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FMCG Sector Report
1. SECTOR REPORT - FMCG
SUBMITTED BY
GROUP 1
Akshar Shah B15067
Aishwary Kumar Gupta B15066
Prateek Taori B15097
Tanay Chourasia B15119
Nirransh Jain B15032
Robin Singla B15164
2. 1 INTRODUCTION
The Indian FMCG sector is the fourth largest sector in the economy with a total market size in excess of
US$ 13.1 billion. It has a strong MNC presence and is characterized by a well-established distribution network,
intense competition between the organized and unorganized segments and low operational cost.
Food products is the leading segment, accounting for 43% of the overall market. Personal care (22%) and
household care (12%) come next in terms of market share. Growing awareness, easier access, and changing
lifestyles have been the key growth drivers for the sector. Opportunities in the FMCG sector include untapped
rural market, less country’s exports as a percentage of overall inputs and increasing demand of food
processing industry.
Rural India accounts for more than 700 Mn consumers or 70% of the Indian population and accounts for 50%
of the total FMCG market. Rural areas expected to be the major driver for FMCG, as growth continues to be
high in these regions. Rural areas saw a 16%, as against 12% rise in urban areas. With rise in disposable
incomes, mid and high-income consumers in urban areas have shifted their purchasing trend from essential
to premium products. In response, firms have started enhancing their premium products portfolio. With
changing lifestyle and increasing consumer demand, the Indian FMCG market is expected to cross $80 Bn
by 2026.
PERFORMANCE OVER THE YEARS
Nielsen, a leading global information and measurement company, predicts India’s FMCG industry to grow
from $37 Bn in 2013 to $49 Bn in 2016. Digital communication, e-commerce and premium products are
foreseen as key drivers for growth. Its future depends on how they evolve around this sections. By 2020,
around 150 Mn consumers are expected to be digitally influenced in FMCG and these digital consumers
alone would spend ~ 40 USD Bn on FMCG categories, by Boston Consulting Group.
3. VALUE CHAIN OF INDIA’S FMCG SECTOR
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.
MAJOR PLAYERS IN THE MARKET
Hindustan Unilever Limited (HUL)
HUL, undertook aggressive expansion by increasing the distribution network by 50% over the last two
years. Company relaunched its two-third portfolio in 2013-14. HUL plans to return 21.9 Bn rupees to
shareholders, signaling a lack of investment options. Revenue from selling shampoos, soaps and
detergents grew at slowest pace in 10 years. Competition in the consumer goods has increased
substantially with new entrants and along with pressure to cut prices, makes it difficult for established
companies to expand the market.
ITC Limited
ITC announced that it is in the process of setting up 20 factories for its FMCG products as it aims for Rs.
1 Lakh revenue from FMCG alone by 2030. ITC plans to introduce new region-specific products. It plans
to launch over 20 new products for its existing categories. ITC would also have up to eight new integrated
factories for its food division in states such as West Bengal, Assam, Karnataka etc. ITC presently has 7%
market share of 2800 Cr juice market, which it is aiming to have 11-12% by 2017. ITC brand yippee
noodles has around 15% market share with four years of launch and now have grown even further.
Nestle India
Nestle India profit fell to 60% to Rs. 124.20 Cr in 2015 Q3, due to Maggi ban. Company is back,
aggressively launching up to 25 products across various categories and hope to cover the 500 Cr hit due
to Maggi ban soon in the coming quarters. The company is also focusing on health-based products by
increase its offerings in the market where it has currently two products.
Parle Agro
Parle Agro is planning to spend 150 Cr in 2015-16 on advertising and building its sales and distribution
network to enter rural markets. Sales force is around 4000 and planning to expand by 20%. Distribution
of outlets will increase to roughly 1 million in 2016. Company did rebranding of its flagship brand Frooti,
which accounts for 50% of the sales. Sales of Appy Fizz has grown by 20%. Company has 76
manufacturing facilities including 8 for beverage production.
Dabur
Dabur operates 20 manufacturing units, 12 in India and the rest abroad in countries such as Egypt, Nepal
and US. Dabur plans to invest 500 Cr in 2016 to expand its manufacturing capacity, including 250 Cr for
a new plant in Assam. Dabur is launching fruit-based carbonated drinks in 2016 so their strategy is very
clear that they want to grow their portfolio and geographical acquisitions.
