FMCG Sector Analysis

PROJECT REPORT
Submitted in partial fulfillment of the requirement for the reward of
Post Graduation Program in Business Management

2008
A EQUITY RESEARCH
on FAST MOVING CONSUMER GOODS SECTOR
in
NAME : DAIPAYAN LODH

ROLL NUMBER : 3015
Under the Supervision of
Prof. Saravan Krishnamurthy, Kohinoor Business School, Khandala

&
Miss. Sheela Khatane, HR Head, Motilal Oswal Securities Ltd., Nagpur

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Presented by | D a i p a y a n L o d h
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Kohinoor Business School

Old Pune – Mumbai Highway, Khandala – 410 301, Dist. Pune
This is to certify that Mr. DAIPAYAN LODH, a student of Post Graduation Program in Business
Management, 2007 – 09 batch has undertaken the project titled – “Equity Research on FMCG
Sector in India” on behalf of “Motilal Oswal Securities Ltd., Nagpur” for duration of three
months.
He has successfully completed the above said project to the best of our satisfaction.
_______________________ ______________
Prof. Sarvan Krishnamurthy Dr. B. P. Verma
Project Guide Director
Kohinoor Business School Kohinoor Business School
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Declaration
I, DAIPAYAN LODH, a bona
bona-fide
fide student of Kohinoor Business School, Khandala hereby
declare that the project titled – “Equity Research on FMCG Sector in India” on behalf of
“Motilal Oswal Securities Ltd., Nagpur” in partial fulfillment of the requirements of the Post
Graduation Program in Business Management is my original work.
Date:
Place:
Signature
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Acknowledgement
“There is joy in work. There is no happiness except in the realization that we have
accomplished something” - Henry Ford
The making of any project requires contribution from many people, right from inception till its
completion. In my case also, there had been a few people who have made this happen. It was not
only learning but also an enriching experience.
I am deeply indebted to Dr. B. P. Verma

Verma,, Director, Kohinoor Business School, Khandala for
having allowed me to carry out the project successfully. I specially thank Prof. Sarvan
Krishnamurthy and Prof. Jay
Jayasheelan,, for his constant guidance, professional help and
support during the course of thee project. I would also like to thanks Prof. Ajit Gaikwad,
Gaikwad Prof.
Salim Samsher, Prof. Anjali Kumar
Kumar, and Prof. Sanjay Ashrit for explaining the concepts of
Financial Accounting to me, for being a source of inspiration and for the valuable suggestions
sugg
provided throughout. Their constant follow
follow-ups and result orientation ensured that I successfully
meet the deadlines.
I would also like to thanks Mr. Harish Daf

Daf, Mr. Harish Mantri, Mr. Prashish Bharne,
Bharne Ms.
Sheela Kathane, Ms. Neha Dutta and a special thanks to Mr. Prashant Arun Pimplewar for
giving me the opportunity to work in his company and gain knowledge related to my project.
I thank my colleagues and friends for providing constant encouragement and help.
help Finally, I am
grateful to my family for their moral support and understanding.
“Teachers open the door, but you must enter by yourself” - Chinese Proverb
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Table of Content
TOPICS Page No.

Industry Overview……………………….…………….. 8
Company Overview…………………………………… 10
Research Methodology………………………………... 13
Why FMCG Sector is Analyzed………………………. 14
Overview……………………………………………..... 16
Why India?...................................................................... 17
Trends………………………………………………….. 19
Market Opportunities for Investment………………….. 22
Hindustan Unilever Limited…………………………… 24
Annexure………………………………………………. 48
Bibliography…………………………………………… 56
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Industry Overview
Broking Insights
The Indian broking industry is one of the oldest trading industries that has been around even
before the establishment of the BSE in 1875. Despite passing through a number of changes in the
post liberalisation period, the industry has found its way towards sustainable growth. With the
purpose of gaining a deeper understanding about the role of the Indian stock broking industry in
the country’s economy, we present in this section some of the industry insights gleaned from
analysis of data received through primary research.
Some key characteristics of the 394 broking firms are:
• On the basis of geographical concentration, the West region has the maximum
representation of 52%. Around 24% firms are located in the North, 13% in the South and
10% in the East
• 3% firms started broking operations before 1950, 65% between 1950-1995 and 32% post
1995
• On the basis of terminals, 40% are located at Mumbai, 12% in Delhi, 8% in Ahmedabad,
7% in Kolkata, 4% in Chennai and 29% are from other cities
• From this study, we find that almost 36% firms trade in cash and derivatives and 27% are
into cash markets alone. Around 20% trade in cash, derivatives and commodities
• In the cash market, around 34% firms trade at NSE, 14% at BSE and 52% trade at both
exchanges. In the derivative segment, 48% trade at NSE, 7% at BSE and 45% at both,
whereas in the debt market, 31% trade at NSE, 26% at BSE and 43% at both exchanges
• Majority of branches are located in the North, i.e. around 40%. West has 31%, 24% are
located in South and 5% in East
• In terms of sub-brokers, around 55% are located in the South, 29% in West, 11% in
North and 4% in East
• Trading, IPOs and Mututal Funds are the top three products offered with 90% firms
offering trading, 67% IPOs and 53% firms offering mutual fund transactions
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• In terms of various areas of growth, 84% firms have expressed interest in expanding their
institutional clients, 66% firms intend to increase FII clients and 43% are interested in
setting up JV in India and abroad
• In terms of IT penetration, 62% firms have provided their website and around 94% firms
have email facility
Financial Markets
The financial markets have been classified as cash market, derivatives market, debt market and
commodities market. Cash market, also known as spot market, is the most sought after amongst
investors. Majority of the sample broking firms are dealing in the cash market, followed by
derivative and commodities. 27% firms are dealing only in the cash market, whereas 35% are
into cash and derivatives. Almost 20% firms trade in cash, derivatives and commodities market.
Firms that are into cash, derivatives and debt are 7%. On the other hand, firms into cash and
commodities are 3%, cash & debt market and commodities alone are 2%. 4% firms trade in all
the markets.
In the cash market, around 34% firms trade at NSE, 14% at BSE and 52% trade at both
exchanges. In the equity derivative market, 48% of the broking houses are members of NSE and
7% trade at BSE, while 45% operate in both stock exchanges. Around 43% of the broking houses
operating in the debt market, trade at both exchanges with 31% and 26% firms uniquely at NSE
and BSE respectively.
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Of the brokers operating in the commodities market, 57% firms operate at NCDEX and MCX.
Around 20% and 21% firms are solely in NCDEX and MCX respectively, whereas 2% firms
trade in NCDEX, MCX and NMCE.
Products
The sustained growth of the economy in the past couple of years has resulted in broking firms
offering many diversified services related to IPOs, mutual funds, company research etc.
However, the core trading activity is still the predominant form of business, forming 90% of the
firms in the sample. 67% firms are engaged in offering IPO related services. The broking
industry seems to have capitalized on the growth of the mutual fund industry, which was pegged
at 40% in 2006. More than 50% of the sample broking houses deal in mutual fund investment
services. The average growth in assets under management in the last two years is almost 48%.
Company research is another lucrative area where the broking firms offer their services; more
than 33% of the firms are engaged in providing company research services. Additionally, a host
of other value added services such as fundamental and technical analysis, investment banking,
arbitrage etc are offered by the firms at different levels.
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Company Overview
Motilal Oswal Financial Services
ervices Ltd. (MOFSL) is a well-diversified,
diversified, financial services
company focused on wealth creation for all its customers, such as institutional and corporate
clients, HNI and retail customers
customers.. Our services and product offerings include equity broking,
commodity
dity broking, distribution of third party products, investment banking and venture capital
management.
Mr. Motilal Oswal and Mr. Raamdeo Agrawal laid the foundation for MOFSL and initially
conducted business as a sub-broking
broking firm. Thus, began the expediti
expedition
on of building a professional
organisation with strong value systems, to provide investment advice to investors.
Today, Motilal Oswal Financial Services Ltd. is a well

well-established
established brand among retail and
institutional investors in India, with a presence in over 1430 business locations across over 430
cities.
From a sub-broking
broking firm, Motilal Oswal Financial Services Ltd. has today become a solid
financial services company straddling a spectrum of businesses in the financial services space.
These businesses include
clude Wealth Management, Institutional Equities, Investment Banking and
Venture Capital Management.
Motilal Oswal Financial Services Limited is the holding company of the following five
subsidiaries:
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MOFSL Businesses
Wealth Management and Retail & Distribution

