Security Analysis and Portfolio Management

ASSIGNMENT

Name: Anika Varkey

Roll No.: 18
Topic: Company Analysis
PGDM 2015 2017

Fundamental Analysis of Hindustan Unilever Ltd

Economic Analysis
Economic analysis deals with the analysis of operating in the overall
economy. In security analysis, the expected course of the economy must be
inquired into because overall economic conditions and economic activities
affect corporate profits and investors expectations and thereby affect the
security prices in decisions.
Industry Analysis
The profitability of an industry depends upon its stage of growth. These
externalities depend on the availabilities of inputs power and interrelations

between the economy and industry. In India, companies like HUL, ITC,
Colgate, Dabur have been a dominant force in the FMCG sector.
The FMCG sector has grown at an annual average of about 11 per cent over
the last decade. The overall FMCG market is expected to increase at (CAGR)
of 14.7 per cent to touch US$ 110.4 billion during 2012-2020, with the rural
FMCG market anticipated to increase at a CAGR of 17.7 per cent to reach US$
100 billion during 2012-2025. Food products are the leading segment,
accounting for 43 per cent of the overall market. Personal care (22 per cent)
and fabric care (12 per cent) come next in terms of market share.
Growing awareness, easier access, and changing lifestyles have been the key
growth drivers for the consumer market. The Government of India's policies
and regulatory frameworks such as relaxation of license rules and approval of
51 per cent foreign direct investment (FDI) in multi-brand and 100 per cent
in single-brand retail are some of the major growth drivers for the consumer
market. According to the study conducted by AC Nielsen, 62 of the top 100
brands are owned by MNCs, and the balance by Indian companies. Fifteen
companies own these 62 brands, and 27 of these are owned by Hindustan
UniLever.

Company Analysis
Company analysis is the final stage of fundamental analysis. The economy
analysis provides the investor a broad outline of the prospects of growth in
the economy. The industry analysis helps the investor to select the industry
in which investment would be rewarding. Now he has to decide in which

company he has to invest. Company analysis provides the answer to this

question.
In company analysis the investor tries to predict the future earnings of the
company because there is strong evidence that the earnings have a strong
effect on the share prices. The level, trend and safety of earnings of a
company, however depend upon a number of factors concerning the
operations of the company.
Hindustan Unilever Ltd (HUL) is India's largest fast moving consumer
goods (FMCG) company with a history of over 80 years in India. It operates
as a subsidiary of the global FMCG giant Unilever Plc. 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. The Company has over 16,000 employees
and has an annual turnover of Rs. 31,425.27 crores (financial year 2015 - 2016).

SWOT Analysis(HUL)
Strengths
1. HUL is a part of the Unilever group, hence strong brand equity.
2. Strong Brand Portfolio.
3. Solid Base of the company.
4. Presence of Established distribution networks in both urban and
rural areas.

5. Reach 6.4 million retail outlets which includes direct reach to

over 1.5 million retail outlets.
6. Excellent Research and Development. Two R&D centres in India
in Mumbai and Bangalore.
7. Strong position in most of the categories of its presence.
8. Products with presence in over 20 consumer categories with over
700 million Indian consumers using its products.
9. Corporate Social Responsibility ( CSR ). As a part of CSR, HUL
has initiatives like project Shakti, plastic recycling, women
empowerment etc.
10. Deep roots in local culture and great understanding of consumer
needs.
Weaknesses
1.

Market share is limited due to presence of other strong FMCG

brands.

2. Availability of substitute products.

3. "Me-too" products which illegally mimic the labels and brands of
the established brands.
4.

High Advertising Costs. Increase in Ad spending, which may

affect the margins.