4. 2 KEY OBSERVATIONS
AUDIT REPORTS AUDITOR’S OPINION FOR THE SECTOR
Nestle India Limited
The auditors have given Nestle India Limited a clean chit audit report by stating categorically that the
financial statements of the company give a true and fair view in conformity with the accounting principles
generally accepted in India
ITC Limited
The auditors have given ITC a clean chit audit report by stating categorically that the financial statements
of the company give a true and fair view in conformity with the accounting principles generally accepted
in India
Hindustan Unilever Limited (HUL)
The auditors have given Hindustan Unilever Limited (HUL) a clean chit audit report by stating
categorically that the financial statements of the company give a true and fair view in conformity with the
accounting principles generally accepted in India
CASH CONVERSION CYCLE
The cash conversion cycle of the sector is one which cannot be generalized. It is majorly dependent on the
company policy and the category of FMCG products the companies are into. For ITC, the raw material
inventory is extremely high compared to the sector as it aggregates supply of annual wheat requirements
primarily for Aashirvaad Atta in late March right after the harvest when the prices are low
ITC HUL Nestle
Raw Material Inventory 153 33 32
WIP Inventory 6 9 7
Finished Goods Inventory 83 44 35
Inventory of trading goods 10 0 1
Inventory Conversion Cycle 252 86 75
Receivables Conversion Period 18 11 4
(Trade Payables Payment Period) (63) (176) (66)
Cash Conversion Cycle (CCC) 208 (79) 13
LOW ENTRY BARRIERS
The threat of new entrants exists in this industry as we can see new FMCG competitors enter the industry
eating up the market share of the existing player.
Example: The new entrant Patanjali has disrupted the market by creating their own range of health and
organic products that are hampering the top-line of top FMCG companies.
The threat is also in form of existing FMCG players venturing into spaces of their competitors
Example: 2 months ago in May 2016, ITC ventured into chocolates and analysts say the market share of
Nestle will fall due to it.
Source: ibef.org-FMCGsectorReport
LOW LEVELS OF EXTERNAL FINANCERS (DEBT LEVEL)
The ratios of Debt to Equity clearly reveal that this sector has very low levels of debt and is majorly
dependent on equity.
The trend is also towards funding long term assets using equity rather than debt.
5. FY13A FY14A FY15A
Debt to Equity 0.06 0.01 0.01
Long Term Debt to Equity 0.05 0.00 0.00
LARGE AMOUNT OF FUNDS INTO INVESTMENTS
20% of the total assets are in current and non-current investment which is typically high as most of these
investments are not strategic but financial in nature. They typically include bonds, mutual funds and
government securities
HIGH DIVIDEND PAY-OUT RATIO
The sector is cash rich as 17% of the total assets is in form of cash and bank balances (Refer to Annexure
for common size balance sheet statement) however, it fails to find adequate growth opportunities in
expanding business operations and thus a large amount of the profit after tax, is dispersed back to
shareholders as dividends. The dividend with the dividend distribution tax is close 47% of the total cash flow
from operations.
(Refer to Common Size Cash Flow of the sector in Annexure)
3 FUNDAMENTAL ANALYSIS
PROFITABILITY RATIOS
FY13A FY14A FY15A
EBITDA Margin 27.40 28.50 28.97
Operating Margin 25.35 26.45 26.92
Pre-Tax Margin 26.07 26.69 27.00
Net Profit Margin 18.56 18.97 18.63
ROA 23.79 23.84 22.67
ROCE 43.14 42.65 38.80
ROE 45.12 42.74 38.86
0%
5%
10%
15%
20%
ITC HUL Nestle
%ofTotalAssets
Current Investments Non-Current Investments
0%
20%
40%
60%
80%
100%
120%
FY13A FY14A FY15A
DividendPayout
ITC HUL Nestle
6. The sector shows consistent and steady profit margins overall.
The slight improvement in EBITDA margin over the three years’ points to the improvement in operational
efficiency that the sector has able to achieve to reduce its cost of goods sold as a percentage of sales.
