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INDUSTRY OVERVIEW

The Fast Moving Consumer Goods (FMCG) sector is the key contributor and the fourth
largest sector of the Indian economy. This fourth largest sector of Indian economy provides
employment to more than 3 million people which accounts for approximately 5% of the total
factory employment in the country. These products are daily consumed by each and every
strata of the society irrespective of social class, income group, age group etc. The consumer
durables market is expected to reach US$ 12.5 billion in 2015 and US$ 20.6 billion by 2020.
Urban markets account for the major share (65 per cent) of total revenues in the consumer
durables sector in India
FMCG sector is more lucrative because of low penetration levels, well established
distribution network, low operating cost, lower per capita consumption, large consumer base
and simple manufacturing processes for most of products resulting in fairly low capital
investments.

GROWTH OF FMCG

The FMCG sector has grown at an annual average of about 11 per cent over the last decade.
The overall FMCG market is expected to increase at (CAGR) of 14.7 per cent to touch US$
110.4 billion during 2012-2020, with the rural FMCG market anticipated to increase at a
CAGR of 17.7 per cent to reach US$ 100 billion during 2012-2025.Food products is the
leading segment, accounting for 43 per cent of the overall market. Personal care (22 per
cent) and fabric care (12 per cent) come next in terms of market share.

RURAL & URBAN TREND

Rural set to rise

Rural areas expected to be the major driver for FMCG, as growth continues to be high in
these regions. Rural areas saw a 16 per cent, as against 12 per cent rise in urban areas. Most
companies rushed to capitalise on this, as they quickly went about increasing direct
distribution and providing better infrastructure. Companies are also working towards
creating specific products specially targeted for the rural market.
The Government of India has also 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 given a boost to rural purchasing power.

Hence rural demand is set to rise with rising incomes and greater awareness of brands.

Urban trends

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.

TOP COMPANIES
According to the study conducted by AC Nielsen, 62 of the top 100 brands are owned by
MNCs, and the balance by Indian companies. Fifteen companies own these 62 brands, and 27
of these are owned by Hindustan UniLever.

The top ten India FMCG brands are:


1. Hindustan Unilever Ltd.
2. ITC (Indian Tobacco Company)
3. Nestl India
4. GCMMF (AMUL)
5. Dabur India
6. Asian Paints (India)
7. Cadbury India
8. Britannia Industries
9. Procter & Gamble Hygiene and Health Care
10. Marico Industries

GOVERNMENT INITIATIVES
In the Union Budget 2016, the government has announced various tax sops and duty cuts for
intermediary products to help increase local manufacturing and reduce import dependency.
The government removed duties on various items such as components for microwaves, LCD
fabrication units, charger, battery, wired speaker, headsets, broadband modems, set-top boxes
and CCTV camera. Depending on the product category, various duties such as special
additional duty, countervailing duty and basic customs duty have been reduced in the range of
four to 12.5 per cent.
Union Cabinet reforms like implementation of the Goods and Services Tax (GST) and
Seventh Pay Commission are expected to give a boost to consumer durable sector in India
during 2016.

ROAD AHEAD

The food services market in India is expected to expand at a CAGR of over 12 per cent
through 2020, primarily driven by increasing disposable income, changing lifestyle, and
changing tastes and preferences of consumers. Another major factor propelling the demand

for food services in India is the growing youth population, primarily in the countrys urban
regions. India has a large base of young consumers who form the majority of the workforce
and, due to time constraints, barely get time for cooking.

Research firm Nielsen projected that rural Indias FMCG market will surpass the US$ 100
billion mark by 2025. Online portals are expected to play a key role for companies trying to
enter the hinterlands. The Internet has contributed in a big way, facilitating a cheaper and
more convenient means to increase a companys reach.

