Financial Management Project

Company Background

Brief History

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. HLL 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.

Hindustan Unilever Limited (HUL) is India's largest Fast Moving Consumer Goods Company with a heritage of over 80 years in India and touches the lives of two out of three Indians. It is owned by Anglo-Dutch company Unilever which owns a 52% controlling share in HUL. HUL's products include foods, beverages, cleaning agents and personal care products.

HUL was established in 1933 as Lever Brothers India Limited and, in 1956, became known as Hindustan Lever Limited, as a result of a merger between Lever Brothers, Hindustan Vanaspati Mfg. Co. Ltd. and United Traders Ltd. It is headquartered in Mumbai, India and employs over 16,500 workers, whilst also indirectly helping to facilitate the employment of over 65,000 people. The company was renamed in June 2007 as "Hindustan Unilever Limited".

Lever Brothers first commenced operations in India in the summer of 1888, when crates full of Sunlight soap bars, embossed with the words "Made in England by Lever Brothers" were shipped to the Kolkata harbor and it began an era of marketing branded Fast Moving Consumer Goods (FMCG)

HUL works to create a better future every day and helps people feel good, look good and get more out of life with brands and services that are good for them and good for others.

With over 35 brands spanning 20 distinct categories such as soaps, detergents, shampoos, skin care, toothpastes, deodorants, cosmetics, tea, coffee, packaged foods, ice cream, and water purifiers, the Company is a part of the everyday life of millions of consumers across India. Its portfolio includes leading household brands such as Lux, Lifebuoy, Surf Excel, Rin, Wheel, Fair & Lovely, Pond’s, Vaseline, Lakmé, Dove, Clinic Plus, Sunsilk, Pepsodent, Closeup, Axe, Brooke Bond, Bru, Knorr, Kissan, Kwality Wall’s and Pureit.

The Company has over 16,000 employees and has an annual turnover of 27408crores (financial year 2013 - 2014). HUL is a subsidiary of Unilever, one of the world’s leading suppliers of fast moving consumer goods with strong local roots in more than 100 countries across the globe with annual sales of €49.8 billion in 2013. Unilever has 67.25% shareholding in HUL.

Vision of the company

We work to create a better future every day. We help people feel good, look good and get more out of life with brands and services that are

good for them and good for others. We will inspire people to take small everyday actions that can add up to a big difference for the

world. We will develop new ways of doing business that will allow us to double the size of our company

while reducing our environmental impact.

Prominent Brands:

Kwality Walls ice cream, Lifebuoy, Lux, Breeze, Liril, Rexona, Hamam, Moti soaps, Lipton tea, Brooke Bond tea, Bru Coffee, Pepsodent and Close Up toothpaste and brushes, and Surf, Rin and Wheel laundry detergents, Kissan squashes and jams, Pond's talc and creams, Vaseline lotions, Fair & Lovely creams, Lakmé beauty products are some of the prominent brands of the company.

Power Brands:

In mid-2000 after M.S. Banga took over the reins at HLL, the company decided that it would focus on 30 odd 'Power Brands' and carefully plan its entry into new businesses. Intuitively this made sense, instead of spreading your resources all over the place concentrate on a few brands.

But what it meant was that power brands had to grow at higher rates to compensate for the loss of sales from other brands. Unfortunately, the other brands have shrunk faster vis-à-vis the rate at which the power brands have grown. This has hit the top line of the company. The company's Vanasapti brand, Dalda, is a case in point

Financial Analysis Of HUL

Balance Sheet as at March 31, 2013      

 As at 31-3-

2013 As at 31-3-

2012  Rs crore Rs croreSources Of Funds      Total Share Capital 216.25   216.15Equity Share Capital 216.25   216.15Share Application Money 0   0Preference Share Capital 0   0Init. Contribution Settler 0   0Preference Share Application Money 0   0Employee Stock Opiton 0   0Reserves 2648.52   3464.93Revaluation Reserves 0   0Networth 2864.77   3681.08Secured Loans 24.74   0Unsecured Loans 0   0Total Debt 24.74   0Minority Interest 20.86   18.3Policy Holders Funds 0   0Group Share in Joint Venture 0   0Total Liabilities 2910.37 3699.38       Application Of Funds      Gross Block 4157.96   3819.31Less: Accum. Depreciation 1726.53   1556.45Net Block 2431.43   2262.86Capital Work in Progress 222.42   227.64Investments 2252.34   2322.16Inventories 2705.97   2667.37Sundry Debtors 996.53   856.74Cash and Bank Balance 1900.71   1996.43Total Current Assets 5603.21   5520.54Loans and Advances 1582.44   1074.05Fixed Deposits 0   0Total CA, Loans & Advances 7185.65   6594.59Deffered Credit 0   0Current Liabilities 6482.97   5739.9Provisions 2698.5   1967.97Total CL & Provisions 9181.47   7707.87Net Current Assets -1995.82   -1113.28