MOFSL offer Wealth Management Services, Broking & third party products to retail customers
through MOFSL, MOSL and MOCBPL. They also provide financing services, investment
advisory, financial planning and portfolio management services (PMS) to their clients. As at
March 31, 2008, they had 461,699 registered customers, to whom they provide equity &
commodities brokerage and PMS.
As at March 31, 2008, they had a total of 340,843 depository clients. They classify their clients
into three segments - 'mass retail', 'mass affluent' (addressed by a separate offering called 'MOSt
Select'), and 'high net worth' (addressed by a separate offering called 'Purple').
Institutional Broking
They offer equity broking services in the cash and derivative segments through MOSL to
institutional clients in India and overseas. These clients include companies, mutual funds, banks,
financial institutions, insurance companies, and FIIs. As at March 31, 2008, they were
empanelled with over 300 institutional clients including 191 FIIs.
Investment Banking
They offer financial advisory services relating to mergers and acquisitions (domestic and cross-
border), divestitures, restructurings and spin-offs through MOIAPL. They also offer capital
raising and other investment banking services such as the management of public offerings,
private placements (including qualified institutional placements), rights issues, share buybacks,
open offers/delistings and syndication of debt and equity.
Private Equity
In 2006, their private equity subsidiary, MOVCAPL was appointed as the investment manager
and advisor to a private equity fund, India Business Excellence Fund, which was launched with a
target of raising US$100 million. The fund is aimed at providing growth capital to small and
medium enterprises in India, with investments typically in the range of US$3 million to US$7
million.
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Research Methodology
The project study has been done with the help of observation and analytical method. The value
of the observation is that one can collect the original data at the time they occur and analysis
them in a proper way with the help of varies financial tools and techniques. For this research, we
have to depend on the financial result of the respective company as well as the daily price trends
of that particular script.
The goal of this research is to provide a foundation for understanding FMCG sector through
fundamental analysis. Fundamental analysis is the cornerstone of investing. In fact, some would
say that you aren't really investing if you aren't performing fundamental analysis. There are an
endless number of investment strategies that are very different from each other, yet almost all use
the fundamentals. The biggest part of fundamental analysis involves delving into the financial
statements. Also known as quantitative analysis, this involves looking at revenue, expenses,
assets, liabilities and all the other financial aspects of a company. My research looks at the
information to gain insight on a company's future performance.
Fundamental analysis serves to answer questions, such as:
1. Is the company’s revenue growing?

2. Is it actually making a profit?
3. Is it in a strong-enough position to beat out its competitors in the future?
4. Is it able to repay its debts?
5. Is management trying to "cook the books"?
It all really boils down to one question: Is the company’s stock a good investment? Think of
fundamental analysis as a toolbox to help you answer this question.
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Why FMCG Sector is Analyzed:

TATA Investment Corporation Limited, non
non-banking
banking financial company registered with Reserve
Bank of India under the 'Investmen
'Investment Company' category. The company's activities comprise
primarily of investing in long-term
term investments in equity shares and other securities of companies
in a wide range of industries.
TICL invested in almost all the sectors. TICL’s portfolio proved to be a very successful
portfolio.
rtfolio. They had got a very good return from all the sectors. Among these sectors, Fast
Moving Consumer Goods (FMCG) proved to be a very successful sector. It has a very good
potentiality in long term in India. The overall cost of investment in FMCG sector
secto was Rs. 13.69
crores and on May 20, 2008, this investment valued Rs. 306.72 crores
crores,, i.e. the cost of value of
investment in FMCG sector was 5% of the overall investment that was increased in 2008 to 15%
of the overall investment. Thus from this, we can cconclude that, there is a 2140.47% increase in
value of investment. For this signi
significant
ficant increase and also recent development of retails shops,
malls, etc. in India, the FMCG sector is one of the booming sectors in India. For this reason, I
had chosen this sector for my equity analysis. Below, I had given a chart, which explains, the
detail investment of TICL in FMCG sector:
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From the given charts, I can rank the top most companies in FMCG sector in TICL’s portfolio.
They can be ranked as follows:
Rank Company
1 Hindustan Unilever Ltd.
2 Tata Tea Ltd.
3 Asian Paints India Ltd.
4 Nestle India Ltd.
5 Indian Tobacco Company Ltd.
6 Marico Industries Ltd.
7 Godrej Consumer Products Ltd.
Among these companies, I had chosen three major companies for the Equity Analysis, i.e.:
• Hindustan Unilever (HUL) Ltd.
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Overview
Products which have a quick turnover, and relatively low cost are known as Fast Moving
Consumer Goods (FMCG). FMCG products are those that get replaced within a year. Examples
of FMCG generally include a wide range of frequently purchased consumer products such as
toiletries, soap, cosmetics, tooth cleaning products, shaving products and detergents, as well as
other non-durables
durables such as glassware, bulbs, batteries, pape
paperr products, and plastic goods. FMCG
may also include pharmaceuticals, consumer electronics, packaged food products, soft drinks,
tissue paper, and chocolate bars.
Subsets of FMCGs are Fast Moving Consumer Electronics which include innovative electronic
products
ducts such as mobile phones, MP3 players, digital cameras, GPS Systems and Laptops. These
are replaced more frequently than other electronic products.
In 2005, the Rs. 48,000-crore

crore FMCG segment was one of the fast growing industries in India.
According to the AC Nielsen India study, the industry grew 5.3% in value between 2004 and
2005.
Market Leader Strong No. 2

45 60
39.1
40
48.8
35 50
30 40
23.7
25 20.8 30.3
30
20
13.6 14.5
15 20
9.7 8.7
10 7.4
3.4 10
5
0 0
Fabric Personal Dishwash Skin Shampoo Tacum Packet Coffee Jams Toothpaste Ketchups
Wash Wash Powder Tea
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Why India?
Large Domestic Market
The Indian FMCG sector is the fourth largest in the economy and has a market size of US$13.1
billion. Well-established
established distribution networks, as well as intense competition between the
organized and unorganized segments are the characteristics of this sector. FMCG in India has a
strong and competitive MNC presence across the entire value chain. It has been predicted that
the FMCG market will reach to US$ 33.4 billion in 2015 from US $ billion 11.6 in 2003. The
middle class and the rural segments of the Indian population are the most promising market for
FMCG, and give brand makers the opportunity to convert them to branded products. Most of the
product categories like jams, toothpaste, skin care, shampoos, etc, in India, have low per capita
consumption as well as low penetration level, but the potential for growth is huge.
Turnover $ Mln Market Capitalization $ Bln

3473
11.5
847 3.3
631 540 2.1
476 338 361 1.5 1.3
323 308 218 1 0.9 0.7 0.7 0.6
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India – A Large Consumer Goods Spender

An average Indian spends around 40 per cent of his income on grocery and 8 per cent on
personal care products. The large share of fast moving consumer goods (FMCG) in total
individual spending along with the large population base is another factor that makes India one
of the largest FMCG markets.
Consumption Pie
4% 7%
2%
8% 7% Clothing
Consumer Durable
4%
Vacation
Eating Out
10% Foot Wear
Movies & Theatre
2% Entertainment
40% 5% Accessories
2% Books & Music
1% Grocery
8%
Change in the Indian Consumer Profile
Consumer Profile
1999 2001 2006
Populations (in millions) 846 1,012 1,087
Population < 25 years of Age 480 546 565
Urbanization (%) 26 28 31
Source: Statistical Outline of India (2002-03).
Rapid urbanization, increased literacy 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.
Aspiration levels in this age group have been fuelled by greater media exposure, unleashing a
latent demand with more money and a new mindset.
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FMCG Category and Products