Since the operating margin is also healthy with improvement over the years builds credibility of this sector
to pay up for its fixed costs and interests. If the same is reflected in operating cash flows, it depicts the
sector can very well satisfy its creditors and suppliers while also creating value for shareholders.
The sector shows a consistent net profit margin of about 18%-19% which reflects stability of bottom line
in this sector.
The return on total assets is in range of 23%. This figure shows the company can generate 23Rs for every
100Rs invested in assets. The thumb rule of investors is wanting ROA of industry above 5%. Sure the
sector cannot be benchmarked against others directly, but the figure of 23% is comfortably well above
the ROA expected by investors.
The fall in RoA from 23.79% to 22.67% over the 3-year period is attributed to sales growing at a rate less
than the current and fixed assets. While current assets are growing at 29.7% and fixed asset are growing
at 15.9%, the sales are growing at a rate of 16% only. This indicates a drop in the asset utilization
efficiency of the sector.
Since the debt levels of the industry are very low (See Solvency Ratios below), the return on capital
employed and equity are close to each other. Though the return on equity is decreasing over the years,
the range of 45%-38% shows a phenomenal return that this sector is able to generate for its shareholders
thus creating value for them (as it exceeds cost of equity).
This reduction in ROE is due to the lower rate of growth rate of PAT vis-à-vis the growth rate in Equity (in
Reserves & Surplus Account).
SOLVENCY RATIOS
FY13A FY14A FY15A
Debt to Equity 0.06 0.01 0.01
Long Term Debt to Equity 0.05 0.00 0.00
Debt to Capital Employed 0.04 0.00 0.00
Debt to Asset 0.02 0.00 0.00
The ratios of Debt to Equity clearly reveal that this sector has very low levels of debt and is majorly
dependent on equity.
The trend is also towards funding long term assets using equity rather than debt
Over the three years, debt ratios are falling which means the sector’s financial risk is also coming down
and is nearly zero
An important matter to note here is the sector is not financing its assets by raising new equity but rather
by internally generating it through operations which shows the sector is self-sufficient in resources. As we
can see from the table below, the sector has not significantly raised new equity but has majorly enhanced
reserves and surplus which is used to fund the long term assets
18.56 18.97 18.63
43.14
42.65
38.80
45.12
42.74
38.86
15.00
20.00
25.00
30.00
35.00
40.00
45.00
50.00
FY13A FY14A FY15A
Net Profit Margin ROCE ROE
7. Sector Average FY13A FY14A FY15A
Share Capital 367.62 369.34 371.44
Reserves & Surpluses 8,742.59 10,422.76 12,054.66
LIQUIDITY RATIOS
FY13A FY14A FY15A
Current Ratio 1.43 1.49 1.64
Quick Ratio 0.92 0.98 1.12
Liquidity ratios represent the ability of the said firm to meet short term obligations.
The current ratio and the quick ratio have increased consistently over the period which shows the
industry’s growing maturity and improvement in its liquidity.
This increase in ratio owes to the fact that the sector is able to generate cash within the organization.
The ratio also places this sector comfortably with respect to chore committee recommendations and given
the debt levels and interest coverage ratios (See Solvency Ratios) thus will be easier for this sector to
approach for a working capital requirement.
COVERAGE RATIOS
FY13A FY14A FY15A
Interest Coverage 113.72 362.49 270.00
DSCR 81.25 214.59 172.13
Over the period of 3 years, we see more than 100% rise in Interest Coverage and DCSR ratios. This is a
phenomenal improvement for the sector.
The reduction in the value of Interest Coverage and DSCR ratios is due to the increase in Interest
Expenses by 46% from 17.74 Crore to 25.84 Crore.