FACTS ABOUT FMCG INDUSTRY:


Overall FMCG market expected to expand at a CAGR of 20.6 per cent to USD103.7
billion during 2016F20F.
Total consumption expenditure to reach nearly USD3600 billion by 2020 from
USD1411 billion in 2014.
The rural FMCG market expected to increase at a CAGR of 18.1 per cent to USD100
billion during 201525F. The overall rural FMCG consumption stands at USD18.92
billion in 2015.
The modern retail market is expected to grow from USD60 billion to USD180 billion
during 2015-2020F.
Indias middle income population estimated to reach 267 million by 2016 from 160
million in 2011.
Rural Indias per capita disposable income is estimated to rise to USD631 in 2020
from USD516 in 2015E.

INDUSTRIAL ANALYSIS
FMCG has three market segments

FMCG

Food &
Beverages (18%)

Health Care(32%)

Household &
Personal
care(50%)

1) No of television sets are driving the companies to target them with customized
advertisements Food & Beverages:

Health beverages, staples/cereals, bakery

products, snacks, chocolates, ice cream, tea/coffee/soft drinks, processed fruits and
vegetables, dairy products, and branded flour
2) Health Care: OTC products and ethical
3) Household & Personal Care: Oral care, hair care, skin care, cosmetics/deodorants,
perfumes, feminine hygiene and paper products, Fabric wash, household cleaners

Retail market in India is estimated to reach USD1 trillion by 2020 from USD600
billion in 2015, with modern trade expected to grow at 20 per cent per annum this is
likely to boost revenues of FMCG companies

REASONS FOR GROWTH

a) Purchase Pattern Shift: Consumers are evolving their purchase pattern by


demanding from need based product to want based product
b) Youth Factor: The young generation is looking beyond the utility aspect of the
product. They have now more say about the brand and the lifestyle associated with the
product. Such trending youth of India are ready to explore different categories of the
product
c) Globalization : With the advent of globalization large no of MNCs are entering into
Indian market and offering wide varieties of product, generating employment, raising
standard of living and increasing the purchasing power of consumer. Thereby bringing
boom to the Indian FMCG industry.
d) Changing Lifestyle: consumer lifestyle is continuously evolving. . On the other hand
consumers are buying products which matches up with their living standard, class and
which are acceptable in the culture. Middle income women have become more
conscious of their looks and they are they are happily willing to spend more on their
lifestyle

e) Growing Awareness: Rural demand is set to rise with rising awareness. Growing
television sets in rural areas have paved the way for marketers to reach to them
although the impact of such televisions are smaller but such increasing

FOOD AND PERSONAL CARE MAKE UP TWO-THIRDS OF REVENUES

Household and Personal Care products are the largest FMCG segment, constituting
around 50 per cent of the total market, followed by health care products (32 per cent)
In 2015-16, the market for packaged atta reached USD1,2 billion and expected to
reach USD2.5 billion in 2019-20

In 2015, biscuits market is estimated to be around USD4.1 billion. Britannia has 28


per cent market share in terms of value.
Soft drinks market in India reached around USD10.64 billion in 2015. In 2015,
carbonated drinks stood at USD4.09 billion and fruit juice market stands at USD1.31
billion

THE URBAN MARKET ACCOUNTS FOR A MAJOR CHUNK OF REVENUES

The urban segment is the largest contributor to the sector, accounting for around 65
per cent of total revenue and had a market size of around USD20.74 billion in 2015
Semi-urban and rural segments are growing at a rapid pace; they currently account for
35 per cent of revenues
In the last few years, the FMCG market has grown at a faster pace in rural India
compared with urban India
FMCG products account for 50 per cent of total rural spending

RURAL SEGMENT

In 2015, rural India accounted for more than 40 per cent of the total FMCG market.
Total rural income, which is currently at around USD572 billion, is projected to reach
USD1.8 trillion by FY21.
Indias rural per capita disposable income is estimated to increase at a CAGR of 4.4
per cent to USD631 by 2020.
As income levels are rising, there is also a clear uptrend in the share of non-food
expenditure in rural India.

SALES OF TOP FMCG COMPANIES

Consumer products manufacturers ITC, Godrej Consumer Products Limited (GCPL),


Dabur and Marico reported healthy net sales in FY15 and F16.
Aggregate financial performance of the leading 10 FMCG companies over the past
eight quarters displays that the industry has grown at an average 16-21 per cent in the
past two years.
ITC (FMCG) has generated highest revenue till FY16.