Minority Interest 0   0Group Share in Joint Venture 0   0Miscellaneous Expenses 0   0Total Assets 2910.37 3699.38       Contingent Liabilities 959.37   1057.68Book Value (Rs) 13.25   17.03

Statement of Profit and Loss for the year ended March 31, 2013        Mar-13   Mar-12  Rs crore     Rs croreIncome      Sales Turnover 26881.24   23311.35Excise Duty 0   0Net Sales 26881.24   23311.35Other Income 1260.5   498.29Stock Adjustments 26   -95.15Total Income 28167.74   23714.49Expenditure      Raw Materials 14237.36   12507.44Power & Fuel Cost 335.94   299.63Employee Cost 1412.68   1200.94Other Manufacturing Expenses 0   0Selling and Admin Expenses 0   0Miscellaneous Expenses 6838.69   5849.61Preoperative Exp Capitalised 0   0Total Expenses 22824.67   19857.62       Operating Profit 4082.57   3358.58PBDIT 5343.07   3856.87Depreciation 251.32   233.54PBDT 5317.35   3855.22Interest 25.72   1.65Other Written Off 0   0Profit Before Tax 5066.03   3621.68Extra-ordinary items 0   0PBT (Post Extra-ord Items) 5066.03   3621.68Tax 1226.66   821.54Reported Net Profit 3839.37   2800.14Minority Interest 10.39   9.48Share Of P/L Of Associates 0   0Net P/L After Minority Interest & Share Of Associates 3223.26   2676.97Total Value Addition 8587.31   7350.18

Preference Dividend 0   0Equity Dividend 3999.99   1620.94Corporate Dividend Tax 665.4   262.96Per share data (annualised)      Shares in issue (lakhs) 21624.72   21615.12Earning Per Share (Rs) 17.75   12.95Equity Dividend (%) 0   0Book Value (Rs) 13.25   17.03

Ratio Analysis: Time Series Analysis

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

Current ratio is defined as ratio of current assets to current liabilities. The concept behind this ratio is to ascertain whether a company's short-term assets (cash, cash equivalents, marketable securities, receivables and inventory) are readily available to pay off its short-term liabilities (notes payable, current portion of term debt, payables, accrued expenses and taxes). In theory, the higher the current ratio, the better.

i.e. INVENTORY + CASH AND BANK + DEBTORS + BILLS RECIEVABLE / CREDITORS + BILLS PAYABLE + O/S EXPENSES + BANK OVERDRAFTS

Year End 2013 2012

HUL 0.78 0.86

Interpretation

Current Ratio of HUL has decreased from 0.86 to 0.78 indicating that the company is now in a relatively poorer situation to meet its short term debt obligations. On an overall basis it has current ratio of less than 1 meaning difficulty in meeting its short term obligations.

Quick / ACID Test Ratio:

A liquidity indicator that further refines the current ratio by measuring the amount of the most liquid current assets there are to cover current liabilities.

The quick ratio is more conservative than the current ratio because it excludes inventory and other current assets, which are more difficult to turn into cash.

Therefore, a higher ratio means a more liquid current position.

Year 2013 2012

Quick Ratio 0.47 0.47

Interpretation

Quick ratio for HUL is less than 1 for both years against the conventionally recommended value of 1. Being a major player in FMCG sector HUL do not have to worry in finding creditors. A small value of quick ratio also signifies efficient utilization of cash.

Current ratio of HUL has been less than 1 for both the 2 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.

Cash Ratio

Cash Ratio = Cash / Current Liabilities

Year 2013 2012

Cash Ratio0.29318

50.34781

6

Profitability Ratio

Gross Profit Margin

Used to assess a firm’s financial health by revealing the proportion of money left over from revenues after accounting for the cost of goods sold.

Year 2013 2012

Gross Profit Margin (%) 14.25 13.4

Interpretation

Gross profit margin of HUL is closed to 15 for both the years.

Gross profit margin represent the company’s ability to efficiently utilize its raw materials, labour and manufacturing-related fixed assets to generate profits, here HUL appears to be more efficient in 2013 as compared to the previous year.

Net Profit Margin

Calculated as net income divided by revenues or net profits by sales.