FY13A FY14A FY15A
Interest 49.38 17.74 25.84
Principal Repayment 0.00 1.42 0.32
Net CGFO 4011.96 4110.16 4503.58
DSCR 81.25 214.59 172.13
FREE CASH FLOW
FY13A FY14A FY15A
EBIT 5615.33 6429.30 6977.75
1.43
1.49
1.64
0.92
0.98
1.12
0.60
0.80
1.00
1.20
1.40
1.60
1.80
FY13A FY14A FY15A
Current Ratio Quick Ratio
8. Tax Rate 28.80% 28.90% 31.01%
Depreciation 453.84 499.34 531.90
Capex 941.00 1,087.69 1,229.53
Change in Working Capital 31.51 770.06 (414.72)
Free Cash Flow 3,479.54 3,212.82 4,530.82
Operating Cash Flow 4011.96 4110.16 4503.58
Net Income 4110.73 4612.46 4828.75
After the reduction of FCF in FY14 from FY13 due to increase in working capital requirement, the sector has
shredded its high working capital requirement without significant increase in its current liabilities (Squeezing
of Suppliers) and thus the sector sees 30% growth in Free Cash Flow for the year FY15
CASH CONVERSION CYCLE
FY13A FY14A FY15A
Raw Material Inventory 70 76 73
WIP Inventory 7 8 8
Finished Goods Inventory 57 49 56
Inventory of trading goods 3 4 4
Inventory Conversion Cycle 137 135 141
Receivables Conversion Period 10 13 10
(Trade Payables Payment Period) (101) (101) (102)
Cash Conversion Cycle (CCC) 46 47 49
2800.00
3300.00
3800.00
4300.00
4800.00
5300.00
FY13A FY14A FY15A
Free Cash Flow Operating Cash Flow Net Income
137
135
141
46
47
49
45
47
49
51
53
55
57
59
132
134
136
138
140
142
1 2 3
Inventory Conversion Cycle Cash Conversion Cycle (CCC)
9. The Cash Conversion Cycle has marginally increased from 46 to 49 days over 3 years owing to increase
in the inventory conversion cycle from 137 to 141 days.
The increase in inventory conversion cycle is primarily due to increase in raw material inventory of 3 days
which is a strategic decision in order to procure raw materials at lower costs.
The Receivables Payable Period & Trade Payables Period has remained fairly consistent over the period.
The sector typically shows a very high payable payment period and this is the sector’s characteristic that
it has a higher bargaining power over its suppliers, one of the additional reasons making this sector cash
rich.
DU-PONT ANALYSIS
FY13A FY14A FY15A
Current Assets (CA) 9222.65 10635.53 11964.72
Fixed Assets (FA) 8058.74 8713.56 9338.68
Total Assets (TA) 17281.39 19349.10 21303.39
Net Worth (NW) 9110.21 10792.09 12426.10
Net Sales 22147.07 24309.35 25919.98
PAT 4110.73 4612.46 4828.75
Equity Multiplier (TA/NW) 1.90 1.79 1.71
Asset Turnover (Net Sales/TA) 1.28 1.26 1.22
Net Margin (PAT/Sales) 18.56% 18.97% 18.63%
RoE 45.12% 42.74% 38.86%
We observe that the Net Profit Margin has remained stable over the 3 years.
However, the Asset Turnover Ratio has declined marginally from 1.28 to 1.22 indicating a slight drop in
efficiency of utilization of total asset as also seen in ROA calculation. The most significant change however
is observed in the Equity Multiplier which has reduced from 1.90 to 1.71 over the 3-year period. This reduction
is attributed to the fact that a large portion of the profits earned by the sector are retained increasing the share
of equity in the total capital employed.
