 2011 - 2012). HUL is a subsidiary of Unilever, one of the worlds leading suppliers of fast moving consumer goods with strong local roots in more than 100 countries across the globe with annual sales of about 46.5 billion in 2011. Unilever has about 52% shareholding in HUL.

2. Performance
Take a look at what the performance of HUL has been over the past decade, when the Indian market has conferred huge profits to Indian companies and multinationals. Its net sales in 1999 were Rs10,142 crore. By 2005, it was still around Rs10,982.35 crore and last year it reported net sales of Rs20,623 crore. In effect, HUL took a whole decade to double its turnovera compounded annual growth rate (CAGR) of 7% in a country where inflation is at least 7% on an average and is sometimes in double digits. Inflation-adjusted HUL has not grown at all. Of course, HUL has demerged divisions and that is why net sales have been down, but it has also acquired businesses during this period. In 2011-12, HUL reported domestic growth of 19% with home and personal care growing at 20.6% and foods business growing at 10.6%. He also attributed the performance to the companys rural focus. It is expected by 2025, the Indian rural market is expected to grow more than ten-fold to a $100 billion opportunity for retail spending. HULs profit after tax but before exceptional items grew 48% to 855 crore. Net profit, at Rs1,331 crore, grew 112% before accounting for an exceptional income of 607 crore arising from the sale of properties (Gulita in Mumbai and a property in Whitefield, Bangalore).

3. Ratio Analysis
Years Sr no. A 1 2 3 B 4 2010-2011 Ratios Return on investment ratio Return on Assets (%) Return on Invested Capital Return on Net worth (%) Activity/Turnover Ratio Total Asset Turnover Ratio Invested Capital Turnover Ratio Net worth turnover ratio Average Collection Period (Days) Inventory Turnover Ratio Working Capital Turnover Ratio Day's Inventory (Days) Average Credit Period (Days) Liquidity Ratio Current Ratio Acid Test Ratio Solvency Ratio Debt Equity Ratio Debt to total Invested Capital 0.004 0.004 0.200 0.170 0.060 0.058 0.86 0.43 0.84 0.46 0.92 0.51 0.68 0.25 8.31 7.66 9.22 10.53 12.19% 87.55% 87.57% 11.84% 80.67% 85.25% 9.45% 101.23% 121.34% 6.61% 127.20% 122.97% 2009-2010 2008-2009 2007-2008

5 6

7.91 7.37

8.99 6.66

9.26 9.82

9.20 9.53

7 8

17.74 7.91

14.21 8.99

9.68 9.26

11.80 7.2

9 10 11 C 12 13 D 14 15

-14.87 46.14 166.72

-13.91 40.60 179.56

-110.69 39.42 107.14

-7.48 50.69 140.93

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Interest Coverage Ratio Capital Market Ratio Earning per share (Rs.) Book value to market value (%) Dividend Payout Price Earning Ratio Profitability Ratio Gross Profit Ratio (%) Net Profit Ratio (%) Operating Profit Ratio (%) Expenses to Sales ratio (%)

11243.63

395.13

116.28

83.09

10.58

10.1

11.46

8.73

18 19 20 F 21 22 23 24

12.19% 71.20% 26.9

11.84% 75.20% 23.63

9.45% 76.47% 20.72

6.61% 131.80% 24.5

12.41 11.56 13.53 88.94

14.7 12.29 15.74 87.62

13.5 12.09 14.46 85.46

15.86 12.58 14.95 87.44

a. Return on Investment Ratio

140.00% 120.00% 100.00% Return on asset 80.00% 60.00% 40.00% 20.00% 0.00% 2010-2011 2009-2010 2008-2009 2007-2008 Return on invested capital Return on Net worth