MARKET SHARE OF COMPANIES IN A FEW FMCG


CATEGORIES

PORTERS FIVE FORCES ANALYSIS

COMPETITIVE RIVALRY
Private label brands by retailers are priced at a discount to mainframe brands limits
competition for the weak brands
Highly fragmented industry as more MNCs are entering.

THREAT OF NEW ENTRANTS


Huge investments in setting up distribution network and promoting brands
Spending on advertisements is aggressive

SUBSTITUTE PRODUCTS
Presence of multiple brands
Narrow product differentiation under many brands
Price war
BARGAINING POWER OF SUPPLIERS

Big FMCG companies are able to dictate the prices through local sourcing from a
fragmented group of key commodity suppliers.

BARGAINING POWER OF CUSTOMERS


Low switching cost induces the customers product shift
Influence of marketing strategies
Availability of same or similar alternatives

PESTEL ANALYSIS ON FMCG INDUSTRY:Pestel analysis is a tool to understand the environment in which business operates, & the
opportunities & threats that lie within it. By understanding the environment in which it
operates, it can take advantage of the opportunities & minimizing the threats. Specifically
PESTEL analysis is useful tool for understanding risks associated with markets growth or
decline, & directing business to grow.
P Political factors
E Economic factors
S Socio-cultural factors
T Technological factors
E Environment factors
L Legal factors
A PESTEL analysis is a measurement tool, looking at all the external factors of the
organization. It is often used within a strategic SWOT analysis (strength, weaknesses,
opportunities & threats analysis).

POLITICAL

Tax Structure: Complicated tax structure, high in direct tax and changing tax policies
are challenges for this sector. But due to GST the cost of the FMCG products is
going to come down.
Infrastructure Issues: Performance of FMCG sector is very much dependent on
government spending on Agricultural, Power, and Transportation Infrastructure. To
address this issue the government has set an ambitious target of spending $1 trillion
on infrastructure .
Regulatory Constraints: Multiplicity permits and licenses for various states,
prevailing outdated labour laws, and cumbersome and lengthy export procedures are
major constraints.
Policy framework: FDI into Retail sector (single-brand & multi-brand retail),
License rules in setting up of Industry, Changes in Statutory Minimum Price of
commodities are barriers for growth of this sector.

ECONOMICAL
GDP Growth: Growth of FMCG industry is consistent with the Indian economy. It
has grown by 15 % over past 5 years. It shows good scope for this sector in near
future.
Inflation: Inflationary pressures alter the purchasing power of consumer which Indian
economy was facing in recent years. But due to decrease in inflation the spending
capacity of Indian consumer has increased to a larger extent.
Consumer Income: Over the past few years, India has seen increased economic
growth. The GDP per capita income of India increased from 797.26 US dollars in
2006 to 1262.4 US dollars in 2014. It resulted in increase of consumer expenditure
Private Consumption: The Indian economy, unlike other economies, has a very high
rate of private consumption (61%).

SOCIAL
Change in consumer Profile: Rapid urbanization, increased literacy, increase in
nuclear families and rising per capita income, have all caused rapid growth and
change in demand patterns, leading to an explosion of new opportunities. Around 45

per cent of the population in India is below 20 years of age and the young population
is set to rise further.
Change in Lifestyle: In past decade changes are taking place in consumption pattern
of Indian consumer with more spending on discretionary (52%) than necessities (e.g.
food, clothings). In last decade the apparel, footwear and healthcare segments have
registered highest growth whereas essentials such as cereals, edible oil, fruits and
vegetables shown decline9.
Rural focus: As market is getting saturated, companies are focusing on rural area for
penetration by providing consumers with small sized or single-use packs such as
sachets.

TECHNOLOGY
Effective use of technology is seen only in leading companies like HUL, ITC etc.
E- Commerce will boost FMCG sales in future. More than 150 million consumers
would be influenced by digital by 2020 and they will spend more than $45 billion on
FMCG categories -CII
ENVIRONMENTAL FACTORS
Environmental issues: Global warming is one of the major issue now-a-days as
external factor is becoming a significant issue for firms to consider. Steps such as
CSR & sustainable development is helping to tackle this issue
Environmental regulations: Various regulations have been declared by government
to safe guard the environment. For example- no company should through its waste in
rivers.

