Term Paper Guidelines Economics 5033 Your paper will be evaluated on the followi

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Term Paper Guidelines Economics 5033 Your paper will be evaluated on the following criteria: 1. Format – Follow guidelines of Publication Manual – Each paper should have an executive summary, an introduction, a discussion of your topic organized into sub-topics, if possible, and a conclusion stating the point of your paper. Double space paper with 1” margins. 2. Research Bibliography – Include a bibliography at the end of your paper in the proper format. Your paper should have at least four research sources. Scholarly sources are the best. The course textbook is not an acceptable research source. 3. Content – Ideas presented in the paper must make logical sense. A paper that consists of a jumble of portions of articles cut and pasted from the internet will be given little credit. The analysis of the topic must be complete. 4. Original Thought – Select a topic that interests you. You may select any topic mentioned in the course textbook. If you have any doubt about the suitability of your topic for a term paper, please contact me. Student papers receiving highest scores will demonstrate an understanding and synopsis of your research on the topic. 5. Writing, grammar, spelling – Well written papers are desirable. However, emphasis is placed upon content and research. 6. Length – Approximately 3,000-4,000 words or approximately 8 pages, more or less, depending on your analysis of the topic. 7. Grade scores– 10% for proper citation, 10% for proper format, 30% for quality of bibliography, 35% content, 15% original thoughts. 8. The term paper is worth a maximum of 100 points. Only well written term papers will receive the entire 100 points. Poorly written papers will be awarded fewer points.

Explanation / Answer

Fundamental Analysis of Companies in FMCG Sector

Abstract

Investment decision is now part of every Indian citizen. Everyone takes such kind of decisions at various contexts. In general investment decisions are made in two ways: 1) Fundamental analysis 2) Technical analysis. This report aims to analyse fundamentals of some of Indian FMCG (Fast-moving consumer goods) companies. The objectives of the study are to do fundamental analysis of NSE listed companies i.e. Britannia industry, Dabur India, Hindustan Unilever Limited. It is found that GNP, Inflation, Foreign exchange reserves, Government expenditure and Agricultural production has a positive growth rate during the study period.

Keywords - Fundamental analysis, Technical analysis, fast moving consumer goods, GNP (gross net product), Foreign exchange, Inflation

Introduction

The Indian FMCG Sector is an important contributor to India's GDP and is very important for its sustenance. It is the fourth largest sector of the Indian Economy. Items in this sector usually are meant for daily consumption and give an enormously high return. It has a market size of Rs. two trillion with rural India contributing to one-third of it.

The Indian FMCG sector is highly fragmented, volume driven and characterized by low margins. The sector has a strong MNC presence, well-established distribution network and high competition between organized and unorganized players. FMCG products are branded while players incur heavy advertising, marketing, packaging and distribution costs. The pricing of the final product also depends on the costs of raw material used. The growth of the sector has been driven by both the rural and urban segments. India is becoming one of the most attractive markets foreign FMCG players due to easy availability of imported raw materials and cheaper labour costs.

All these factors make the FMCG Sector a very good investment. To minimise the risk of an investment the investor should know about the past performance of a company. This research project is aimed at finding the investment opportunities in the companies of the FMCG Sector. We approach this problem of finding feasible companies through the process of Fundamental Analysis which is aimed at finding the intrinsic value of a stock through various different quantitative and qualitative approaches. Finally, the investors take a buy or sell decision-based on this analysis. Thus, the main purpose of this paper is to analyse companies in the Indian FMCG Sector using Fundamental Analysis and uncover possible investment opportunities. This is done keeping a long-time frame in mind.

Objectives

This study is conducted to study the impact of:

Ratio Analysis

Introduction:

It is a ratio which calculates the company's total liabilities to its shareholders’ equity. It is a leverage ratio. A lower percentage means that a company is using less leverage and has a stronger equity position. On the other hand, companies with very low debt to equity may be earning less than their competitors as a result.

Table 1.1: Debt to Equity Ratios of three companies over 3 years

2016-17

2015-16

2015-14

Hindustan Unilever

-

-

-

Britannia

-

-

-

Dabur

0.08

0.03

0.06

Source: Annual report of respective company of last 3 years

Analysis:

Introduction:

A leverage ratio that measures the extent of a company’s or consumer’s leverage. The debt ratio is defined as the ratio of total – long-term and short-term – debt to total assets. It can be interpreted as the proportion of a company’s assets that are financed by debt.