HULs return on assets increased sharply from 6.61% to 12.19% over the four years from 2007 to 2011 owing to the increase in the profit after tax (PAT) from Rs 1769.06 Cr to Rs 2305.97 Cr. During these years, the Supply Chain team of the company worked on a strong Cost Effectiveness Programme to deliver savings throughout the supply chain, by various means including identification of further opportunities for waste elimination. This has facilitated the business to achieve a significant cost
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reduction (around 6% of supply chain costs), the highest ever in the past and also neutralised the impact of cost inflation on inputs such as Palm oil, laundry chemicals, packaging and freight cost. Return on invested capital plummeted from 127.20% (2007-08) to 80.67% (2009-10) mainly because the company achieved the zero loan-funds status by then. The ratio increased in 2010-11 to 87.55% due the aggressive cost effective programme which came into full effect during this financial year making the company more profitable. Return on net worth or return on equity of more than 100% in year 2007-08 and 200809 shows the stability of the FMCG firm in spite of the economic downturn. Companys efficiency in utilising investor money brought them institutional and retail investors. In 2009-10 companys ROE declined sharply to 85.25% possibly because it could not find opportunities that would yield higher returns as the managers would have already invested in such projects. In 2010-11, ROE stood at 87.57% ; the rise can be attributed to the cost effective programme mentioned above.

b. Activity/Turnover Ratio:
12.00 10.00 8.00 6.00 4.00 2.00 0.00 Total Asset Turnover Ratio Invested Capital Turnover Ratio Net Worth Turnover Ratio Inventory Turnover Ratio

0.00 -20.00 Days -40.00 -60.00 -80.00 -100.00 -120.00

200.00 150.00 100.00 50.00 0.00 Avg. Credit Days Year Avg. Collection Period Day's Inventory

Working Capital Turnover Ratio

Total Asset Turnover Ratio showed modest decline from 10.53 in 2007-08 to 7.66 in 2009-10 owing to a significant rise in current assets, current liabilities and investment by the company but only 1.4% growth in net sales (comparing with the un-audited
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2008-09 figures instead of the 15-months audited figures). Food price inflation was a major cause of worry in these years (9.9% WPI). Food inflation, along with firming up of the global commodity prices, spilled over into prices of domestic commodities and services as well with the overall consumer inflation rate hovering at over 15% for several months. In 2010-11, the ratio improved to 8.31. Invested capital turnover ratio of HUL has shown very slight changes over the years with the ratio being 9.20 in 2007-08 declining to 7.91 in 2010-11; prevalent inflation and economic downturn could be a probable reason which affected the sales of the company to some extent. Net Worth turnover ratio also fell from 9.53 in 2007-08 to 6.66 in 2009-10. Inventory turnover ratio indicates the efficiency of a firms inventory management and also shows the rate at which stocks are converted into sales and then into cash. High inventory ratio is preferable for consumer goods. Here, the constantly declining ratio shows that HUL is experiencing poor sales and also excess inventory due to inflationary pressures. Working capital turnover ratio was -7.481 in 2007-08 to a sharp fall to -110.689 next year. Negative working capital ratio indicates that the activities are not generating enough revenue to cover their expenses. Ratio improved in 2009-10 and thereafter. Average collection period rose from 11.5 days (2007-08) to 17.5 days in 2010-11. Average credit period for HUL has been historically high; it stood at 166 days in 2010-11. The company tries to extract greater amount of credit from its suppliers. Financing HUL operations using suppliers funds results in lower costs for the company but the cost for the overall chain is higher because more expensive funds are used in managing the supply chain. The FMCG giant could reduce their inventoryholding period measured by Days inventory ratio from 50.69 days to 46.14 days. c. Liquidity Ratio:
1 0.9 0.8 0.7 0.6 0.5 0.4 0.3 0.2 0.1 0 2010-2011 2009-2010 2008-2009 2007-2008 Current Ratio Acid test Ratio

Current ratio for HUL has been less than 1 since 2007 which means company has shortage of funds to meet the short-term obligations. The ratio rose from 0.68 in 200708 to 0.86 in 2010-11. Acid test ratio has also been less than 1 which is not a satisfactory result from a FMCG giant like HUL. The ratio was 0.43 in 2010-11.