Category Products
Fabric wash (laundry soaps and synthetic detergents); household cleaners
Household Care (dish/utensil cleaners, floor cleaners, toilet cleaners, air fresheners,
insecticides and mosquito repellents, metal polish and furniture polish).
Health beverages; soft drinks; staples/cereals; bakery products (biscuits,
bread, cakes); snack food; chocolates; ice cream; tea; coffee; soft drinks;
Food and Beverages
processed fruits, vegetables; dairy products; bottled water; branded flour;
branded rice; branded sugar; juices etc.
Oral care, hair care, skin care, personal wash (soaps); cosmetics and
Personal Care
toiletries; deodorants; perfumes; feminine hygiene; paper products.
Analysis of FMCG Sector
Strengths: Weakness:
• Low Operational Costs • Lower scope of investing in technology
• Presence of established distribution and achieving economies of scale,
networks in both urban and rural areas especially in small sectors
• Presence of well-known brands in • Low exports levels
FMCG sector • “Me-too” products, which illegally
mimic the labels of the established
brands. These products narrow the
scope of FMCG products in rural and
semi-urban market.
Opportunities: Threats:
• Untapped rural market • Removal of import restrictions
• Rising income levels, i.e. increase in resulting in replacing of domestic
purchasing power of consumers brands
• Large domestic market- a population of • Slowdown in rural demand
over one billion. • Tax and regulatory structure
• Export potential
• High consumer goods spending
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Trends
The Structure
The Indian FMCG sector is the fourth largest sector in the economy and creates employment for
three million people in downstream activities. Within the FMCG sector, the Indian food
processing industry represented 6.3 per cent of GDP and accounted for 13 percent of the
country's exports in 2003-04. A distinct feature of the FMCG industry is the presence of most
global players through their subsidiaries (HUL, P&G, Nestle), which ensures new product
launches in the Indian market from the parent's portfolio.
Critical Operating Rules in FMCG Sector

• Heavy launch costs on new products on launch advertisements, free samples and product
promotions.
• Majority of the product classes require very low investment in fixed assets.
• Existence of contract manufacturing.
• Marketing assumes a significant place in the brand building process.
• Extensive distribution networks and logistics are key to achieving a high level of
penetration in both the urban and rural markets.
• Factors like low entry barriers in terms of low capital investment, fiscal incentives from
government and low brand awareness in rural areas have led to the mushrooming of the
unorganized sector.
• Providing good price points is the key to success.
Rural Markets: Small is Beautiful

By the early nineties FMCG marketers had figured out two things:
• Rural markets are vital for survival since the urban markets were getting saturated.
• Rural markets are extremely price-sensitive.
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Thus, a number of companies followed the strategy of launching a wide range of package sizes
and prices to suit the purchasing preferences of India's varied consumer segments. Hindustan
Unilever,
ever, a subsidiary of Unilever, coined the term nano
nano-marketing in the early nineties, when it
introduced its products in small sachets. Small sachets were introduced in almost all the FMCG
segments from oil, shampoo, and detergents to beverages.
Consumer
Consumer-Class Boom
Household Income Distribution
2003 2015
60
54
50
41
40
34
per cent
30 26
18
20
13
10 5 4 3
2
0
Very Rich Consuming Climbers Aspirants Destitutes
Class
Source: HUL,
HU NCAER. .
Demand for FMCG products is set to boom by almost 60 per cent by 2007 and more than 100
per cent by 2015. This will be driven by the rise in share of middle class (defined as the climbers
and consuming class) from 67 per cent in 2003 to 88 per cent in 2015. The boom in various
consumer categories, further, indicates a latent demand for various product segments. For
example, the upper end of very rich and a part of the consuming class indicate a small but rapidly
growing segment for branded products. The middle segment
segment,, on the other hand, indicates a large
market for the mass end products.
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Market Opportunities for Investment

Measuring the Opportunity: Domestic FMCG Market to treble
FMCG Market Size (US$ billion)

40
35 33.4
30
25
20
15
11.6
10
0
India - 2003 India - 2015
According to estimates based on China's current per capita consumption, the Indian FMCG
market is set to treble from US$ 11.6 billion in 2003 to US$ 33.4 billion in 2015. The dominance
of Indian markets by unbranded products, change in eating habits and the increased affordability
of the growing Indian population presents an opportunity to makers of branded products, who
can convert consumers to branded products.
Sectoral Opportunities
According to the Ministry of Food Processing, with 200 million people expected to shift to
processed and packaged food by 2010, India needs around US$ 28 billion of investment to raise
food processing levels by 8-10 per cent. In the personal care segment, the lower penetration rates
also present an untapped potential. Key sectoral opportunities are mentioned below:
• Staple: Branded and Unbranded: Investment in branded staples is likely to rise with the
popularity of branded rice and flour among urban population.
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• Dairy Based Products: Investment opportunities exist in value-added products like

desserts, puddings etc. The organized liquid milk business is in its infancy and also has
large long-term growth potential.
• Packaged Food: Growth of dual income households, where both spouses are earning, has
given rise to demand for instant foods, especially in urban areas. Increased health
consciousness and abundant production of quality soya-bean also indicates a growing
demand for soya food segment.
• Personal Care and Hygiene: Rapid urbanization is expected to propel the demand for
cosmetics to 100,000 metric tonnes by 2011-12, with an annual growth rate of 10 per
cent.
• Beverages: According to CIER, demand for coffee is expected to rise to 535,000 metric
tonnes by 2012, with an annual growth rate of 5 per cent between 2006-12.
• Edible Oil: The demand for edible oil in India, according to CIER, is expected to rise to
21 million tonnes by 2011-12 with an annual growth rate of 7 per cent per annum.
• Confectionary: The explosion of the young age population in India will trigger a spurt in
confectionary products. In the long run the industry is slated to grow at 8 to 10 per cent
annually to 870,000 metric tonnes by 2011-12.
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Hindustan Unilever Limited

Overview
Hindustan Unilever Limited, erstwhile Hindustan Lever Limited (also called HLL),
headquartered in Mumbai, is India's largest consumer products company, formed in 1933 as
Lever Brothers India Limited. Its 41,000 employees are headed by Mr. Harish Manwani, the
non-executive chairman of the board. HUL is the market leader in Indian products such as tea,
soaps, detergents, as its products have become daily household name in India. The Anglo-Dutch
company Unilever owns a majority stake in Hindustan Lever Limited.
Recently in February 2007, the company has been renamed to "Hindustan Unilever Limited" to
provide the optimum balance between maintaining the heritage of the Company and the future
benefits and synergies of global alignment with the corporate name of "Unilever".
Brands
6 Mega Brands ~ $ 150 to 200 million each, 53% FMCG Portfolio
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Home & Personal Care
Personal Wash: Laundry:

• Lux • Surf Excel
• Lifebouy • Rin
• Liril • Wheel
• Hamam
Hair Care: Deodorants:
• Sunsilk Naturals • Axe
• Clinic • Rexona
Ayurvedic Personal and Health Care: Skin Care:
• Ayush • Fair & Lovely
• Breeze • Pond’s
• Dove • Vaseline
• Peers
• Rexona
Oral Care: Colour Cosmetics:
• Pepsodent • Lakme
• Closeup
Foods
Tea: Coffee:
• Brooke Bond • Brooke Bond Bru
• Lipton
Foods: Ice-Cream:
• Kissan • Kwality Wall’s
• Annapurna
• Knorr
Hindustan Lever Network

Started in 2003, Hindustan Unilever Network (HLN) is HUL's Direct Selling arm. It already has
about 3.5 lakh consultants - all independent entrepreneurs, trained and guided by HLN's expert
managers and trainers. HLN offers you to build a business with different categories of Home &
Personal Care (HPC) and Food products. They are all essential household needs. And they are all
exclusive to HLN, specifically developed for the Direct Selling channel, and not available in the
retail channel.
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Water
Hindustan Unilever Limited has launched Pureit, the most advanced in-home water
purifier in the world. It is the only purifier that gives you water that is ‘as safe as
boiled water'™ without boiling, and without needing electricity or continuous tap
water supply.
Exports
Over time HUL has developed into a viable & competitive sourcing base for Unilever world
wide in Home and Personal Care & Foods & Beverages category of products. HUL is also a
global marketing arm for select licensed Unilever brands and also works on building categories
with core country advantage such as branded basmati rice.
Management Structure
Hindustan Unilever Limited is India's largest Fast Moving Consumer Goods (FMCG) Company.
It is present in Home & Personal Care and Foods & Beverages categories. HUL and Group
companies have about 16,000 employees, including 1200 managers.
Board
Mr. Harish Manwani Chairman
Mr. Nitin Paranjpe CEO and Managing Director
Mr. D. Sundaram Vice Chairman and CFO
Mr. Sanjiv Kakkar
Mr. Dhaval Buch
Mr. D. S. Parekh
Mr. C. K. Prahalad Director
Mr. A. Narayan
Mr. S. Ramadorai
Mr. R. A. Mashelkar
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Listing Details of Equity Shares