LEGAL FACTORS
Employment law: Employment law provides equal opportunities to every citizen to
work & earn his livelihood. It provides equal opportunities to every citizen.
Consumer protection: This law helps to protect the rights of consumers & he can file
a case against seller if he fined that he is cheated.

Industry-specific regulations: These laws are related to industry for example- no


industry can establish in between cities i.e. it should be outside the cities.

SWOT analysis of this sector is carried as follows:


(i) STRENGTHS:
Well-established distribution network extending to rural areas.
Strong brands in the FMCG sector.
Low cost operations
(II) WEAKNESSES:
Low export levels.
Small scale sector reservations limit ability to invest in technology and achieve
economies of scale.
Several "me-too products.
(III) OPPORTUNITIES:
Large domestic market.
Export potential
Increasing income levels will result in faster revenue growth.
(IV) THREATS:
Imports
Tax and regulatory structure
Slowdown in rural demand

SENSITIVITY TO BUSINESS CYCLE

Inflation: High food inflation has an adverse effect on the FMCG industry. People
will spend less money on discretionary items which will hit the FMCG industry. The
food inflation is very high around 12%, during 2010 -2013 and the raw material cost
has increased up to 15 to 20 per cent during that period. The operating margins which
are typically about 20 per cent in the last few years have seen a drop to almost 16 per
cent. FMCG is also dependent on the monsoons. A good monsoon will not give any
inflation worries and also increases the consumption power creating demand for hair
oil, biscuits, soaps, shampoos, laundry, and toilet soaps. But coming and stable
inflation figure of around 6% and good monsoon this year is bringing hope for the
revival of this sector.
Interest Rates: As many companies are taking debt for their daily operations, thus
increase in interest rate will have adverse effect on the profitability of FMCG
companies. Again with interest rate showing a downward trend the companies will be
able to expand with cheaper fund available in future.
Consumer sentiments: Slowing global economy together with an overall moderating
consumer sentiment might lead to a slow volume growth of FMCG segment.

COMPANY BACKGROUND
OVERVIEW

Marico Limited is 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, Marico has nurtured multiple brands in the categories of hair care, skin care, health
foods, male grooming, and fabric care. Marico's India business markets household brands
such as Parachute Advansed, Saffola, Hair & Care, Nihar, Mediker, Revive, Manjal, Setwet,
Zatak and Livon among others that add value to the life of 1 in every 3 Indians. The
International business offers unique brands such as Parachute, Hair Code, Fiancee, Caivil,
Hercules, BlackChic, Code 10, Ingwe, X-Men, L'Ovite and Thuan Phat that are localized to
fulfil the lifestyle needs of our international consumers. Charting an annual turnover of Rs. 61
billion (Financial Year 2015 - 2016) 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.

Beauty & Wellness Solutions


Hair Care, Health Care, Skin Care, Male Grooming
A leading Indian MNC Group
Market Capitalization

INR

USD

30,000 Cr

4.1 Billion

Turnover FY 15

5,733 Cr

940 Million

Profit FY 15

573 Cr

94 Million

Turnover from overseas: 22%


Sustained Profitable Growth
Turnover 18%

Profits 15% (5 yr CAGR)

STRONG DISTRIBUTION NETWORK:

Indirect Reach: ~ 3.6 million outlets out of ~9 million outlets Huge Headroom for
growth
Direct Reach: Over 850,000 outlets - Initiatives in place to increase the reach
Project ONE Targeting direct coverage increase in top 20 towns (Incremental
Turnover ~INR 65-75 crores in FY 2016) Leveraged technology coupled with
robust IT Infrastructure to drive impact.