d. Solvency Ratio:
0.25 0.20 0.15 0.10 0.05 0.00 Debt to Total Invested Capital Debt Equity Ratio

Intrest Coverage Ratio

12000 10000 8000 6000 4000 2000 0

Intrest Coverage Ratio

Debt equity ratio declined from 0.2 in 2008-09 to zero in 2010-11 due to decrease in long term liability. The lower the debt equity ratio, the higher the degree of protection enjoyed by the creditors. The ratio indicates the extent the use of financial leverage; a low ratio indicates that the company is making little use of leverage and is too conservative. On similar lines, debt to total invested capital kept declining. Interest coverage ratio of the company made huge strides and reached 11243.63 in 2010-11 from 83.09 in 2007-08. This was mainly because the companys interest charges dropped down sharply.

e. Capital Market Ratio:

Earning per Share

15 10 5 0 Earning per Share 30 20 10 0

Price Earning Ratio

Price Earning Ratio

140.00% 120.00% 100.00% 80.00% 60.00% 40.00% 20.00% 0.00%

Book Value to Market Value Dividend Payout

Earning per share fell down after 2008-09 from Rs 11.46 to Rs 10.58 in 2010-11 which is not a good sign as the ratio indicates the earning power of the company. Book value to market value increased from 6.61% (2007-08) to 12.19% (2010-11). Ratio exceeding 1 shows that the company has contributed to the creation of wealth to the society. Dividend payout ratio decreased sharply over the four years from 131.80% in 2007-08 to 71.20% in 2010-11. The lower the ratio, higher would be the retained earnings which means higher will be the amount of earnings ploughed back to the business and thus, stronger financial position of the company. Price earning ratio for HUL increased from 24.5 (2007-08) to 26.9 in 2010-11 which indicates the increasing faith of market in HULs future.

f. Profitability Ratio
100 90 80 70 60 50 40 30 20 10 0

Gross Profit Ratio Net Profit Ratio Operating Profit Ratio Expenses to Sales Ratio

Year

Gross profit margin has shown a fluctuating trend in last five years. Margin was 15.86% in 2007-08 and fell to 12.41% in the financial year 2010-11. Net profit and operating profit also showed a slight declining trend. All these trends can be attributed to HULs raw material expenses, purchase of goods and other expenditures are very high.
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4. Revenue Generating Activities (Main Business) of the company

Acceleration in innovation, with almost 35% of turnover coming through innovations. As a result, growth was broad-based across core categories as well as new categories. This growth was delivered in the face of significantly enhanced competitive intensity, with marketing and trade investments also being maintained at competitive levels throughout the year. Company rolled out one of the most ambitious cross-category rural marketing efforts through Khushiyon Ki Doli programme which touched almost 25 million consumers. A robust value analysis and cost savings programme enabled improve margins, thereby driving profit growth ahead of turnover growth. The business maintained high levels of customer service and product quality, and rationalised working capital levels, thereby improving cash generation. Company launched a new model, Pureit Marvella. This is being marketed as Indias first fully automatic purifier, as consumers do not need to start, stop, fill or wait to pour water out of it. These initiatives have led to sustained turnover growth with improved margins, in line with business plans. In line with this strategy, the business has started inducting right profile business partners (who are capable of buying and selling premium products) into the business and launched new innovations which serve to differentiate the business in the premium Beauty & Wellness space, such as Aviance Perfect Radiance Beauty Capsules and Serums. This re-engineering should help in driving the top-line in a profitable manner, going forward. The on-shelf availability was supported with an extensive merchandising and visibility programme. The programme has tripled the scale of operations, and is significantly more reliable, well-managed and measurable, thus improving the in-store presence of Companys products. Project Shakti, 45,000 Shakti entrepreneurs operating in 135,000 villages, serving nearly 100 million consumers. The revenues generated are now very considerable and margins are healthy. Company had also embarked on an enormous coverage expansion project, in rural and urban businesses. With the help of geo-spatial analysis, potential markets were identified. The c o v e r a g e expansion was well-supported b y the required infrastructure and the project exceeded its ambition. The urban coverage was increased by 20%, while the rural coverage was tripled. Today, Company has more than 1.5 million outlets under direct coverage, doubling the coverage in
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the last two years. By the end of 2010, there were more than 23,000 Shaktimaan, and the Shakti programme had spread to an astounding 5,00,000 outlets, adding another dimension to Companys distribution and contributing to tripling the rural footprint. On the back of strong R&D initiatives, a number of new products were launched successfully in the market in 2010-11. In Skin Care, Vaseline Men range with moisturising and skin lightening benefits was launched with distinctive packaging and formats. Ponds Gold Radiance range and Lakm Perfect Radiance range of skin care products were introduced during the year. Dove and Sunsilk hair conditioners were launched to meet the needs of different segments of the market for hair care. Lifebuoy soap and Close-Up toothpaste were re-launched with new, distinctive benefits.