Name of the Stock Exchange Stock Code
Bombay Stock Exchange Limited 500696
National Stock Exchange of India Limited HINDUNILVR
The listing fee for the financial year 2007-2008 has been paid to the above stock exchanges. The
ISIN Number allotted to the Company’s equity shares of face value of Re. 1/- each under the
depository system is INE030A01027 and it’s belong to the BSE Group A. The Company Forms
A Part Of The Following Indices:
• Sensex • BSE-200
• Nifty • S&P CNX 500
• BSE-100 • CNX FMCG
Shareholding Pattern as on December 31, 2007

Percentage
16% 16%
15%
1%
52%
Foreign Holdings (15.44%) Govt. / Financial Institutions (15.2%)

Corporate Bodies(not covered above) (0.89%) Directors and their Relatives (52.11%)
Other including Indian Public (16.31%)
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Categories of Shareholders as on December 31, 2007

Percentage
16.79
0.01
1.12 0.29
52.12
14.29
12.56
0.35
2.47
Unilever and its associates Mutual Funds & Unit Trust of India
Financial Institutions/Banks Insurance Companies
Foreign Institutional Investors Bodies Corporate
NRIs/Foreign Bodies Corporate/Foreign Nationals Directors and their Relatives
Resident Individuals and Others
Bifurcation of Shares Held in Physical and DEMAT Form as on December 31, 2007
Particulars Percentage
Physical Segment:
Unilever & its Associates 52.12
Others 4.57
DEMAT Segment:
National Securities Depository Limited 42.47
Central Depository Services (India) Limited 0.84
Total 100
Dividend
The Board of Directors at their meeting held on 13th February, 2008 recommended a final
dividend of Rs. 3/- for Equity Shares of face value of Re. 1/- each for the year 2007, subject to
the approval of the shareholders. Together with the Interim Dividend of Rs. 3/- per share paid on
22nd August, 2007 and the Platinum Jubilee Dividend of Rs. 3/- per share paid on 22nd
November, 2007, the Total Dividend for the year works out to Rs. 9/- per share. Final dividend,
if approved, will be paid on or after 8th April, 2008.
29 | P a g e
Mergers/Acquisitions/Joint Ventures and Disposals
1. Divestment of “Sangam Direct”

In March 2007 "Sangam Direct" a non-store home delivery retail business, operated by
Unilever India Exports Limited (UIEL), a fully owned subsidiary of HUL was transferred
to Wadhavan Foods Retail Pvt. Limited (WFRPL) on a slump sale basis.
2. Amalgamation of Modern Foods Industries (India) Limited and Modern Foods and
Nutrition Industries Limited with Hindustan Unilever Limited
HUL had sought approval from the shareholders and the Courts to merge the above
Companies as of 30th September, 2006. While the shareholder approvals were received
in 2006, HUL received approvals from the High Courts of Mumbai and Delhi in March
Quarter 2007. Thus the two companies have been merged with your Company w.e.f. 1st
October, 2006.
3. Demerger of the Non-Operational Facilities in Shamnagar, Jamnagar and the

“Janmam” Land into Separate Companies
HUL had undertaken demerger of its nonoperational facilities in Shamnagar, Jamnagar
and Nilgiris district into three independent and separate companies, being 100%
subsidiaries of the Company known as Shamnagar Estates Pvt. Limited, Jamnagar
Properties Pvt. Limited and Daverashola Estates Private Limited (Formerly known as
Hindustan Kwality Walls Foods Private Limited).
4. Joint Venture with Smollan Holdings

HUL has entered into a strategic tie-up through a Joint Venture (JV) with Smollan
Holdings of South Africa, which aims to build long term capabilities and bring ‘in-store’
execution focus in servicing the Company’s Modern Trade customers. Smollan Holdings
is one of the leading ‘in-store execution and field services’ companies internationally. It
has leading edge capabilities in servicing Modern Trade focused on shelf filling, logistics
for merchandising materials and in-store execution.
30 | P a g e
Project Shakti - Changing Lives in Rural India

Hindustan Unilever’s Project Shakti is a rural initiative that targets small villages with a
population of less than 5000. It is a unique win-win initiative that empowers women in rural
India even as it benefits the business. Project Shakti impacts society in three favorable ways –
Shakti Entrepreneur program creates livelihood opportunities for underprivileged rural women;
Shakti Vani program improves quality of life by spreading health and hygiene awareness and;
iShakti community portal empowers rural community by creating access to information. Parallel,
Project Shakti benefits your business by significantly enhancing its direct rural reach, and by
enabling Company’s brands to communicate effectively in regions not touched by any media.
Objectives
• To Reach:
• Small, scattered settlements and poor infrastructure make distribution difficult.
• Over 500,000 villages not reached directly by HUL.
• To Communicate:
• Low literacy hampers effectiveness of print media.
• Poor media-reach: 500 million Indians lack TV and radio
• To Influence:
• Low category penetration, consumption, brand awareness
• Per capita consumption in Unilever categories is 33% of urban levels
Initiatives
• Shakti entrepreneur; currently ~ 44000 women cover 1,25,000 villages
• Shakti Vani: one-to-many communication for category growth
• iShakti: customized interaction with remote consumers
Impact on Community
• Business and social impact can go together
• Partnerships with diverse stakeholders
31 | P a g e
Financial Overview
Ratio Analysis
Liquidity Ratios
Dec ' 07 Dec ' 06 Dec ' 05 Dec ' 04 Dec ' 03
Current Ratio 0.69 0.74 0.70 0.95 0.97
Quick Ratio 0.24 0.33 0.32 0.47 0.52
Inventory Turnover Ratio 8.20 9.27 9.97 8.23 8.78
Debtors Velocity (Days) 11 12 12 11 10
Creditors Velocity (Days) 87 85 81 78 81
1.2
0.8
0.6
0.4
0.2
0
Dec'03 Dec'04 Dec'05 Dec'06 Dec'07
Current Ratio Quick Ratio
12 100
9.97 90
10 9.27 80
8.78
8.23 8.2 70
8 60
50
6
40
30
4
20
10
2
0
0 Dec'03 Dec'04 Dec'05 Dec'06 Dec'07
Dec'03 Dec'04 Dec'05 Dec'06 Dec'07 Debtors Velocity

Inventory Turnover Ratio Creditors Velocity
32 | P a g e
Current Ratio of HUL has been less than 1 for all the 5 years taken for analysis. This implies that
working capital of HUL is always negative. This is generally considered an aggressive strategy
i.e. to financing its long term asset by short term sources that increases profitability because
current liabilities are non interest bearing items. There is significant difference between CR and
LR which indicates that the current asset of HUL consists of good amount of inventory. Value of
sundry debtors is quite low since there is minor difference between LR and ACR. The liquidity
ratios have decreased from previous year which shows that HUL has reduced its liquidity further.
On analyzing the operating cycle it can be said that HUL takes good amount of time to pay its
creditors and this is how it manage to run its operations with negative working capital.
Solvency Ratios
Total Debt/Equity 0.06 0.02 0.02 0.70 0.79
Interest Coverage 82.73 171.46 85.57 12.42 33.47
Debt to Total Assets 0.018 0.016 0.014 0.311 0.355
Reserve to Total Assets 0.254 0.548 0.497 0.396 0.400