URBAN RURAL SPLIT:


Share of Business
Urban 67%
Rural 33%

PRODUCT PORTFOLIO:

MARICOS BRAND POSITION

MARICO S PEERS
GODREJ CONSUMER PRODUCTS

Leader among Indias Fast Moving Consumer Goods (FMCG) companies, with
leading Household and Personal Care Products
The major brands are Good knight, Cinthol, Godrej No. 1, Expert, Hit, Jet, Fairglow,
Ezee, Protekt and Snuggy
With Rs. 11,000 crores as the market capitalization, the company is largest marketers
of toilet soaps in the country and is also leaders in hair colours and household
insecticides
COLGATE PALMOLIVE (INDIA) LTD

Incorporated in the year 1937, is a Large Cap company (having a market cap of
Rs 26774.27 Cr.) operating in Personal Care sector.
Truly global company serving hundreds of millions of consumers worldwide
Top 50 Brands in the Bottom of the Pyramid Category
The only brand to be in the top three for the last 15 years
EMAMI LIMITED

A Large Cap company (having a market cap of Rs27135.11 Cr.) operating in Personal
Care sector
Niche category player and innovator. Portfolio includes Zandu, one of the strongest
Ayurvedic brands
Emami scaled up direct distribution in rural markets at CAGR of 12 per cent over
FY1115 to 640,000 outlets. Rural contribution is significant at 55 per cent; hence,
direct reach presents opportunity to materially increase throughput per outlet
In 2015, Emami acquired Kesh King to enter into hair oil market with USD270.38
million

DABUR INDIA LTD

Large Cap company (having a market cap of Rs 51735.86 Cr.) operating in Personal
Care sector
Among top four FMCG companies in India
14 brands with turnover of USD16.6 million with 3 brands over USD165.9 million
Wide distribution network covering 2.8 million retailers across the country

FUNDAMENTAL RATIO ANALYSIS

DEBT EQUITY RATIO

COLGATE
DABUR
EMAMI
MARICO
GODREJ
INDUSTRY

2012
0.308
4
0.068
9
0.153
2
0.666
9
0.557
8
0.351
0

2013
0.322
9
0.549
5
0.110
3
0.393
3
0.588
2
0.392
8

2014

2015

2016

0.2942

0.2335

0.1710

0.2666

0.2187

0.1902

0.0234

0.0158

0.4785

0.3865

0.1831

0.0731

0.4507

0.5033

0.5161

0.2843

0.2309

0.2858

DEBT EQUITY RATIO


0.8000
0.6000
0.4000

MARICO
INDUSTRY

0.2000
0.0000
2012 2013 2014 2015 2016

Interpretation :
The debt to equity ratio is a financial, liquidity ratio that compares a company's total debt
to total equity. The debt to equity ratio shows the percentage of company financing that
comes from creditors and investors. The debt equity ratio of Marico has been declining it
means its reducing its debt component and diluting its share. On the other hand industry
is showing more less the same trend. Also companies with high debt equity ratio are
considered more risky, since interest on debt is compulsory obligation which company
need to fulfil. So In this case Marico is doing well. Whereas looking at its peers except

Godrej, rest have significant brought down there debt component. Thus overall its a
good sign for Marico.

CURRENT RATIO
2012
1.425
1.041
1.183
1.508
1.409
1.313
2

MARICO'
COLGATE
GODREJ
EMAMI
DABUR
INDUSTRY

2013
1.448
0.999
1.133
1.801
1.473
1.370
8

2014
1.255
0.896
0.72
2.095
1.485

2015
1.494
0.908
0.887
3.508
1.181

2016
1.892
0.967
1.012
0.468
1.215

1.2902

1.5956

1.1108

CURRENT RATIO
2
1.5

MARICO'
INDUSTRY

1
0.5
0
2012

2013

2014

2015

2016

Interpretation:

Current ratio refers to the ability of a business to pay its short-term obligations when they
become due within 1 year. The current ratio helps investors and creditors understand the

liquidity of a company and how easily that company will be able to pay off its current
liabilities. A higher current ratio is always more favourable than a lower current ratio because
it shows the company can more easily make current debt payments. Again Marico has
performed better when compared with its peers except in 2014 where is has declined. This
means Marico has 1.8 times its current assets than liability to meet its short term obligations.
Whereas Emami Current ratio has drastically decreased this is alarming for the company.
INTEREST COVERAGE
RATIO