5. Growth Drivers for the products of the Company

Home & Personal Care Business (HPC)
During the year, the HPC business saw double digit volume growth and a value growth of 9.8%. Rural m arket s present a tremendous growth opportunity considering relatively lower penetration in these markets. There w a s acceleration in innovation, with almost 35% of turnover coming through innovations. The impact of cost inflation was felt in inputs such as Palm oil, laundry chemicals, packaging and freight cost. The business was managed dynamically with increased frequency of cost and pricing review, and aggressive cost saving programmes, which helped to minimise price impact.

Soaps and Detergents

While there was strong volume growth in the Soaps and Detergents category, value grew by 6.1% due to price corrections taken in laundry business in the early part of 2010. During the year, the Company rolled out Comfort, the fabric conditioner, following its successful test market in the South. Margins were under pressure due to rising input cost prices, and price increases were initiated in the latter part of the financial year. The Companys cost-effective programmes delivered well to neutralise part of the impact. Personal Wash category recorded good growth during the year. This was driven through innovations across the portfolio (Re-launch of Lifebuoy and Hamam, launch of Lux variants) backed by strong micro marketing and market development. Through strong use of market mix modeling and focus on costeffectiveness, the Company was able to grow the category, despite stiff competition and volatile commodity costs.

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Personal products
The Personal P ro du ct s category g r e w by 15.7% during the year. Hair Care continues to be an attractive category with high volume growth, driven through increased consumption and value growth through premiumisation. Company had a strong year, strengthening its position by gaining share across shampoos and conditioners. The Skin Care category holds very strong potential as the country becomes more affluent. In this context, the category delivered strong double digit growth, led by a very powerful innovation programme and strong market development efforts. Deodorants business continued to witness growth. During the year, Company strengthened its position in anti-perspirants category with the launch of Sure brand both in roll-on and aerosol spray format. Company continued to drive new innovations across Dove and Axe led by Go Fresh range of Dove and launch of Axe Musicstar Campaign.

Foods
The Foods business has delivered strong double-digit growth across the portfolio during the year. Consumer and Customer needs have been translated into many relevant and successful innovations in beverages, ice creams and packaged foods segments. Company has continued its focus on micro-marketing initiatives in core categories to increase consumption and penetration.

Export Business
The exports business continued to focus on growth of profitable turnover during the year. Despite a sluggish recovery in most overseas markets, turnover grew by 9.3%. A robust value analysis and cost savings programme enabled improve margins, thereby driving profit growth ahead of turnover growth. The business maintained high levels of customer service and product quality, and rationalised working capital levels, thereby improving cash generation.

Water
Pureit is a unique in-home drinking water purification system that offers protection to children and families from waterborne diseases. Pureit has a special Germ Kill Kit that removes Also during the year, Company launched a new model, Pureit Marvella. This is being marketed as Indias first fully automatic purifier, as consumers do not need to start, stop, fill or wait to pour water out of it. These initiatives have led to sustained turnover growth with improved margins, in line with business plans.

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Beauty and wellness

Lakme Lever Private Limited (LLPL), a wholly owned subsidiary of HUL, expanded the network of Lakm Beauty Salons during the year with the opening of 11 Company owned and managed salons, along with 18 franchisee salons.