0.9
0.8
0.7
0.6
0.5
0.4
0.3
0.2
0.1
0
Total Debt/Equity Debt to Total Assets Reserve to Total Assets
200
171.46
150
100 85.57 82.73
50 33.47
12.42
0
Interest Coverage Ratio
33 | P a g e
The loans taken by HUL were high in 2004 which is indicated by high debt to total source ratio
and this is why its ICR ratio was low (as compared to ICR in 2007 and 2006). It has decreased its
loan and currently it is financing its business mostly by net worth and current liability. Debt to
equity ratio has decreased over the years as it has reduced the loans, but in 2007, debt/equity
ratio has increased. This implies that HUL is relying less on its owner equity to finance its assets
rather than on borrowed funds. Its RS to Total source has decreased which indicates that HUL
invests accumulated profit into business with increasing debt.
Profitability Ratios
Operating Margin (%) 14.95 14.74 14.14 15.32 20.58
PBT/Net Sales (%) 17.01 18.12 14.65 14.95 21.45
Gross Profit Margin (%) 13.96 13.68 13.03 14.12 19.36
Net Profit Margin (%) 12.58 14.94 12.42 11.68 16.84
Return On Net Worth (%) 82.89 61.48 64.05 56.61 61.14
Return on Total Assets (%) 49.03 48.10 39.15 34.16 46.58
Return on Capital Employed (%) 97.61 71.34 55.46 43.62 59.13
Earning Per Share 8.73 8.41 6.40 5.44 8.05
Dividend Per Share 9.00 6.00 5.00 5.00 5.50
CFO/PBIT 0.714 0.725 1.198 0.806 0.661
25
20
15
10
0
Gross Profit Margin Net Profit Margin
34 | P a g e
120
100
80
60
40
20
0
RONW ROTA ROCE
PBIT as percentage of sales is moderately good and there has been significant change in it during
last three years. Similar is the case of PBT/Sales. PBT/Sales are higher than the PBIT/Sales for
year 2007 and 2006 which indicate that PBT is more than PBIT. This implies that interest paid
by the company is negative. On closely watching the financial statement, it has been found that
Net Income from Interest for HUL is positive for the years 2007 and 2006 making PBT higher
than PBIT. That is because Income Received by the company is more than that to be paid. There
has not been any significant change in operating expense as percentage of sales in last three
years. For FMCG business the operating expense to sales ratio around 30% can be considered
good as the company has to spend heavily on its distribution network and promotional activities.
The profit distributing ability of the firm is excellent with return on net worth (RONW) being
around 82.89% over the years. The profit generating ability similar to the profit distributing
ability is pretty good with ROCE over 97.61% during the year 2007. ROCE in year 2006 has
increased from the figure of 2005, perhaps because of the decrease in debt (change in capital
structure) and increase in current liability (non interest bearing item). Return on total asset
(ROTA) has been moderately good with almost constant value of around 43.40% over the years.
10
0
EPS DPS
35 | P a g e
The face value of Equity Share of HUL is Rs. 1. Analyzing the EPS and DPS, which are profit
distributing ability ratios, for HUL we can see that it has been generating more than 500% times
profit for its shareholders over the years. The EPS increased over the years from Rs.5.xx in year
2004 to Rs. 8.xx in year 2007. It has been generous in distributing the profit in form of dividend
with DPS Rs. 5.00 in year 2004 and Rs. 9.00 in year 2007.
1.4
1.198
1.2
1
0.806
0.8 0.725 0.714
0.661
0.6
0.4
0.2
0
CFO/PBIT
The trend of CFO/PBIT is worth analyzing since the company’s CFO is close to its PBIT which
indicates that almost entire profit of HUL comes from its operation and the profit is realized. In
year 2005 the CFO is higher than PBIT indicating the negative CFF or CFI i.e. the company has
realized the profit(in form of cash) and invested in long term assets or paid its long term outside
liabilities(loans).
36 | P a g e
Market Based Return
Price to Earning Ratio 29.67 28.61 34.79 30.02 32.24
Market Capitalization 47222.70 47786.09 43418.67 31587.22 45058.56
P.B. Ratio 32.826 17.550 18.837 15.099 21.075
40
35
30
25
20
15
10
5
0
Price to Earning Ratio P.B. Ratio
60
Thousands
47.78609 47.2227
50 45.05856 43.41867
40
31.58722
30
20
10
0
Market Capitalization
PER ratio for HUL is not so good with values over 30 in year 2007 and 2006 and somewhat
better with value around 30 in the year 2007. It means an investor will get return around 1/30
times on his actual investment. Market capitalization of HUL has increased after 2004, but there
is a small decrease in the year 2007.
37 | P a g e
Economic Value Added

(Rs. crores) 2005 2006 2007
Cost of Capital Employed (COCE)
1 Average Debt 360 163 382
2 Average Equity 2200 2515 2402
3 Average Capital Employed : (1) + (2) 2560 2677 2785
4 Cost of Debt, post
post-tax % 3.38 5.9 6.24
5 Cost of Equity % 15.5 16.38 17.59
6 Weighted Average Cost of Capital % (WACC) 13.8 15.74 16.03
7 COCE : (3) x (6) 353 421 446
Economic Value Added (EVA)
8 Profit after tax, before exceptional items 1355 1540 1769
9 Add : Interest, after taxes 12 7 17
10 Net Operating Profits After Taxes (NOPAT) 1367 1547 1786
11 COCE, as per (7) above 353 421 446
12 EVA : (10) - (11) 1014 1125 1340
1340
1400 1125
1200 1014
1000
800
600
400
200
0
2005 2006 2007
• Cost of debt is taken at the effective rate of interest applicable to an “AAA” rated
company like HUL with an appropriate mix of short, medium and long term debt, net of
taxes. I had considered a pre tax rate of 9.45% for 2007 (8.90% for 2006) after taking into
account the trends over the years and market situations.
• Cost of Equity is the return expected by the investors to compensate them for the
variability in returns caused by fluctuating earnings and share prices.
38 | P a g e
Du Pont Analysis
The data used to calculate all the ratios used in Du Pont chart are shown below:
COGS / Sales
(0.45)
Expenses / Sales
PBIT / Sales (0.16)
(0.87)
Depn. / Sales
ROTA = PBIT / Total Asset (0.01)
(1.63)
Sales / Debtors
Sales / FA (0.08)
(0.30)
Sales / Total Asset
(9.65)
Sales / CA Sales / Cash
(0.04) (0.53)
Sales / Inventory
(0.07)
Analysis
• HUL has a lower ROTE mainly because of low operating profit (PBIT) and
comparatively higher capital employed. This has been the recent trend in past 5 years
when HUL is trying to expand and hence incurring more cost on it, as a result its non-
trade investment is quite low as compared to other competitors who have been
operating in market for a quit long time.
• PBIT/SALES are less for HUL mainly because of higher EXP/SALES.
• SALES/TA of HUL is more than the industry average mainly because of lower Total-
Assets, which in turn is due to lower Current-Assets.
• SALES/CA is also quite high for HUL because of lower amounts of ‘OTHER CA’
and ‘LOANS & ADV’, or in other words, huge SALES/OTHER CA and
SALES/LOANS & ADV.
• As explained earlier, Capital Employed of HUL is low mainly because it has low Net
Worth and it has raised lower amount of Long Term.
39 | P a g e
Recommendation downgraded to Sell
Over the last two years, HUL’s business has turned around buoyed by stronger topline growth,
improvement in margins and higher fiscal benefits. Going forward we are becoming concerned
about renewed competitive pressures and hence believe earnings growth will be below market
expectations. Coupled with rich valuation I believe downside risks are high. Key trigger will
likely be consensus earnings downgrades beginning post the September quarter results due at the
end of this month.
Henceforth, I am downgrading HUL to Sell for the following reasons:

Earnings momentum is slowing – HUL’s 1H 2006 profit grew 30% Y-o-Y. In the
second half of the year profit growth to slow to just 13% Yo-Y. While 1H had the benefit
of positive base effect, this plays negatively in 2H. Overall, I believe the turnaround in
HUL is now behind us and normalized earnings growth of 15% in 2007 is unexciting.
Competitive issues continue to persist – HUL’s topline has benefited from volume
rebound led by sharp price cuts and rising income levels. However, it is disappointed by
the fact that HUL’s market share in most of its key categories is either flat or down
despite substantial jump in advertising costs over the last 2 years. Going forward, while
40 | P a g e
Procter & Gamble (P&G) remains a latent risk, we believe there will also be increasing
risk from ITC’s likely launch of new FMCG products.
Valuation is rich – Over the last two years, HUL has re-rated from its trough P/E of 20x
to now 30xDec07E. In my opinion this is excessive for a business forecast to grow profits
at 15% CAGR.
Risks for Sell recommendation:

• Can topline growth exceed expectations? – Given its diversified product range and
distribution depth, HUL is well positioned to benefit from growing income levels.
Indeed, we have already seen this in the last two years with volume growth improving to
double digits in shampoos, detergents and skin care and to high single digit in soaps. The
key question is – does it get any better from here? I have some doubts owing to likely
new competition from ITC and also poor monsoons this year. Should HUL resort
aggressively to the other topline driver – price, then it may end up re-visiting the
problems of low priced competition.
• Growing organized retailing – opportunity or obstacle? – A number of large corporate
houses have announced plans to start food and grocery retailing. This may substantially
reduce wastage in the farm economy and thereby boost demand for HUL’s products. On
the other hand, trade margins may rise with bargaining power moving from HUL to
organized retailers. It is at this stage difficult to comment on the timing of these possible
developments. I believe in the initial stages, organized retailing may be either neutral or
positive for HUL but will likely hit negatively in a few years time.
• New management, new processes – Contrary to the tradition of last two decades when
HUL was run by local managers, Doug Bailley, an expatriate and turnaround expert from
South Africa, has been appointed the MD. This may possibly lead to new processes and
culture with more focus on product innovation and new avenues of cost cutting. However
we think the near term impact on earnings will likely be small.
41 | P a g e
Competitive issues – The worst is not over

Looking back the problems in HUL began in early 2000 when focus on innovation began to
reduce and retail price increases were sharp which led to mushrooming of regional low-priced
competition. I believe today HUL is a far improved company with greater focus on innovation
and a lot more sensitivity towards maintaining the appropriate price value equation. Yet, my key
concern is HUL’s market share is not growing despite increased advertising costs over the last
two years.
P&G – Peaceful co-existence for how long?