LEVERAGE RATIOS
FY13A FY14A FY15A
% Change in EBIT 0.14 0.09
% Change in Sales 0.10 0.06
Operating Leverage 1.49 1.39
EBIT 5615.33 6429.30 6977.75
Interest 49.38 17.74 25.84
Financial Leverage 1.01 1.00 1.00
Total Leverage 1.50 1.39
1.90 1.79 1.71
1.28 1.26 1.22
18.56% 18.97% 18.63%
45.12% 42.74% 38.86%
0.00
0.50
1.00
1.50
2.00
FY13A FY14A FY15A
Equity Multiplier (TA/NW) Asset Turnover (Net Sales/TA)
Net Margin (PAT/Sales) RoE
10. The operating leverage is showing an improvement from 1.49 to 1.39, which is positive news for the
sector and enhances ability to bear the fixed cost burden and subsequently depicts decreasing
operational risk
The financial leverage as expected after analyzing the debt levels are almost 1 showing that the sector
can easily bear the low interest cost burden and the take up financial risk
Due to the drop in operational leverage, the sector’s overall risk is decreasing and is a positive news for
the sector
VALUE ADDED STATEMENT
FY13A FY14A FY15A
Net Revenue 221 243 258
Material & Operating Expenses (121) (134) (139)
Value Added 100 100 100
Employees 8 8 9
Government 55 50 45
External Financers 0 0 0
Shareholders 24 21 20
Reinvestment in Business 13 21 26
FY13A FY14A FY15A
Net Revenue 26,784.57 29,510.93 31,251.48
Material & Operating Expenses 14,650.39 16,279.94 16,816.78
Value Added 12,134.18 13,230.99 14,434.71
Employees 978.27 1,096.03 1,227.38
Government 6,638.38 6,574.31 6,548.76
External Financers 49.38 17.74 25.84
Shareholders 2,872.02 2,730.25 2,907.44
Reinvestment in Business 1,596.13 2,812.66 3,725.28
11. The share of value added to shareholders is gradually reducing from 24 to 20 percent over the 3-year period
however the reinvestment in the business has increased from 13 to 26 percent which is a positive indicator
for the sector. The share of value to government has reduced from 55 to 45 percent over the 3-year period
whereas the employee share is almost consistent between 8 to 9 percent.
8
55
0
24
13
FY13A
Employees Government
External Financers Shareholders
Reinvestment in Business
8
50
0
21
21
FY14A
Employees Government
External Financers Shareholders
Reinvestment in Business
9
45
0
20
26
FY15A
Employees Government
External Financers Shareholders
Reinvestment in Business
12. 4 STRENGTHS AND WEAKNESS
STRENGTHS
Phenomenal Return on Equity in the sector of 38.86%
Excellent Return on Asset percentage of 22.67%
Adequate profit margins of 18.63%
Negligible levels of debt, and high cash generated from operations leading to DSCR ratio of 172.13
Low days of sales outstanding (10 Days) compared to a comfortable payable period (162 Days) causing
freeing of cash blocked in working capital requirements
Quick ratio above 1 (1.12) signifying realizable current assets against the current liabilities in the sector
proofing the sector against short term crisis
High reserves and surplus and investments acting as a shield against any unseen circumstances
WEAKNESS
Low reinvestment opportunities with high dividend payout ratio and investments in current and non-
current investments
Raw material majorly dependent on the agricultural output and is an uncertainty for the sector
Stagnant net profit margins (Refer to profitability ratios in annexures) in the sector impacted due to entry
of local players
Falling RoE for the sector primarily due to inadequate growth in PAT vis-à-vis growth in equity
Agency effect as negligible levels of debt: Increasing provisions for management incentives in sector
report of ITC and Nestle in its long term provisions
Off- Balance sheet, contingent liabilities and dues leading to uncertainty in the sector
5 AREAS OF CONCERN & REMEDIAL ACTIONS
AREAS OF CONCERN FOR THE SECTOR
RAW MATERIAL COSTS
On an average, 48% of the expenses of the sector are tied up with the raw material expenses. Raw Materials
consumed by the sector are mostly tied with agricultural produce e.g. Coffee, Palm Oil, etc. Therefore, an
unforeseen increase in agricultural produce prices will impact the raw material expenses and ultimately the
profitability of the sector.
100 99 101 104 106
115
123 122
0
20
40
60
80
100
120
140
FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14
Agriculture Products Index
13. Our analysis shows that an average 10% increase in the raw material costs decreases the Net Profit Margin
from the current 18.6 % to 15.3 %.
Growth in Raw Material Costs NPM Growth in Raw Material Costs NPM
5% 16.9% 11% 14.9%
6% 16.6% 12% 14.6%
7% 16.3% 13% 14.2%
8% 15.9% 14% 13.9%
9% 15.6% 15% 13.6%
10% 15.3%
Remedial Action
Raw Material Costs are dependent on inflation which cannot be controlled by the industry and is a
macroeconomic factor. In the short term, there is little the sector could do to mitigate the risks from the
volatility of raw material costs. However, in the long term, the industry must participate in hedging of
commodities or backward integration to reduce the risks arising from unfavorable movements in raw material
prices.