Table 1.2: Debt to Assets Ratio of three companies over three years

2016-17

2015-16

2015-14

Hindustan Unilever

-

-

-

Britannia

-

-

-

Dabur

0.05

0.02

0.035

Source: Annual report of respective company of last 3 years

Analysis:

Introduction:

It is a ratio which shows the extent of solvency of a company. Also shows the extent to which funds are available for the operation of the company. Calculated by dividing net fixed assets by net worth.

Table 1.3: Fixed Assets to Net Worth of three companies over three years

2016-17

2015-16

2014-15

Hindustan Unilever

0.65

0.89

0.79

Britannia

0.655

0.9704

0.8357

Dabur

0.28

0.25

0.30

Source: Annual report of respective company of last 3 years

Analysis:

Introduction:

Return on Equity is a measure of profitability that calculates how many dollars of profit a company generates with each dollar of shareholder's' equity It is calculated by dividing the net income of the company or individual by the shareholders equity.

Table 1.4: Return on Equity of three companies over last three years

RoE (in%)

2016-17

2015-16

2014-15

Hindustan Unilever

69.18

110.73

115.83

Britannia

32.67

44.05

50.37

Dabur

27.29

32.71

32.64

Source: Annual report of respective company of last 3 years

Analysis:

Introduction:

Return on assets (ROA) is an indicator of how profitable a company is relative to its total assets. ROA gives an idea as to how efficient management is at using its assets to generate earnings. Calculated by dividing a company's annual earnings by its total assets, ROA is displayed as a percentage.

Table 1.5: Return on Assets of three companies over a span of three years

RoA (in%)

2016-17

2015-16

2014-15

Hindustan Unilever

30.43

28.81

31.65

Britannia

22.82

24.42

25.28

Dabur

19.14

21.08

20.67

Source: Annual report of respective company of last 3 years

Analysis:

Return on Assets of HUL remain almost the same in the three years of our analysis. The minor correction in 15-16 is due to the overall fall in GDP during the year. Similarly, Dabur’s RoE remains the same throughout the year. Britannia’s RoE falls over the span of three years and shows the management is not efficient in using its assets.

Introduction:

Return on capital employed (ROCE) is a financial ratio that measures a company's profitability and the efficiency with which its capital is employed. ROCE is calculated as:

ROCE = Earnings Before Interest and Tax (EBIT) / Capital Employed

Table 1.6: Return on Capital Employed of three companies over three years

RoCE (in%)

2016-17

2015-16

2014-15

Hindustan Unilever

59.47

81.16

88.95

Britannia

32.36

43.43

49.41

Dabur

24.9

31.51

31.39

Source: Annual report of respective company of last 3 years

Analysis:

HUL, Britannia and Dabur have a falling RoCE over the span of three years and it is a sign of poor capital allocation and not an investable grade attribute. All these three companies have had a huge fall in RoCE in 2016-17.

Introduction:

PBDIT margin is a measurement of a company's operating profitability as a percentage of its total revenue. It is equal to earnings before interest, tax, depreciation and amortization (PBDIT) divided by total revenue.

Table 1.7: PBDIT Margin of three companies over a span of three years

PBDIT Margin

2016-17

2015-16

2014-15

Hindustan Unilever

20.61

19.47

18.91

Britannia

16.03

15.47

11.97

Dabur

26.19

22.52

19.81

Source: Annual report of respective company of last 3 years

Analysis:

All the three companies have shown an increase in the PBDIT Margin over the three years which is a positive sign. Dabur has the highest PBDIT Margin among the three. However, this shouldn’t be seen in its singularity as PBDIT margin doesn’t take debt into account and Dabur has a greater debt than HUL and Britannia.

Introduction:

Net profit margin is the ratio of net profits to revenues for a company or business segment. Typically expressed as a percentage, net profit margins show how much of each dollar collected by a company as revenue translates into profit. The equation to calculate net profit margin is:

Net profit margin = Net profit / Revenue

Table 1.8: Net profit margin of three companies over three years

Net profit Margin

2016-17

2015-16

2014-15

Hindustan Unilever

14.07

12.76

14.0

Britannia

10.02

9.42

8.67

Dabur

18.86

16.33

14.04

Source: Annual report of respective company of last 3 years

Analysis:

Britannia and Dabur showed increasing Net profit margin which is good for investing point of view as this ratio gives more accurate view of how profitable a company is. In case of HUL we can see a drop in FY16 as their profits were less for that year.

Introduction:

Inventory turnover is a ratio showing how many times a company's inventory is sold and replaced over a period of time. The days in the period can then be divided by the inventory turnover formula to calculate the days it takes to sell the inventory on hand. It is calculated as sales divided by average inventory.