I saw the P&G offensive in March 2004 when they cut detergent prices by 30% forcing HUL to
follow suit. Since then there seems to be some pricing power coming back and there appears to
be a relatively peaceful co-existence between the two companies. However, I believe it is a
matter of time before P&G expands its product portfolio in India and intensifies the competitive
pressure on HUL. P&G is a global giant but India is perhaps the only large market where its
business is less than 1/5th of Unilever’s business. With emerging markets being a priority for
global companies we believe P&G will eventually increase its efforts in India.
ITC – Emerging competition

The second major threat I foresee is emerging competition from ITC. The trade participants
indicate that ITC is set to launch its personal care business over the next few months. While this
is a new category for ITC, I would be wary of this development from HUL’s perspective given
the former’s strong balance sheet, powerful distribution, desire to build a large FMCG business
and tremendous capability in executing its plans. A case in point is the flour business where in
the last 5-6 years ITC has become the market leader surpassing multinationals such as HUL,
Conagra, Pillsbury, etc.
Market share gains is a priority

Management has stated (and rightly so) that market share gains is a priority. Given this strategy
and my belief that the Indian market will get even more competitive in the future, it implies that
advertising costs for HLL will rise faster than has been the case in the last two years. Indeed in
1H 2006, advertising costs have risen 32%. I expects ad-spend to rise 29% in the current year
and 18% CAGR next two years. In terms of % of domestic consumer sales, I expect the ratio to
42 | P a g e
increase to 12.6% in 2008, up from 10.1% in 2005 (see chart 3). I expect a large part of this
increase to be funded by savings from crude oil linked raw material costs.
HUL’s market share not rising despite higher advertising

HUL’s advertising costs increased 10% in 2004 and 20% in 2005. As a percentage of domestic
consumer business, it has improved from 8.6% in 2003 to 10.1% in 2005 (see chart 3). This has
however not resulted in market share gains in its key categories (see chart 4). Soap and
toothpaste shares continue to fall and skin and detergent shares are largely flat. The only bright
spot is shampoos where shares are on an upward trend.
43 | P a g e
Peer Group Comparison

• QoQ volume growth shows mixed trend: 2QFY09 volume growth shows mixed
trend across companies and product categories. Companies such as Dabur, Godrej
Consumer, GSK Consumer and ITC have reported QoQ increase in volume growth by 1-
4%. HUL, Asian Paints, United Spirits and Colgate have reported lower QoQ volume
growth by 1-4%. YoY trend still shows 3-5% higher volume growth for most of the
companies in our coverage universe. Our FMCG universe posted 19.9% YoY growth in
revenue in the quarter ended September 2008.
• Input costs impact gross margins by 382bp (excluding ITC): The impact of a
decline in raw material cost is not reflected in the September quarter results, as most
companies have been carrying inventories at higher levels. Gross margin for our coverage
universe declined 220bp YoY. Excluding ITC, the decline in gross margins is 382bp.
Small cap and mid-sized companies reported gross margin decline of 630bp and 420bp
respectively while large caps gross margins improved by 90bp (due to 330bp expansion
in ITC gross margins led by cigarettes). Meltdown in commodity prices is expected to
increase profit margins in the December quarter. Margin expansion beyond that would be
category specific, and would depend on the competitive intensity and strength of the
market leader in that segment.
• Cost control restricts EBITDA margin decline to 220bp: Our FMCG universe
companies were able to restrict EBITDA margin decline to 220bp by focusing on cost
control measures in adspend and other overheads. Advertising spend grew by 27% YoY
growth in June 2008. Lower growth in other expenditure also resulted in a positive
operating leverage. EBITDA growth for our coverage universe was just 6.5% YoY.
• Mid-sized companies continue to outperform: Mid-sized (based on market cap)
companies in our coverage universe continue to outperform others. Sales growth for mid-
sized companies is 23.7% versus 21.1% for small companies and 17.4% for large
companies. EBITDA of these companies have grown by 13% compared with decline of
6.1% for small caps and growth of 7.6% for large caps. EBITDA margin erosion for
midcaps has been 160bp versus 330bp (for small caps) and 190bp (for large caps).
Midcaps have reported 12.1% PAT growth versus 6.1% for small caps and 5.1% for large
caps.
44 | P a g e
• Challenging times ahead but softer raw material prices could

cou boost
profitability: Most FMCG companies are positive on long
long-term
term growth potential; the
short-term
term outlook is uncertain due to uncertain economic environment and erosion in
purchasing power. Although no clear signs of a downturn are visible, select product
pro
segments are witnessing down trading and a shift toward small packs, which might
impact near term volume growth. We expect full impact of price increases to reflect in
the coming quarter, which might show lower volume growth on a QoQ basis. We expect
margin expansion for most of the companies in our universe from 3QFY09 as the full
benefits of decline in input cost and price increases are reflected. We believe that
companies with a presence in product segments that lack substitutes, high consumer
switching
hing costs and strong pricing power, will emerge stronger in this period. We rate
ITC as our top pick in large caps. United Spirits and Nestle are top picks in the mid-cap
mid
space, while we rate Marico Industries as our top pick in small caps.
45 | P a g e
HUL and Daburr emerge most aggressive in product launches

HUL and Dabur have been on the forefront for launch of new products and variants. HUL has
launched new variants across segments — prominent being Rin Matic in detergents and entry
into the ready-to-eat segment under
nder the Knorr brand. Dabur has focused on the Gulabari brand in
Skin Care and Dazzl brand in Home Care. GCPL has launched its power hair dye, Godrej Hair
Expert in four new colors. ITC continues to launch new variants in its Personal Care and Foods
range. We expect new launches to gain momentum in the coming months with players like
Dabur, Nestle, ITC and HUL being in the forefront for new launches.
46 | P a g e
Top-2 Buys Top-2 Switches
ITC Hindustan Unilever

• Adverse regulatory environment in
• HUL’s volume growth has declined from
cigarette business is near its peak; 75-80%
10.4% in Q1CY08 to 8.4% in 2QCY08 and
non-filter conversion rate and price
6.8% in 3QCY08. We expect volume
increases have ensured 12-15% PBIT
growth to decline to 5% levels in the
growth.
coming quarter.
• Increase in paper capacity by 50% and pulp
• The share in toilet soaps has declined by
capacity by 100%, will start contributing
around 400bp to 50.2%. Toilet Soaps
positively in another 3-6 months and would
contribute 25% to total sales and 35% to
boost sales and profits from 2HFY09.
the PBIT of the company.
• Rising consumer acceptability in Skin Care
• HUL’s attempt to create a strong presence
is positive due to 20-25% EBITDA
in the high potential food market has seen
margins and market size of more than
poor implementation.
US$2b.
United Spirits Dabur India