RETURN ON EQUITY
The RoE for the sector has declined from 45.12% to 38.86% in the 3-year period. This is largely due to the
retained earnings being invested in Current and Non-Current Investments rather than productive fixed assets
for manufacturing purposes.
The RoE can be increased by making capital expenditure on productive fixed assets rather than current and
non-current investments. This will increase the sales of the sector, thus increasing the returns and therefore
also the RoE.
Remedial Action
Efforts have been made to increase the RoE by investing the profits generated by the operations in highly
productive tangible assets. This helps increase the RoE by increasing the Sales and Profit figures whereas
the equity figures do not increase as much.
HIGH PROPORTION OF OFF-BALANCE SHEET ITEMS
FY13A FY14A FY15A
Statutory Dues
ITC 403.3 367.7 566.2
HUL 442.0 513.0 681.3
Nestle 144.2 142.2 139.0
Contingent Liabilities
ITC 466.5 361.5 404.9
HUL 894.2 991.2 1072.7
Nestle 72.7 39.7 84.0
Sector Average 807.6 805.1 982.7
Average Assets 17281.4 19349.1 21303.4
Percentage of Assets 4.67% 4.16% 4.61%
45.12%
42.74%
38.86%
34.00%
36.00%
38.00%
40.00%
42.00%
44.00%
46.00%
FY13A FY14A FY15A
RoE
14. The Off-Balance Sheet Items comprise of over 4.5% of the total assets of the sector. Most of these items in
Statutory Dues are tied up in litigation over taxation related matters. Contingent Liabilities also include capital
expenses it is liable for. Any unfavorable ruling will adversely affect the profitability of the sector adversely.
Remedial Action
By its very nature, these are contingencies and are thus unpredictable. Though the sector can invest in top
law firms to try to get rid of these contingencies from their off balance sheet items, but expecting so within a
year is unrealistic for the sector. So we assume the sector will eventually (over a few years) try to mitigate its
risks from these contingencies but as of today they do remain an important area of concern for the sector as
a whole.
LOW RE-INVESTMENT OPPORTUNITIES
The sector is cash rich as 17% of the total assets is in form of cash and bank balances (refer to Annexure for
common size balance sheet statement) however, it fails to find adequate growth opportunities in expanding
business operations and thus a large amount of the profit after tax, is dispersed back to shareholders as
dividends. The dividend with the dividend distribution tax is close 47% of the total cash flow from operations
(Refer to Common size cash flow of the sector in Annexure). Only about 18% of the cash flow from operations
is diverted back into fixed operating assets for the sector. Some companies also invest the extra cash into
purchase of investments which are for trade and not strategic in nature. The high dividend yield, low
reinvestment into the business and negligible levels of debt (Refer to Annexure for common size balance
sheet statement) clearly shows that the sector is unable to find re-investment opportunities and looks forward
to redistributing cash back to its shareholders or parking funds as investments.
Remedial Action
Focus of the sector is now to invest in assets that boosts sales and typically FMCG companies of the sector
are looking to boost production to cater demand by investing and doing capital expenditure in expanding
plant and machinery. Further details of capital expenditure and its funding is done in Assumptions in
Annexures
TURNOVER CLOSELY LINKED WITH PURCHASING POWER
As we can see the consumption of FMCG goods, is very closely linked to the purchasing power of the nation.
This implies that the top-line of the industry depends heavily on the macro-economic situation of the country.
This is an area of concern specifically if the purchasing power of the country reduces due to inflation or slow
economic growth.
Remedial Action
The sales growth we have taken into consideration incorporates both the price change due to inflation and
the volume growth.
FY13A FY14A FY15A
0.00%
2.00%
4.00%
6.00%
8.00%
10.00%
12.00%
FY 13A FY 14A FY 15A
Sales Growth Rate GDP Per Capital Growth(PPP)
15. Net Revenue from Operations 64,812.53 71,112.57 75,488.33
Growth Rate in Revenue 7.23% 9.72% 6.15%
GDP per Capita 5256 5855 6266
GDP Per Capita Growth 7.98% 10.23% 6.56%
Remedial Action
This is an externality and both a threat and opportunity that exists in the sector due to macroeconomic factor.