5. HUL products have stiff competition from big domestic players

and international brands.
6. Declining Export levels.
Opportunities

1. Large domestic market.

2. Untapped rural markets.
3. Changing Lifestyles & Rising income levels, i.e. increasing per
capita income of consumers.
4. Increasing purchasing power of people thereby increasing
demand
5. Export potential-expansion of horizons towards more and more
countries. Tax & duty benefits for setting exports units.
6. Mergers and acquisitions to strengthen the brand.
7. Opportunity in food sector.
8. Lower price and smaller packs which increases the trading
volume.
Threats
1. Intense and increasing competition amongst other FMCG
companies.
2. Mimic of brands.
3. FDI in retail thereby allowing international brands.
4. Losing market share in most of the categories of its presence.
Financial ratio analysis
The prosperity of a company will depend upon its profitability and financial
health. The financial statement published by a company periodically helps us
to access the profitability and financial health of the company. The two basic
financial statements provided by the companies are the balance sheet and

the P&L A/C. The first gives us a picture of the companys assets and
liabilities while the second gives us a picture of its earnings.
Profitability Ratios

Profitability
Ratios
Gross profit
margin
Operating profit
margin

16-Mar

15-Mar

14-Mar

13-Mar

12-Mar

16.91

15.97

15.04

14.59

13.89

17.91

16.90

15.97

15.51

14.88

Net profit
margin
Return on equity

12.76%

14%

13.8%

14.71%

12.17%

110.73%

115.87%

118.04%

142.02%

76.63%

28.82%

31.65%

29.75%

32.98%

24.56%

Return on Assets
Ratio
Earnings per
share

18.87

19.95

17.88

17.56

12.45

16.00

15.00

13.00

18.50

7.50

84.81%

75.21%

72.69%

105.36%

60.23%

Dividend per
share
Dividend payout
ratio
Earning
Retention Ratio

15.19

24.79

27.30

-5.35

39.77

Gross profit margin:

Gross Profit Margin = Gross Margin/Sales
The ratio of HUL is continuously improving in last 5 years. A
consistent improvement in gross profit ratio over the past years is the
indication of continuous improvement .Higher ratios mean the
company is selling their inventory at a higher profit percentage. A
company with high gross margin ratio mean that the company will have
more money to pay operating expenses like salaries, utilities, and rent.
Operating profit margin:
Operating profit margin = PBIT / Revenue x 100
The operating profit of the Hindustan Unilever Ltd., is increasing at a
constant rate. Its at the highest position in 2016.It shows company is
earning more per rupee of sales Also shows that the company has a
tendency of profitability increment or to have the ability to keep a
balanced state.

Net profit margin:

Net profit margin = Net profit / Revenue x 100
In 2016, even though there is an increase in gross profit and operating
profit margin, net profit has decreased for HUL,which shows an
increase in net operating expenses.

Return on equity:
Return on Equity = Net Income/Shareholders fund

Return on equity (ROE) is the amount of net income returned as a

percentage of shareholders equity. Return on equity measures a
corporation's profitability by revealing how much profit a company
generates with the money shareholders have invested.
ROE of HUL has fallen from 115.87% to 110.73% in 2016 which is not
good for the company in retaining the shareholders. It had an increase
in ROE in 2015 but ROE fell in 2016.

Return on Assets Ratio:

Return on Assets Ratio=Net Income / Average Total Assets
The return on assets ratio, often called the return on total assets, is a
profitability ratio that measures the net income produced by total assets
during a period by comparing net income to the average total assets.
The positive ROA ratio of indicates an upward profit trend as well.
Earnings per share:
Earnings per Share = Profit after Tax / No. of equity
Earning per share, also called net income per share, is a market prospect
ratio that measures the amount of net income earned per share of stock
outstanding. Higher earnings per share means that the company is more
profitable and the company has more profits to distribute to its
shareholders. But there is fall in EPS in 2016 which is not a good sign.
Although many investors don't pay much attention to the EPS, a higher
earnings per share ratio often makes the stock price of a company rise. Since
so many things can manipulate this ratio, investors tend to look at it but
don't let it influence their decisions drastically.