6. Areas covered in HULs Accounting Policies:

Accounting policies covered are revenue recognition, expenditure, fixed assets, goodwill and other intangible assets, impairment of assets, sundry debtors & loans & advances, provisions, taxes on income, foreign currency translation, operating leases, segment reporting.

7. Financial Health of HUL

a. Shareholders(Present & Potential)
Of late, an increase in roic has been noticed due to increase in companys profit margin owing to the cost effective programmes implemented. RONW for HUL though has declined sharply over the years, it still stands strongly in the FMCG market. Net worth turnover ratio, debt equity ratio and debt to total invested capital have declined but they are still comparable to the industry average. What present shareholders would be interested to look into would be ROE (or RONW), EPS, book value to market value ratio, dividend payout ratio and P/E ratio. All these ratios suggest a financially sound position HUL in the industry. Also, the companys financial performance is very keenly observed by the potential shareholders given competitive RONW, debt equity ratio and debt to invested capital company has invested in brand innovation and augmented their distribution and supply chains over the past three-four years, and these will have a positive bearing on its performance in the next two-three years.

b. Managers (Efficiency)
As a manager, there are certain ratios, which do not specifically look at profits. These ratios will measure performance and health of the organization. Trend of the ROA is from 2007-08 to 2010-11 is increasing continuously. So, company is earning more money on less investment. RONW, from 2007-08 to 2010-11 had declined from 127% to 87%. That is negative side for the company to generate capital and get money to invest in new venture. Total Asset Turnover Ratio (TATR), had declined from 10.53 to 8.31. so, companys utilization of asset to manufacture products is low, ultimately its efficiency is low. Avg. Collection period for the company had increased from 12 to 18 days, which shows uncertainty of company to turn its receivables into cash. Inventory Turnover Ratio, from 2008-09 to 2010-11, has decreased. From figures poor sales and excess inventory levels. Working Capital Turnover Ratio (WCTR), Negative working capital ratio indicates that the activities are not generating enough revenue to cover their expenses. Days
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Inventory, From 2008-09 to 2010-11, it has increased or improved. So, company is converting its inventory into cash at fast pace. Avg. Credit period, has increased from time. This situation enhances the credit worthiness of the company. Companys Current Ratio, is not very trust worthy. As liabilities are more then assets, company is not very safe in its day-to-day obligations. Overall company is not very efficiently operated and needs to be worked upon inventory and liabilities part.

c. Lenders (Short Term & long Term)

Lenders considering loans to a business are primarily interested in the liquidity ratios of the company which indicate companys ability to repay short-term debt. The liquidity ratios i.e current ration and acid test ratio for HUL are less than 1 which is satisfactory from the lenders point of view as this shows that company does not have enough current assets to meet the payment schedule of current liabilities with a margin of safety. Acid test is considered to be a better indicator of liquidity of a company because inventory, which is the least liquid of all the components of current asset, is deducted from it. Further, low debt equity and debt to invested capital ratios of HUL is seen financially good as higher these ratios, debt portion would have been higher and a large part of the profit may go to pay debt. Overall, for short term and long term lenders, HULs performance can be seen as satisfactory.

8. Major Expense heads for the company Major Expense Heads

Advrtising and sales promotion (Rs. Cr) 2764.23 2423.04 2130.91 1422.89 1045.15 1136.68 874.01 731.41 Carriage and freight (Rs. Cr)

2010-2011

2009-2010

2008-2009

2007-2008

As shown in the graph, two major expense heads for the company are advertising & sales promotion and carriage & freight. So, company is spending good amount of
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money on selling and distribution expenses of product. Expense on Advertising and sales promotions, as can be seen in graph, constantly increases from 2007-08, it was 10.37% of net sales and in 2010-11 it reached to 14.25% of net sales. So, this expense has been one of the margin eaters for HUL. Expense on Carriage and Freight, in 2007-08 to 2008-09 increased substantially then came down to 874.01 Cr. In 2009-10 and again increased to 1045.15 Cr. In 2010-11. So, carriage and freight expenses are more of a fluctuating kind of and concern for the company.