MARICO
COLGATE
GODREJ
EMAMI
DABUR
INDUSTRY

2012
21.47
390.033
44.14
16.141
54.348
105.2264

2013
16.033

2014
31.527

2015
57.412

2016
124.81

32.695
42.409
61.532
38.1672
5

16.779
97.405
76.516

22.513
118.59
191.019

27.012
8.101
378.8

55.55675

97.3835

134.6808

INTEREST COVERAGE RATIO


150
MARICO

100

INDUSTRY

50
0
2012

2013

2014

2015

2016

Interpretation:

The interest coverage ratio is that which measures a companys ability to make interest
payments on its debt in a timely manner. Higher the ratio means company is able to fulfil its

interest obligations. Marico has a great IC ratio but slightly below the industry. But overall
its is good which means company is able to pay of the interest as well as principle amount
easily. Whereas dabur has just outperformed everyone. Thus a high ICR means company are
generating enough cash flows from operating activities.

ROE

COLGATE
DABUR
EMAMI
MARICO
GODREJ
INDUSTR
Y

2012
0.6318
0.0413
0.3663
0.2774
0.2592

2013
0.6389
0.3644
0.4048
0.2119
0.2403

2014
0.5792
0.3441
0.4318
0.3567
0.2012

2015
0.4542
0.3178
0.3946
0.3143
0.2104

2016
0.4109
0.3011
0.2559
0.3457
0.2196

0.3152

0.3721

0.3826

0.3383

0.3066

ROE
0.5000
0.4000

MARICO

0.3000

INDUSTRY

0.2000
0.1000
0.0000
2012

2013

2014

2015

2016

Interpretation:
The return on equity ratio or ROE is a profitability ratio that measures the ability of a firm to
generate profits from its shareholders investments in the company. This ratio show how much
profit each dollar of shareholder equity earn. We can see in the chart that in 2012 Marico has

lower ROE than industry but in 2016 Marico has higher ROE than industry. Except the
Marico rest are showing a declining trend. Even in the last year Marico is able to outperform
the industry.

NET PROFIT
RATIO

COLGATE
DABUR
EMAMI
MARICO
GODREJ
INDUSTR
Y

2012
0.162
7
0.120
3
0.171
7
0.078
5
0.149
3
0.136
5

2013

2014

2015

2016

0.1546

0.1488

0.1392

0.1372

0.1216

0.1265

0.1335

0.1444

0.1794

0.2137

0.2099

0.1351

0.0854

0.1023

0.0990

0.1164

0.1242

0.0999

0.1096

0.1248

0.1330

0.1382

0.1382

0.1316

NET PROFIT RATIO


0.1500
MARICO

0.1000

INDUSTRY

0.0500
0.0000
2012

2013

2014

2015

2016

Interpretation:
The ratio indicates what portion of the net sales is left for the owners after all expenses have
been met. A high net profit ratio is a good sign as it ensures sufficient return to owners, more
coverage for additional expenses. The net profit ratio of industry is almost stable from 2012
to 2016 but net profit ratio of Mario is increasing at diminishing rate.in 2012 there is a gap
between industry and Marico and in 2016 we can see that there is less gap in industry and
Marico

EPS

COLGATE
DABUR
EMAMI
MARICO
GODREJ
INDUSTR
Y

2012
32.830
5
3.7018
17.106
5
5.1571
21.355
3
16.030
2

2013
36.527
9
4.3802
20.800
7
6.1393
23.394
1
18.248
4

2014
39.698
4
5.2410
17.732
5
7.5264
22.318
7
18.503
4

2015
41.103
9
6.0679
21.395
5
8.8907
26.648
6
20.821
3

2016
21.196
3
7.1213
15.819
8
5.6176
32.875
5
16.526
1

EPS
25.0000
20.0000
15.0000
10.0000
5.0000
0.0000
2012

MARICO
INDUSTRY

2013

2014

2015

2016

Interpretation:
This ratio gives the amount of money each share of stock would receive if all of the profits
were distributed to the outstanding shares at the end of the year. EPS being a widely used
ratio is a measure of profitability from the owners point of view. Higher the ratio, investors
will be more attracted. We can see that both industry and Marico has the same trend of EPS.
However the EPS of Marico is lower than the industry.