Though assumption of a remedial measure so as to say is not possible by any of the companies in the sector,
this remains an area of concern and a macroeconomic parameter to be followed carefully and interpreted
well to cater and predict demand.
AREAS OF CONCERN FOR INDIVIDUAL COMPANIES OF THE SECTOR
ITC
Lower Total Asset and Fixed Asset Turnover Ratios
ITC has lower Total Asset and Fixed Asset Turnover Ratios than the sector average of 1.18 and 3.95. This
shows inefficiencies in the asset utilization of ITC and the imminent need to improve it to make use of the
economies of scale.
FY13A FY14A FY15A FY16E
Total Asset Turnover 0.88 0.85 0.83 0.91
Fixed Asset Turnover 2.69 2.78 2.65 2.86
Remedial Action
By means of investments in highly productive tangible assets, we are gradually increasing the Total asset
turnover and fixed asset turnover to 0.91 and 2.86.
HUL
Lower Current & Quick Ratio
HUL has historically had lower current and quick ratio than the industry average of 1.64 and 1.12 respectively.
FY13A FY14A FY15A FY16E
Current Ratio 1.02 1.06 1.08 1.09
Quick Ratio 0.69 0.74 0.78 0.80
Remedial Action
The Company needs to take corrective action to increase its current ratio. Therefore, when making the capital
expenditure, the company needs to be cognizant of the amount of cash, current investments and non-current
investments it is going to use to fund the capex in order to gradually increase the current ratio up to 1.09 and
quick ratio to 0.80 in FY16E.
NESTLE
Low NPM compared to sector
While the sector averages a net profit margin of 18.63%, Nestle in the last financial year reported a NPM
of mere 6.8%
16. FY13A FY14A FY15A FY16E
Net Profit Margin 12.16 11.92 6.80 9.34
Remedial Action
The low NPM was majorly due to ban on Maggi and effect on external contingencies which increased
exceptional items in the P&L. For the next year, nestle is projected to shrug that off as Maggi returns and
is on the way to NPM recovery by posting a modest 9.34% return according to the projected numbers
Low total and fixed asset turnover ratio
Nestle has lower Total Asset and Fixed Asset Turnover Ratios than the sector average of 1.18 and 3.95.
This shows inefficiencies in the asset utilization of Nestle and the imminent need to improve it to make
use of the economies of scale.
FY13A FY14A FY15A FY16E
Total Asset Turnover 1.44 1.69 1.34 1.48
Fixed Asset Turnover 2.70 3.10 2.82 3.22
Remedial Action
By means of investments in highly productive tangible assets, we are gradually increasing the Total asset
turnover and fixed asset turnover to 0.91 and 2.86.
6 CONCLUSION
As shown, the consumption of FMCG goods is closely linked to the purchasing power of the country, the
Indian economy seem to be in a brighter spot now. According to IMF, India is set to become the world’s
fastest-growing major economy ahead of China, in the next couple of years. India’s consumer inflation has
also come down to about 5% currently which is a positive indicator for consumption and demand and has
helped in reducing pressure on margins across industry because of which the Profitability margin of the sector
is pretty decent.
Recent initiatives such as proposed implementation of GST should work for the benefit of organized sector
by developing a common Indian market and reducing the cascading effect on the cost of goods and services.
The long-term government agenda of investing in infrastructure as well as building smart cities should be
favorable for FMCG sector. In addition, the Swachh Bharat campaign is likely to lead to greater demand for
health and hygiene related products. Continuity of MNREGA, newer schemes to boost rural farm yields,
investment in infrastructure, and creation of National Agricultural mission to ensure better prices for both
farmers and consumers, all these initiatives are expected to help the rural growth story improve.
While the long term prospects remain intact, the FMCG industry is also changing fast with technological
advancement, changes in consumption patterns, emergence of newer channels such as e-commerce and
increasing salience of organized retail. E-commerce for instance is growing very fast and offers immense
opportunities for FMCG.
Recent years might see huge capex in new projects with increasing opportunities, which might decrease the
net profits in the coming year. Overall the FMCG sector is expected to gain momentum with increasing
economic activity, rise in income levels, favorable demographics, increase in working population and lower
inflation cycle.