9. Cash Flow Analysis

HULs growth did not come without a price, as growing the business took precedence over everything else. Not only did margins get affected, as seen from its interim results, but its cash flow from operations also declined in 2010-11 after seeing a surge in last four years. HULs operating profit before working capital changes fell by 2%, but working capital requirements rose during the year. Receivables and inventories increased while payables fell.The net result was a 39% fall in its cash from operations. This is partly a base effect, as the previous years cash flow saw a substantial jump. The focus on volume growth in 2010-11 could explain higher stocks with the company, and better terms to trade channels. A fall in payables could be due to stocking up on materials to protect from an expected rise in prices. Since margins are under threat, a company may prefer lower costs to better credit. At around Rs1,900 crore, HULs net cash from operations is still relatively healthy and adequate for its needs. Net cash generated from investing activity also showed a huge decline in 2010-11 due to significant purchases and sales of investment. The company invested huge amount in the supply chain cost effectiveness programme and R&D activities. However, this saw great rise in the preceding four years. 2008-09 saw a huge decline in net cash generated from the financing activities owing mainly to the repayment of the borrowings. Further, there was not so significant trends in the financing area, it increased. Hence, overall net cash and cash equivalent recovered to some extent in 2010-11 after a tremendous fall in 2009-10 due to large negative cash outflow in investing and financing area.

10.

Issues covered in MDA

Indian current economic scenario and FMCG market condition. Performance of businesses of HUL like Home & Personal care Business, Soaps & Detergents, Personal products, Foods, Export Business, Water purifier, Hindustan Unilever Network, Beauty & wellness. Different customer management initiatives like PROJECT SHAKTI. Supply chain progress by implementing SAP and enhanced TPM.
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Companys R&D and Innovation planning in Health and Hygiene, Laundry, Skin Care, Water Purification, Tea, Ice Cream and Naturals segments. Details of expenditure on R&D and Innovation. Companys stance on Environment, safety, Health and Energy Conservation. Its focus on the vision of being an Injury Free and Zero Environment Incident organisation. Company has adopted a progressive and pro-active stance on environmental issues like education of Green House Gases (GHG), Water conservation and Waste reduction across the value chain. steps taken to reduce the CO2 emission from its operations significantly. Human Resource agenda of HUL, is widely acclaimed for its people development practices and has further reinforced its position in this area in 2010-11. Information Technology area, The enterprise-wide SAP platform forms the backbone of IT and encompasses all core business processes in the Company and for collaboration with our suppliers and customers. Finance and accounting, Companys continued focus on cash generation resulted in a strong operating cash flow during the year; driven by good business performance, efficiencies and cost savings across the supply chain and greater focus on working capital management. Employee Stock Option Plan (ESOP) Corporate Governance in that Rick and internal adequacy, Outlook and Cautionary Statement. Subsidiary Company Corporate Social Responsibility, Companys vision is to increase the positive impact in the social agenda by improving health and well being, reduce the environmental impact from greenhouse gases, water and waste and work towards prosperity of India and business by enhancing livelihoods amongst farmers through sustainable sourcing and expanding our small distributor model. The Unilever Sustainable Living Plan (USLP) has three significant outcomes by 2020: Help more than a billion people take action to improve their health and well-being, Halve the environmental impact of the making and use of Unilever product and Enhance the livelihoods of thousands of people in Unilevers supply chain Board of directors and Management Committee Auditors Appreciations and acknowledgement

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References

Hindustan Unilever Limited - http://www.unilever.com HUL Information - http://economictimes.indiatimes.com/hindustan-unileverltd/stocks/companyid-13616.cms HUL Information http://www.moneycontrol.com/india/stockpricequote/personalcare/hindustanunilever/ HU

About HUL Net - http://www.business-standard.com/india/news/hul-net-jumps-112to-rs-1331-cr-in-apr-jun/179777/on

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