Table 1.9: Inventory turnover ratio of three companies over three years

Inventory turnover

2016-17

2015-16

2014-15

Hindustan Unilever

13.50

12.65

11.84

Britannia

13.96

20.70

20.76

Dabur

8.83

9.34

9.86

Source: Annual report of respective company of last 3 years

Analysis:

HUL shows increasing Inventory turnover ratio indicating strong sales compared to Britannia and Dabur as they have decreasing Inventory Turnover Ratio which implies week sales and, therefore, excess inventory.

Introduction:

Asset turnover ratio is the ratio of the value of a company’s sales or revenues generated relative to the value of its assets. The Asset Turnover ratio can often be used as an indicator of the efficiency with which a company is deploying its assets in generating revenue.

Table 1.10: Asset turnover ratio of three companies over three years

Asset turnover

2016-17

2015-16

2014-15

Hindustan Unilever

216.18

225.78

225.94

Britannia

227.65

259.12

291.47

Dabur

101.43

129.06

147.25

Source: Annual report of respective company of last 3 years

Analysis:

As we can see all the three companies have shown decreasing Asset Turnover Ratio for the last three years implying company is not performing well and shouldn’t be seen as a good sign for Investing point of view. This is implying company is getting lower revenue per Rupee of assets.

Introduction:

The current ratio is a liquidity ratio that measures a company's ability to pay short-term and long-term obligations. To gauge this ability, the current ratio considers the current total assets of a company (both liquid and illiquid) relative to that company’s current total liabilities. The formula for calculating a company’s current ratio is:

Current Ratio = Current Assets / Current Liabilities

Table 1.11: Current ratio of three companies over three years

Asset turnover

2016-17

2015-16

2014-15

Hindustan Unilever

1.31

1.03

1.05

Britannia

1.84

1.06

1.19

Dabur

1.48

1.32

1.25

Source: Annual report of respective company of last 3 years

Analysis:

In case of HUL Current Ratio is almost equal for FY15 and FY16 and it jumped to 1.31 in FY17 which is a good sign as company is now more capable of paying its obligations.

In case of Britannia a drop in FY16 is not a good sign for Investing point of view but the company showed better results in FY17 with a great recovery.

In case of Dabur we can see increasing current ratio which is a good sign for investing point of view as company would have collected more assets or lesser their Liabilities.

Du Pont Chart Analysis for Last year

Employee Benefits

What are Employee Benefits?

They are the non-salary offerings that vary from company to company. These offerings are provided in addition to salary to the potential employee to stay competitive in the talent marketplace.

Why Benefits are Important?

Let’s have a brief overview on how our companies handle employee benefits…

Types of Benefits Offered by all the three companies

(All figures are given in Rs. crores unless specified)

1.   Hindustan Unilever Limited

Table 3.1: Employee benefits expense data over three years

2016-2017

2015-2016

2014-2015

Salaries, Wages and Bonus

1439.00

1373.86

1390.08

Contribution to Provident and Other Funds

86

76.57

57.69

Share based payment expense

94.00

19.30

19.41

Staff welfare expenses

106

105.62

99.97

Source: Annual report of respective company of last 3 years

Comments:

     2. Dabur India Limited

Table 3.2: Employee benefits expense data over three years

2016-2017

2015-2016

2014-2015

Salaries, Wages and Bonus

368.08

344.47

313.16

Contribution to Provident and Other Funds

30.46

29.04

26.2

Share based payment expense

11.22

44.85

39.2

Staff welfare expenses

15.54

13.41

14.43

Source: Annual report of respective company of last 3 years

Comments:

3. Britannia Industries Limited

Table 3.3: Employee benefits expense data over three years

2016-2017

2015-2016

2014-2015

Salaries, Wages and Bonus

216.46

192.21

249.64

Contribution to Provident and Other Funds

8.88

12.65

16.11

Share based payment expense

5.47

Staff welfare expenses

10.87

9.03

14.83

Source: Annual report of respective company of last 3 years

Comments:

Dividend Pay-out Ratio

The dividend pay-out ratio is the ratio of the total amount of dividends paid to stockholders to the net income of the company. The amount that is not paid out to shareholders is retained by the company to pay off long-term borrowings or to reinvest in future operations.

A new, growth-focused company that aims to expand, make new products and penetrate new markets would pay little to its shareholders and invest most of their net income into their ongoing or future projects and could be forgiven for having a smaller dividend pay-out ratio. Meanwhile, a company with over 100% pay-out ratio is spending more in giving dividends to its shareholders than it is earning and will be eventually forced to cut dividends or to stop it altogether.