It measure how much out of every dollars of sales a company actually keeps in earnings.

Net Profit Margin = Net Income/Revenues

Year March 2013 March 2012

Net Profit Margin (%) 13.9 11.83

Interpretation

Net Profit Margin of HUL is showing an increasing trend from 2012 to 2013.

As Net Profit margin represents a comprehensive view of the profitability of the company HUL seems relatively high profitable in 2013 as compared to 2012.

Operating Profit Ratio

Operating profit means profit earned by the concern from its business operation and not from other sources.

Operating Profit Ratio = Operating Profit/Net Sales

Whereas Operating Profit = Gross Profit – Operating Expenses

And Net Sales = Total Sales – Sales Return

Year 2013 2012

Operating Profit Margin (%) 15.18 14.4

     

Interpretation

Operating Profit Ratio for HUL is higher in 2103 as compared to 2012.As Operating Profit ratio is deemed to be more reliable than Net Profit ratio for comparison between companies, HUL seems to be less profitable in its operational activities in 2012.

Return on Capital Employed

Indicates the efficiency and profitability of a company’s capital investments.

This ratio indicates the profit making ability of the firm on total capital employed which consists of owners fund and debt. This is a profit generating ability ratio which is seen by owners and debt providers.

ROCE = Net Income/Capital Employed

Capital Employed:- Average Debt Liability + Average Shareholder Equity

Year 2013 2012

Return On Capital Employed (%) 155.25 95.34

Interpretation

ROCE for HUL is showing an increasing trend from 2012 to 2013.

This ratio indicates that HUL is able to generate more returns by using less capital in 2013 as compared to 2012.

13

Return on Equity:

Calculated as the amount of net income returned as a percentage of shareholders equity.

Return on Equity = Net Income/ Shareholder's Equity

Year 2013 2012

Return On Equity (%) 24.70 17.84

Interpretation

ROE is showing an increasing trend from 2012 to 2013. However since ROE is the ratio of Net Income to Equity, Increased ROE ratio indicates that HUL is able to more effectively use its investor money in 2013.

For HUL share of equity in total capital is much more than that of debt hence the ROE is an important ratio in determining their profitabilities.

Return on Assets

Return on Assets(ROA) = Net Income / Total Assets

Year 2013 2012

ROA9.67840

56.41039

6

Earnings 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.

Calculated as the portion of company’s profit allocated to each outstanding share of common stock.

EPS = Net income- Dividend on Preferred Stock/Average Outstanding shares

Year 2013 2012

Reported EPS (Rs) 17.88 17.56

Interpretation

Earnings per share for HUL have increased from 2012 to 2013 indicating higher earnings on the shares.

14

Turnover Ratio

Turnover ratio measures the degree to which assets are efficiently employed in the firm.

These are also known as activity ratio or asset management ratio and they are important for a business concern to find out how well the facilities at the disposal of the concern are being used.

Debtors Turnover Ratio

It is a measure as to how well the debtors are being used as current assets or how well assets have been employed in the firm.

It is an activity ratio which reflects upon the efficiency of the asset in generating sales flow.

DEBTORS TURNOVER RATIO = SALES / DEBTORS

Year 2013 2012

Debtors Turnover Ratio 29.01 25.62

Interpretations

HUL was managing it’s debtors in an increasing more efficient fashion in 2013.

Day’s sales in Receivables

Day’s sales in Receivables = 365 / Debtors Turnover

Year 2013 2012

Days sales in Receivables12.5818

714.2466

8

Stock Turnover Ratio

It is an indicator as to with what efficiency and rapidity a firm is able to move its merchandise. It is basically a measure of liquidity of firm’s inventory.

STOCK TURNOVER RATIO = C O S T S O F G O O D S S O L D AVERAGE STOCK

Year 2013 2012

Inventory Turnover Ratio 9.93 8.74

15

Interpretation

As can be seen above, HUL has a higher Stock Turnover Ratio for 2013 as compared to 2012 This means that money is tied up for less time on stocks.

A quicker stock turnover also indicates that HUL makes profits on its stocks quicker than the others, pointing towards a more competitive organisation.

Day’s Sales in Inventory

Day’s sales in Inventory = 365 / Stock Turnover Ratio

Year 2013 2012Days Sales in Inventory 36.7573 41.76201

Total Assets Turnover Ratio

It is an indicator that defines whether a firm is utilising its assets efficiently or not.

It is an activity ratio which suggests that whether the assets of the firm are operating as desired and is contributing to the sales of the firm.