• United Spirits has posted 16% volume • Dabur India has planned capex of Rs2-2.5b
growth in 1HFY09; we expect 12-15% for capacity expansion before
volume growth in the coming years due to implementation of the sunset clause for
60% share in IMFL, strong brands and excise and income tax benefits in 2010.
presence across price points and segments. • It plans to open 15-18 NewU stores in the
• Input cost pressures are expected to subside coming 6-8 months to take advantage of
as the prices of molasses, ENA and glass decline in lease rental rates. I expect long
bottles are expected to decline due to more gestation period as Health and Beauty
than 50% decline in crude prices. stores as a concept store is yet to catch up
• We expect the company to sell treasury in India.
stock (17.75m shares) in the coming 12-15 • Performance in Skin Care and Household
months to reduce debt (US$619m from Care has been below expectations. Further,
Citibank, GBP325m from ICICI Bank and high growth segments like juices are
rupee borrowings of Rs14b). witnessing cut throat competition.
47 | P a g e
Conclusion
FMCG companies are fighting to stand out amid the clutter of a massively vigorous and
strengthening consumer market. To keep consumers interested India's brands are diversifying
well-loved favorites by entering new FMCG territory. It is quite common for emerging market
companies to want to sell their share of the business to their global partners. In case the global
company is willing to acquire the local partner, the latter would improve its negotiating power
and strengthen its position.
FMCG sector is long established and over the years, sustaining ups and downs of the Indian
economy. Thus the Critical operating rules in Indian FMCG sector can be summarized as
follows:
• Heavy launch costs on new products on launch advertisements, free samples and product
promotions.
• Majority of the product classes require very low investment in fixed assets
• Existence of contract manufacturing
• Marketing assumes a significant place in the brand building process
• Extensive distribution networks and logistics are key to achieving a high level of
penetration in both the urban and rural markets
• Factors like low entry barriers in terms of low capital investment, fiscal incentives from
government and low brand awareness in rural areas have led to the mushrooming of the
unorganized sector
• Providing good price points is the key to success.
Nevertheless, the FMCG growth story is here to stay. According to a survey on fast moving
consumer goods (FMCG) industry undertaken by Federation of Indian Chambers of Commerce
and Industry (FICCI), the growth momentum is likely to continue in the current fiscal as well,
spurred by lifestyle category goods. It includes products categories like skin care, shampoos,
deodorants, anti-aging solutions, fairness products and various men's products. Most are
counting on two factors as driving forces:-
• Increased market penetration in rural areas and

• A shift in urban outlook regarding expenditure.
48 | P a g e
Annexure
Balance Sheet of HUL
(Rs. in Crs.)
Year Dec 07 Dec 06 Dec 05 Dec 04 Dec 03
SOURCES OF FUNDS :
Share Capital 217.75 220.68 220.12 220.12 220.12
Reserves Total 1,221.49 2,502.81 2,085.50 1,872.59 1,918.60
Total Shareholders Funds 1,439.24 2,723.49 2,305.62 2,092.71 2,138.72
Secured Loans 25.52 37.13 24.5 1,453.06 1,603.70
Unsecured Loans 63.01 35.47 32.44 18.06 100.61
Total Debt 88.53 72.6 56.94 1,471.12 1,704.31
Total Liabilities 1,527.77 2,796.09 2,362.56 3,563.83 3,843.03
APPLICATION OF FUNDS :
Gross Block 2,669.08 2,462.69 2,375.11 2,314.22 2,141.72
Less : Accumulated Depreciation 1,146.57 1,061.94 951.17 891.08 846.09
Net Block 1,522.51 1,400.75 1,423.94 1,423.14 1,295.63
Capital Work in Progress 185.63 110.26 98.03 94.42 73.84
Investments 1,440.81 2,413.93 2,014.20 2,229.56 2,574.93
Inventories 1,953.60 1,547.71 1,321.77 1,479.58 1,402.45
Sundry Debtors 443.37 440.37 522.83 489.27 470.85
Cash and Bank 200.86 416.94 355.03 698.05 806.48
Loans and Advances 679.58 764.63 573.38 638.06 822.01
Total Current Assets 3,277.41 3,169.65 2,773.01 3,304.96 3,501.79
Less : Current Liabilities and Provisions
Current Liabilities 3,837.09 3,201.63 2,969.45 2,590.79 2,559.49
Provisions 1,273.89 1,321.42 1,158.87 1,123.46 1,311.11
Total Current Liabilities 5,110.98 4,523.05 4,128.32 3,714.25 3,870.60
Net Current Assets -1,833.57 -1,353.40 -1,355.31 -409.29 -368.81
Deferred Tax Assets 403.71 385.43 338.68 365.85 377.09
Deferred Tax Liability 191.32 160.88 118.54 139.85 109.65
Net Deferred Tax 212.39 224.55 220.14 226 267.44
Total Assets 1,527.77 2,796.09 2,362.56 3,563.83 3,843.03
Contingent Liabilities 494.37 476.4 468.34 476.41 478.34
49 | P a g e
Income & Expenditure Statement of HUL

(Rs. in Crs.)
Year Dec 07 Dec 06 Dec 05 Dec 04 Dec 03
INCOME :
Sales Turnover 14,930.12 13,321.08 12,464.87 11,550.76 11,785.67
Excise Duty 1,058.54 946.32 885.07 948.07 990.97
Net Sales 13,871.58 12,374.76 11,579.80 10,602.69 10,794.70
Other Income 667.03 998.94 455.33 596.95 568.71
Stock Adjustments 91.39 70.23 -181.13 -154.93 62.39
Total Income 14,630.00 13,443.93 11,854.00 11,044.71 11,425.80
EXPENDITURE :
Raw Materials 6,323.23 5,659.96 5,302.58 4,837.02 4,945.87
Power & Fuel Cost 201.46 193.07 190.29 179.86 184.05
Employee Cost 799.6 784.21 734.95 720.65 687.57
Other Manufacturing Expenses 1,500.02 1,371.92 1,279.99 1,138.02 1,097.39
Selling and Administration Expenses 2,560.82 2,371.52 2,066.95 1,787.51 1,626.54
Miscellaneous Expenses 748.13 683.57 519.89 545.47 525.46
Total Expenditure 12,133.26 11,064.25 10,094.65 9,208.53 9,066.88
Operating Profit 2,496.74 2,379.68 1,759.35 1,836.18 2,358.92
Interest 26.49 13.97 24.2 136.25 69.12
Gross Profit 2,470.25 2,365.71 1,735.15 1,699.93 2,289.80
Depreciation 141.91 135.67 138.38 195.68 199.99
Profit Before Tax 2,328.34 2,230.04 1,596.77 1,504.25 2,089.81
Tax 313.07 310.29 220.66 265.17 410.03
Deferred Tax 56.17 -10.38 17.53 37.77 3.93
Net Profit before Minority Interest 1,918.87 1,894.16 1,358.58 1,201.31 1,675.85
Minority Interest 3.98 3.63 2.66 -2.19 -9.02
Net Profit after Minority Interest 1,914.89 1,890.53 1,355.92 1,203.50 1,684.87
Extraordinary Items 197.45 351.13 36.3 33.44 30.1
Adjusted Net Profit 1,717.44 1,539.40 1,319.62 1,170.06 1,654.77
Adjst. below Net Profit 150.01 -3.63 -2.66 7.09 104.39
P & L Balance brought forward 640.27 452.12 498.45 670.46 1,048.04
Appropriations 2,532.23 1,702.38 1,402.25 1,380.41 2,157.82
P & L Balance carried down 176.92 640.27 452.12 498.45 670.46
Dividend 1,976.12 1,325.48 1,100.62 1,100.62 1,599.21
Equity Dividend (%) 900 600 500 500 550
EPS before Minority Interest (Unit Curr.) 7.18 7.74 5.45 4.77 5.9
EPS after Minority Interest (Unit Curr.) 7.16 7.72 5.43 4.78 5.94
Book Value (Unit Curr.) 6.92 11.89 9.85 9.59 9.76
50 | P a g e
Ratio Analysis
Ratio Analysis assumes there is a relationship between certain aspects of the activities of the firm
as revealed in its income statement and balance sheet. Such a relationship indicates a pattern of
behavior.
Liquidity Ratio
Liquidity Ratios indicate the company’s ability to meet its short-term liability. These ratios
indicate the availability of liquid asset to meet short term obligations. Creditors usually check
this ratio to assess the ability of firm to meet its short term obligations.
Current Ratio
This is the ratio of the current assets and current liabilities, and is found out by dividing the
current assets by the current liabilities. This ratio is the indicator of the short-term liquidity
position of a firm. The conventional ratio is taken at 2:1 i.e., every current liability of Re.1
should be backed by a current asset of Rs.2.