Dabur:

Table 4.1: Dividend pay-out indicator data over three years

March’17

March’16

March’15

Dividend/Share

2.25

2.25

2

EPS

5.67

5.34

4.35

Dividend Pay-out Ratio

39.68%

42.13%

45.97%

Source: Annual report of respective company of last 3 years

Britannia:

Table 4.2: Dividend pay-out indicator data over three years

March’17

March’16

March’15

Dividend/Share

22

20

16

EPS

70.31

62.44

51.9

Dividend Pay-out Ratio

31.29%

32.03%

30.82%

Source: Annual report of respective company of last 3 years

Hindustan Unilever Limited:

Table 4.3: Dividend pay-out indicator data over three years

March’17

March’16

March’15

Dividend/Share

17

16

15

EPS

20.75

18.87

19.95

Dividend Pay-out Ratio

81.29%

84.79%

75.18%

Source: Annual report of respective company of last 3 years

The dividend pay-out ratio of Dabur is steadily increasing over the years and thus shows a mature and growing business. On the other hand, dividend pay-out ratios of both Britannia and HUL are increasing at first and then decreasing which the companies are extremely reluctant to do, since it can drive the stock price down and reflect poorly on the management's abilities.

The dividend pay-out ratio of Hindustan Unilever Limited is the highest amongst the three companies at an aggregate of 80.6% which implies it’s satisfied with the growth its making. However, Britannia is the least in paying dividends to its shareholders which shows vision in the longer term for the company by investing for core operations and increasing growth.

Ownership and Shareholding Pattern of Companies

Shareholding Pattern shows the total number of equity shares outstanding in the company and how it is divided between various owners (individual and institution). Shareholding pattern of listed companies is required to be disclosed to the stock exchanges every quarter. We will have a detailed analysis of the three companies and their shareholding pattern.

Shareholding Pattern:

Table 5.1: Shareholding pattern data over three years

Year

FY 2016-17

FY 2015-16

FY 2014-15

Promoter Holding (%)

67.20

67.21

67.23

Foreign Institutional Investor (%)

13.26

14.20

15.01

Insurance Companies (%)

3.55

3.61

3.39

Mutual Funds (%)

1.78

0.87

0.32

Individual Shareholders up to 1 lakh (%)

11.69

11.94

12.08

Source: Annual report of respective company of last 3 years

Analysis:

2. Dabur India

Shareholding Pattern:

Some important statistics:

Table 5.2: Shareholding pattern data over three years

Year

FY 2016-17

FY 2015-16

FY 2014-15

Promoter Shareholding (%)

68.04

68.11

68.16

Foreign Institutional Investor (%)

19.98

19.60

20.96

Mutual Funds (%)

0.15

0.94

1.14

Insurance Companies (%)

3.80

3.61

3.75

Total Individual Holding (%)

4.65

5.09

4.85

Source: Annual report of respective company of last 3 years

Analysis:

3. Britannia

Shareholding Pattern:

Table 5.3: Shareholding pattern data over three years

Year

FY 2016-17

FY 2015-16

FY 2014-15

Promoter Shareholding (%)

50.73

50.74

50.75

Foreign Institutional Investor (%)

5.00

11.46

17.62

Mutual Funds (%)

6.70

6.16

5.21

Insurance Companies (%)

4.71

2.96

3.81

Individual Holding below 1 lakhs (%)

13.34

13.78

13.12

Foreign Portfolio Investors (%)

11.01

6.51

1.48

Analysis:

Overall the pattern signifies the lack of trust of FIIs and the Government in the company but the rise of FPIs is reassuring.

Summary

Fundamental Analysis aims at finding the true growth of a security by analysing the macroeconomic industry scenario and company financial position. An Investor can make safest as well as lucrative investment by analysing the related variables and ensure for optimum return. Fundamental Analysis suggests that no investor should buy or sell a share on the basis of the advices of market intermediaries. Fundamental Analysis calls upon investor to make his buy or sell decision based upon the detailed analysis of the information available. In this study, a thorough analysis of the company’s different ratios was conducted and their analysis was undertaken. Their cash inflows and outflows was also taken into account. By calculating the intrinsic value of the companies, namely Hindustan Unilever, Dabur and Britannia, and concluded whether the company is overvalued or undervalued. The benefits that the companies provide to its employees was noted. We have also analysed the laws and regulations affecting the FMCG sector as whole and particularly the above-named companies. The time series and cross-sectional analysis of the ownership patterns of different companies in this sector also factored in our analysis. The company analysis done with the help of above mentioned procedures indicates that Hindustan Unilever, Dabur and Britannia are financially in satisfactory position.

References[1]

[1] All the references are subject to APA style

2016-17

2015-16

2015-14

Hindustan Unilever

-

-

-

Britannia

-

-

-

Dabur

0.08

0.03

0.06

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