TOTAL ASSETS TURNOVER RATIO = SALES / TOTAL ASSETS

Year 2013 2012

Total Assets Turnover Ratio 9.35 6.35

Interpretation

In the period under consideration, HUL achieved its higher turnover ratio in the year 2013.

This ratio indicates how quickly the assets are being converted into sales.

The ratio is higher in 2013 indicating quick assets conversion into sales for the company.

Capability Intensity

16

Capital Intensity = Total Assets / Sales

Year 2013 2012Capital Intensity 0.108268 0.158694

Leverage Ratio

Leverage Ratio used to calculate the financial leverage of the company to get an idea of the company’s methods of financing or measure its ability to meet financial obligations.

DEBT EQUITY RATIO

The debt-equity ratio is a leverage ratio that compares a company's total liabilities to its total shareholders' equity.

This is a measurement of how much suppliers, lenders, creditors and obligors have committed to the company versus what the shareholders have committed.

DEBT EQUITY RATIO = Long term Debt/EQUITY SHAREHOLDERS CAPITAL

Year 2013 2012

Debt Equity Ratio 0.01 --

Interpretation

Debt/Equity ratio for HUL is not following a trend over the period under consideration. Analysis of balance sheet of HUL reveals that capital of HUL is funded majorly through equity rather than debt.

INTEREST COVERAGE RATIO

It is the measure that determines whether the firm would be able to service its debt. The ratio is the test of solvency for the firm.

INTEREST COVERAGE RATIO = EBIT / Interest to be paid

Year 2013 2012

Interest Cover 174.42 2127.05

Interpretation

Interest Coverage ratio for HUL has decreased from 2012 to 2013 indicating that relatively compared to previous year this year company is finding some difficulty in meeting its interest obligation.

Total Debt Ratio

17

Total Debt Ratio = (Total Assets – Total Equity) / Total Assets

Year 2013 2012

Total Debt Ratio0.92569

70.94157

1

Equity Multiplier

Equity Multiplier= Total Assets/Total Equity

    Year 2013 2012

Equity Multiplier 13.4583584 17.1148739

Interpretation

From the above table we can see that ratio of assets to equity has decreased in 2013 as compared to the previous year.

Cash Coverage Ratio

Cash Coverage Ratio=EBIT+Depriciation/Interest

Year 2013 2012Cash Coverage ratio 207.739891 2337.49697

Interpretation

The above table shows that the cash coverage for the company has declined significantly from the previous year.

18

Dupont AnalysisA method of performance measurement that was started by the DuPont Corporation in the 1920s. With this method, assets are measured at their gross book value rather than at net book value in order to produce a higher return on equity (ROE). It is also known as "DuPont identity".

DuPont analysis tells us that ROE is affected by three things: 

Operating efficiency, which is measured by profit marginAsset use efficiency, which is measured by total asset turnoverFinancial leverage, which is measured by the equity multiplier

ROE = Profit Margin (Profit/Sales) * Total Asset Turnover (Sales/Assets) * Equity Multiplier (Assets/Equity) 

It is believed that measuring assets at gross book value removes the incentive to avoid investing in new assets.

New asset avoidance can occur as financial accounting depreciation methods artificially produce lower ROEs in the initial years that an asset is placed into service.

If ROE is unsatisfactory, the DuPont analysis helps locate the part of the business that is underperforming

DUPONT Analysis Particulars 2013-12 2012-2011 Operating Efficiency Revenue 26881.24 53737.78Net Income 5343.07 4456.5

Profit Margin(%) - A 0.2 8.29     Asset Use Efficiency Revenue 26881.24 53737.78Assets 2910.37 67632.4

Total Asset Turnover - B 9.24 0.79     Financial Leverage Assets 2910.37 67632.4Equity 216.25 25223.02

Asset/Equity - C 13.46 2.68     

ROE (%) A*B*C 24.87 17.55

19

The DuPont Analysis is important as it determines what is driving a company's ROE; Profit margin shows the operating efficiency, asset turnover shows the asset use efficiency, and leverage factor shows how much leverage is being used.

The method goes beyond profit margin to understand how efficiently a company's assets generate sales or cash and how well a company uses debt to produce incremental returns.

Using these three factors, a DuPont analysis allows analysts to dissect a company, efficiently determine where the company is weak and strong and quickly know what areas of the business to look at (i.e., inventory management, debt structure, margins) for more answers.

The measure is still broad, however, and is not a substitute for detailed analysis

Our ROE thus calculated via dupont analysis matches with the one calculated using financial statements.