Current Ratio =

Quick Ratio
Quick ratio is computed as follows:

Quick Ratio =

While calculating the quick ratio, inventories are excluded from current assets on the assumption
that they take more time for conversion than debtors or other receivables. The conventional ratio
is 1:1, i.e., every rupee of short-term liabilities must be backed by equivalent liquid assets. If,
however, the ratio is less than 1, then some portion of the short-term liabilities must be met from
the funds to be collected from outside.
Stock Turnover Ratio

This ratio indicates the number of times the stock is turned over, on an average, and must be
replaced during a given accounting period.
! "

Stock Turnover Ratio =
#
51 | P a g e
Debtors Turnover Ratio

This ratio shows the number of day for which credit is outstanding in the value of the amounts
owed by the debtors. It gives an indication of the efficiency or otherwise of the credit and
collection policies of the firm.
$
Debtors Turnover Ratio =
$%
$ $

Average Debtors =

& '

Average Daily Credit Sales =
#()
Creditors Turnover Ratio

This ratio measures the promptness or otherwise with which payment is made to creditors for
credit purchase. It is measured as follows:

Creditors’ Turnover Ratio = $% *
Leverage Ratio
Leverage Ratios indicate the company’s ability to meet its Long-term liability. These ratios
indicate the ability of the firm to return the investment made by its owners and debt providers in
the business, in case the company is closed down. These ratios are usually seen by the debt
providers or financial institutions in order to assess the risk involved in the business. If the firm
is closed down then first it is liable to pay back its loan and then if it is left with something that
belongs to the share holders.
Debt/Equity Ratio
This measures the relation between debt and equity in the capital structure of a firm and is
expressed as:
$
Debt/Equity Ratio =
"+%
Generally, the higher the ratio, the greater is the possibility of increasing the rate of return to the
equity, as long as the cost of debt is lower then the rate of return from the investment.
52 | P a g e
Fixed Assets Turnover Ratio

This indicates the extent to which the fixed assets contributed towards sales and is measured by:
,
Fixed Assets Turnover Ratio = !-
Profitability Ratio
Profitability Ratios show how successful a company is in terms of generating returns or profits
on the Investment that has been made in the business i.e. the Profitability ratios indicates the
ability of the firm to generate and distribute the profit. It can be broadly categorized into profit
generating ability (PGA) ratios and profit distributing ability (PDA) ratios. It can be said the
higher these ratios the better it is for the company.
Gross Profit Ratio

This ratio shows the amount of gross profit made out of the total net sales.
. */
Gross Profit Ratio = ,
Net Profit Margin Ratio

This ratio shows the amount of net operating profit made out of the total net sales
, */

Net Profit Margin Ratio = ,
Operating Margin Ratio

This ratio shows the amount of operating expenses made out of the total net sales.
"-
Operating Margin Ratio =
,
Return on Net Worth

This ratio gives an indication about the profit being made by the firm on the investment made by
the owner. This ratio is used to analyze the business from the perspective of the owner. RONW
is an indicator of profit distributing ability of a firm.
*/
Return on Net Worth =
, 0
53 | P a g e
Interest Coverage Ratio

This ratio measures the ability of the firm to meet its interest payments as they become due and
is computed as follows:
, */ 1 &-

Interest Coverage Ratio = 1
Payout Ratio
Earning Per Share

EPS is an indicator of profit distributing ability of a firm. This ratio tells how much profit the
firm is making on owner’s investment on a single share of the company.
, / 2 -3 %

Earning Per Share = , "+%
Dividend Per Share

DPS ratio gives an idea of the actual distribution of profit to the owners i.e. profit distributed to
shareholders per share.
, / 2 -3 %

Dividend Per Share =
$ $
Dividend Payout Ratio

It is a ratio between dividends distributed to equity shareholders and net earnings of the firm.
Thus:
$ $
Dividend Payout Ratio = 4 100
, "
54 | P a g e
Economic Value Added

M/s Stern Steward and Company (USA) pioneered the concept of Economic Value Added
(EVA) as a measure of the business performance in the 1980s. Any surplus generated from
operating activities over and above the cost of capital is termed as EVA
Operationally, a firm’s EVA is the excess of its after-tax operating profits over the required
minimum rate of return that investors could get by investing in securities of comparable risk, i.e.,
EVA = NOPAT – (WACC 4 TCE3
where,
NOPAT = Net Operating Profit after Tax, i.e., Net Profit + Interest Expenses
+ Non-Operating – Non-Operating Income : Stern-Stewart
adjustments
WACC = Weighted Average Cost of Capital expressed in percentage
= (Kd 4 W1) + (Ke 4 W2) + (Kp 4 W3)
where,
Kd = cost of debt after tax (interest rate)
Ke = cost of equity under Capital Asset Pricing Model (CAPM)
Kp = cost of per preference and W1, W2, W3 are the market value weights
assigned to debt equity and preference capital, respectively.
TCE = Total Capital Employed, i.e., the sum total of adjusted equity
Shareholder’s fund, all interest bearing obligations and preference share
capital circulating in the business.
55 | P a g e
Du Pont Analysis
Centrec’s Du-Pont Financial Analysis Model provides the framework to understand the drivers
of ROI. The Du Pont Model can be used to troubleshoot operational or structural problems from
a financial perspective, with a specific focus on ROTA, ROCE and RONW. It is an approach to
analyse the firm by evaluating inter relationships among many of the performance measures. In
the Dupont Analysis we try to find out what are the factors/drivers that are causing the profits to
move up. By identifying these factors/drivers we can concentrate on them and improve our
efficiency.
COGS /
Sales
Expenses /
PBIT / Sales
Sales
Depn. /
ROTA = PBIT / Sales
Total Asset
Sales /
Sales / FA
Sales / Total Debtors
Asset Sales /
Sales / CA
Cash
Sales /
Inventory
56 | P a g e
Bibliography
• www.naukrihub.com/india/fmcg/
• www.ibef.org
• www.hul.co.in
• www.hll.co.in
• www.myiris.com/shares/research/brokResMain.php?cSelect=4&icode=HINLEVER
• money.rediff.com/money/jsp/company.jsp?companyCode=12520002
• www.moneypore.com
• www.capitaline.com
• HUL Annual Report 2007
• Investor Presentation - Citigroup India Conference 2007
• Financial Policy and Management Accounting (Seventh Edition) – Bhabatosh Banerjee
- The End -

FMCG Sector Analysis

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PROJECT REPORT

Submitted in partial fulfillment of the requirement for the reward of

Post Graduation Program in Business Management

NAME : DAIPAYAN LODH

Under the Supervision of

Prof. Saravan Krishnamurthy, Kohinoor Business School, Khandala

Miss. Sheela Khatane, HR Head, Motilal Oswal Securities Ltd., Nagpur

Kohinoor Business School

I am deeply indebted to Dr. B. P. Verma

I would also like to thanks Mr. Harish Daf

TOPICS Page No.

Some key characteristics of the 394 broking firms are:

Today, Motilal Oswal Financial Services Ltd. is a well

Wealth Management and Retail & Distribution

Fundamental analysis serves to answer questions, such as:

1. Is the company’s revenue growing?

Why FMCG Sector is Analyzed:

• Hindustan Unilever (HUL) Ltd.

In 2005, the Rs. 48,000-crore

Market Leader Strong No. 2

Turnover $ Mln Market Capitalization $ Bln

India – A Large Consumer Goods Spender

Change in the Indian Consumer Profile

FMCG Category and Products

Analysis of FMCG Sector

Critical Operating Rules in FMCG Sector

Rural Markets: Small is Beautiful

Market Opportunities for Investment

FMCG Market Size (US$ billion)

• Dairy Based Products: Investment opportunities exist in value-added products like

Hindustan Unilever Limited

6 Mega Brands ~ $ 150 to 200 million each, 53% FMCG Portfolio

Home & Personal Care

Personal Wash: Laundry:

Hindustan Lever Network

Listing Details of Equity Shares

Shareholding Pattern as on December 31, 2007

Foreign Holdings (15.44%) Govt. / Financial Institutions (15.2%)

Categories of Shareholders as on December 31, 2007

Mergers/Acquisitions/Joint Ventures and Disposals

1. Divestment of “Sangam Direct”

3. Demerger of the Non-Operational Facilities in Shamnagar, Jamnagar and the

4. Joint Venture with Smollan Holdings

Project Shakti - Changing Lives in Rural India

Current Ratio Quick Ratio

0 Dec'03 Dec'04 Dec'05 Dec'06 Dec'07

Dec'03 Dec'04 Dec'05 Dec'06 Dec'07 Debtors Velocity

Reserve to Total Assets 0.254 0.548 0.497 0.396 0.400

100 85.57 82.73

Market Based Return

Market Capitalization 47222.70 47786.09 43418.67 31587.22 45058.56

P.B. Ratio 32.826 17.550 18.837 15.099 21.075

Economic Value Added

Recommendation downgraded to Sell

Henceforth, I am downgrading HUL to Sell for the following reasons:

Risks for Sell recommendation:

Competitive issues – The worst is not over

P&G – Peaceful co-existence for how long?

ITC – Emerging competition

Market share gains is a priority

HUL’s market share not rising despite higher advertising

Peer Group Comparison

• Challenging times ahead but softer raw material prices could

! "

$ $

& '

, */

, */ 1 &-

, / 2 -3 %

, / 2 -3 %