Liquidity Ratios:
Liquidity ratios analyze the ability of a company to pay off both its current
liabilities as they become due as well as their long-term liabilities as they
become current. These ratios show the cash levels of a company and the
ability to turn other assets into cash to pay off liabilities and other current
obligations.
16Mar

15-Mar

14-Mar

13-Mar

12-Mar

Current Ratio

1.03

1.05

1.03

0.99

1.21

Quick Ratio
Debt Equity
Ratio

0.75

0.76

0.71

0.66

0.82

Liquidity Ratios

Interpretation
Current Ratio:
The current ratio is a liquidity and efficiency ratio that measures a ability to
pay off its short-term liabilities with its current assets.
Current Ratio = Current Assets / Current Liabilities
A higher current ratio is always more favorable than a lower current ratio
because it shows the company can more easily make current debt payments.
HUL is maintaining a stable current ratio above 1. A current ratio of
1.03 in 2016 would mean that the company has 1.03 times more current
assets than current liabilities. Book value of current assets is almost
the same as book value of current liabilities in case of HUL. It
indicates managerial efficiency. Unilever solely focuses on branding

and outsources manufacturing to other companies and hence current

assets are low.
Quick Ratio:
The quick ratio or acid test ratio is a liquidity ratio that measures the ability
of a company to pay its current liabilities when they come due with only
quick assets. Quick assets are current assets that can be converted to cash
within 90 days or in the short-term.

Quick Ratio = (Current Assets- Inventory Prepaid Expenses)/Current

Liabilities
HUL is maintaining a stable quick ratio which indicates company can
quickly convert its assets into cash in order to pay off its current
liabilities.

Efficiency Ratios:

Efficiency
Ratios
Inventory
turnover
Receivables
turnover
Payables
turnover
Asset turnover

16-Mar

15-Mar

14-Mar

13-Mar

12-Mar

12.65

11.84

10.20

10.21

8.79

18.06

38.52

33.96

34.13

27.27

0.56
1.16
225.79% 225.95%

1.02
215.56%

1.07
224.19%

2.23
201.82%

Inventory turnover:
Inventory turnover = Cost of goods sold/Average Inventory
The inventory turnover ratio is an efficiency ratio that shows how effectively
inventory is managed by comparing cost of goods sold with average
inventory for a period. This measures how many times average inventory is
"turned" or sold during a period. FMCG goods would normally have higher
inventory turnover ratio because the goods are cheap and are consumed very
fast and on the top they are perishable also.
HUL have a high and increasing inventory ratio which indicates that
the company does not overspend by buying too much inventory and
wastes resources by storing non-salable inventory. It also shows that
the company can effectively sell the inventory it buys, which indicates
the increase in sales.
Receivables turnover:
Receivables turnover = Net revenue /Average Receivables
Receivables turnover ratio measures company's efficiency in collecting its
sales on credit and collection policies.
Receivable turnover ratio of HUL has decreased from 38.5 to 18.06 in
2016 which is bad for the company. The lower the ratio is the longer
receivables are being held and the risk to not be collected increases. A
low receivables turnover ratio implies that the company should reassess its credit policies in order to ensure the timely collection of
credit sales that is not earning interest for the firm.

Payables turnover:
Payables turnover = Purchases/Average payables
The accounts payable turnover ratio is how many times a company can pay
off its average accounts payable balance during the course of a year. The
turnover ratio of HUL is falling from one period to another, this is a
sign that the company is taking longer to pay off its suppliers than it
was before and may be an indicator of worsening financial condition.
Asset turnover:
Asset turnover = Net Revenues / Average total assets
This ratio shows how efficiently a company can use its assets to generate
sales, so a higher ratio is always more favorable. A ratio of .5 means that each
Rupee of assets generates 50 paisa of sales.
HUL has a very high Asset Turnover ratio. Higher turnover ratios
mean the company is using its assets more efficiently.

Comparison with Competitors

Name
HUL
Godrej
Consumer
Dabur India
Marico
Emami
Colgate
P and G
Gillette India
Godrej Ind
Bajaj Corp
Jyothy Labs
JHS Svendgaard
GKB
Ophthalmics

Market Cap. Sales

Net Profit
(Rs. cr.)
Turnover
194,565.69 31,987.17
4,082.37
55,020.05
4,811.57
739.72
53,743.15
35,828.05
26,057.02
25,377.62
20,605.91
15,380.22
14,366.61
5,900.00
5,252.47
143.31
34.91

5,750.00
4,947.38
2,391.51
4,162.29
2,333.79
1,973.50
1,309.51
868.77
1,575.37
100.09
31.17

939.51
701.87
327.67
576.51
346.14
158.13
157.3
197.91
162.36
-21.63
13.66