Price - Earning Ratio

COLGATE
DABUR
EMAMI
MARICO
GODREJ
INDUSTR
Y

2012
17.247
7
28.796
8
15.958
8
15.413
4
21.848
0
19.852
9

2013
17.791
6
31.265
9
18.749
3
15.897
8
32.647
6
23.270
4

2014
17.424
1
34.278
0
25.320
7
13.456
6
37.630
7
25.622
0

2015
24.741
5
43.762
9
47.486
6
21.344
9
38.745
3
35.216
2

2016
38.881
2
35.091
8
59.166
4
43.168
1
41.818
4
43.625
2

Price - Earning Ratio


50.0000
40.0000

MARICO

30.0000

INDUSTRY

20.0000
10.0000
0.0000
2012

2013

2014

2015

2016

Interpretation:
The price earnings ratio shows what the market is willing to pay for a stock based on its
current earnings. A company with a high P/E ratio usually indicated positive future
performance and investors are willing to pay more for this company's shares. A company with
a lower ratio, on the other hand, is usually an indication of poor current and future
performance. This could prove to be a poor investment. We can see in the chart that industry

has higher P/E ratio form 2013-2015 but in 2016 both industry and Marico has same P/E
ratio. This is shows that Marico is doing well and able to justify its earning which can be
reflected in its stock price.

JENSEN ALPHA
Jensens alpha measures the extra return that the portfolio or a stock earns after adjusting for
its beta risk. It provides a measure of whether the investment in question earned a return
greater than or less than its required return, given both market performance and risk.
The difference between a and Rf (1-) is called Jensens alpha.
Thus a comparison of the intercept (a) to Rf (1-) should provide a measure of the stock's
performance, at least relative to the capital asset pricing model
In summary, then:
If a > Rf (1-).... Stock did better than expected during regression period.
a = Rf (1-).... Stock did as well as expected during regression period.
a < Rf (1-).... Stock did worse than expected during regression period

ANNUALIZED
COMPANY
HUL
BAJAJ CORP LIMITED
MARICO LTD
GODREJ
CONSUMER
LTD
COLGATE

ALPHA
17.72%
8.66%
9.77%

22.14%
PALMOLIVE -1.37%

JENSEN

LTD
EMAMI LTD
DABUR INDIA LTD
P&G
JYOTHY LABORTARIES
GILLITE INDIA LTD
INDUSTRY

17.38%
15.69%
20.58%
8.08%
12.93%
13.16%

Interpretation:
Looking at the above table we can clearly see that Marico has given 9.77% of risk adjusted
return which is good for Marico. But when we compare it with other firms in the same
business except Colgate, Bajaj & Jyothy rest have performed better than Marico. Although
positive alpha means Marico stock has been able to generate superior return. But whereas the
industry has generated 13.16% which means Marico has not performed well when compared
with industry standards. It can be due to market specific or firm specific measures which
might have caused the Marico to underperform. On the other hand companies like Godrej,
P&G are the best performing stocks and give us with better returns in future. But we have to
see the other factors such as beta and R square to know how much is the systematic and
unsystematic risk in order to know which stock will perform better in future.

BETA :
Beta is a numeric value that measures the fluctuations of a stock to changes in the overall
stock market.
Beta measures the responsiveness of a stock's price to changes in the overall stock market.
On comparison of the benchmark index. This helps the investor to decide whether he wants to
go for the riskier stock that is highly correlated with the market (beta above 1), or with a less
volatile one (beta below 1).
Beta is the key factor used in the Capital Asset Price Model (CAPM) which is a model that
measures the return of a stock. The volatility of the stock and systematic risk can be judged
by calculating beta. A positive beta value indicates that stocks generally move in the same
direction with that of the market and the vice versa.
Ways of calculating Betas:

Historical beta
Fundamental beta
Accounting beta
Here in valuation we have used fundamental beta due to following reasons:
To reduce the standard error
To know the beta of newly formed & private company.
Calculating Levered beta

So our levered beta comes out to be .415

Cost of equity
Having estimated the riskless rate, the risk premium(s) and the beta(s), we can now estimate
the expected return from investing in equity at any firm. In the CAPM, this expected return
can be written as:
Expected Return = Riskless Rate + Beta * Expected Risk Premium
= Risk free rate + Beta (Mature Market Risk Premium)
Where the riskless rate would be the rate on a long-term government bond, the beta is,
fundamental betas described above and the risk premium is the historical premium.

So it comes out to be 8.72%


Market return
Risk free Rate
Beta
Ke

11.03%
7.05%
0.415
8.72%

CALCULATING GROWTH
Growth rate would be:
Expected Growth rate = Reinvestment Rate * Return on Capital =

Dividend pay-out
ratio
b (retention ratio)
r
Growth (b*r)

2012

2013

2014

2015

2016

0.19
0.81
0.28
22%

0.33
0.67
0.21
14%

0.40
0.60
0.36
21%

0.56
0.44
0.31
14%

0.71
0.29
0.35
10%

Fundamental valuation using FCFE


In order to do the valuation using FCFE model firstly we need to calculate FCFE by

Free Cash Flow to Equity (FCFE) = Net Income - (Capital Expenditures - Depreciation) (Change in Non-cash Working Capital) + (New Debt Issued - Debt Repayments)
This is the cash flow available to be paid out as dividends or stock buybacks.

The Two-stage FCFE Model The two stage FCFE model is designed to value a firm which is
expected to grow much faster than a stable firm in the initial period and at a stable rate after
that.

The Model The value of any stock is the present value of the FCFE per year for the
extraordinary growth period plus the present value of the terminal price at the end of the
period. = FCFE PV of + price PV of terminal

FCFE CALCULATION

Year
Net Income
Capex
Depreciation
Change in non-cash W C

Debt Issue
Debt Repaid
Net Debt Issue

2016
736.62
85.82
101.84
-0.07
0.00
46.35
-46.35

706.36

FCFE
.
High Growth
Phase

Year
2017
2018
2019
Total

FCFE
777.62
856.07
942.44

PV
715.02
723.78
732.64
2171.44

Stable Growth
Phase

FCFE2020
TV
PV of TV

1008.
411
25022
.61
19452
.38

Value of
Equity

21623.
82

167.60

Market
Capitalization

31287.
35

242.50

So after calculating we can clearly see overall value of the equity is lower than market
capitalization in March 2016.
Thus we can say it is overvalue.

ASSUMPTIONS

Marico is seen to be growing at a high rate as the growth from 2011 onwards
which is more than the growth of economy but during past years it has been
seen that it growth has declined . So we will be using two stage FCFE model
for valuation and assuming a stable growth rate for after 3 years.
We have taken information from 2012-13 to 2015-16.
We have taken closing monthly value of stock as well as the market in order to
calculate the returns.
As the company is listed, so information regarding stock prices of past 5 years
was readily available on the BSE website. Here we have calculated
fundamental beta in order to get the precise value .
For calculating risk free return (Rf), we took the current 10 year government T
bond over the same period.

In order to find out risk premium, we went on with the actual


industry practises followed in India and calculated it by the
formula= CAGRe-Rf.
.

References

http://economictimes.indiatimes.com/ as assessed on 8th sept 2016.


http://www.bseindia.com/ as assessed on 8th sept 2016.
http://www.ibef.org/ as assessed on 8th sept 2016.
http://www.cii.in/ as assessed on 8th sept 2016.
http://ficci.in/ as assessed on 8th sept 2016.

ANNEXURES
Calculation of Jensen Alpha
Formula: a-Rf*(1-B)
Calculation of Beta
Attachment of Excel File for calculation of Jensen Alpha.
Attachment of Excel File for calculation of fundamental ratio
Attachment of Excel file for calculation of FCFE.