17. 7 FINANCIALS
The financials for FY16 for the sector have been forecasted after incorporating the remedial actions. The
assumptions taken in doing so and the forecasted financials in common size form are given below:
ASSUMPTIONS OF FINANCIAL FORECASTING
ITC HUL Nestle Basis
Profit & Loss Statement
Expected Sales Growth
Figure
10,827.93 9,634.11 1,724.92 Calculated as (Total Capex)*(Fixed Asset Utilization)
Sales Growth Rate 29.66% 31.27% 21.10% Calculated as % of Last year Sales
Other Income to Total
Investments
0.15 0.22 0.10
Calculated as Average of Other Income/(Current Investments +
Non-Current Investments)
Other Income 1,120.59 623.33 127.32
Computed as Historical Other Income/Total Investments *
Forecasted Total Investments
Raw Material Consumed 28.88% 37.77% 40.54% Computed as Percentage of Sales from last year
Purchase of Trading
Goods
10.25% 11.77% 1.18% Computed as Percentage of Sales from last year
Employee Benefit
Expenses
4.68% 5.02% 10.11% Computed as Percentage of Sales from last year
Other Expenses (Other
Overheads)
17.30% 26.72% 27.68% Computed as Percentage of Sales from last year
Depreciation -6.78% -11.67% -11.98% Computed from Last year average depreciation rate
Interest Expense (57.42) (16.82) (3.29) Same as Last Year
Exceptional items 0.00 500.46 178.92 Historical Average of last 3 years
Dividend Yield 63.03% 86.11% 68.37% Historical Average of last 3 years
Balance Sheet
Fixed Asset Utilization 2.71 12.04 2.87
Calculated as average of last 3 years' Fixed Asset Utilization (Net
Revenue from Operations/Tangible Assets)
Total Capex 4000 800 600 Management decision to boost sales by growth percentage
Working capital in
progress conversion
1000 200 100 As per estimate
New Capex 3000 600 500 New investment to be made for fixed assets
Sale of Non current
Investment
0 0 0 Management decision to fund Capex
Sale of Current Investment 2000 500 200 Management decision to fund Capex
Cash decrease to fund
fixed asset
1000 100 300 Cash required to fund Fixed Asset Purchase
Additional Investment in
Non current Investment
1200 100 200 Invested so as to maintain ratio of cash to non current investment
Long term borrowings 38.69 0.00 16.79 Same as Last Year
Deferred tax Liability 1,631.60 0.00 172.93 Same as Last Year
Other Long Term Liabilities 7.05 170.11 0.00 Same as Last Year
Long Term Provisions 100.72 956.35 1,597.17 Same as Last Year
Cash Flow
Miscellaneous
Inflows/(Outflows) in
Operating Cash Flow
Captures the changes in other current asset and liabilities and
changes in short term and long term provisions
Ratio of Interest received
to other income
0.37 0.36 0.90 Based on Historical division
Ratio of dividend received
to other income
0.63 0.64 0.10
Assumption that Other income comprises of only 2 main line items:
Interest & Dividend.
18. SECTOR COMMON SIZE PROFIT AND LOSS
Common Size
FY13A FY14A FY15A FY16E
REVENUE
Net Revenue from Operations 98 98 97 98
Other Income 2 2 3 2
TOTAL 100 100 100 100
EXPENDITURE
Raw Material Consumed 35 36 34 34
Purchase of Trading Goods 10 9 10 10
Changes in Inventory (except raw material inventory) (0) (0) (0) 2
Employee Benefit Expenses 5 5 5 5
Other Expenses (Other Overheads) 23 22 22 22
TOTAL 73 71 71 73
EBITDA 27 29 29 27
(Depreciation & Amortization Expenses) (2) (2) (2) (2)
EBIT 25 26 27 25
(Interest Charges) (0) (0) (0) (0)
PBT Before Exceptional Items 25 26 27 25
Exceptional Items 1 0 2 1
PBT 26 27 27 26
(Tax Charges) (8) (8) (8) (8)
PAT 19 19 19 18
19. SECTOR COMMON SIZE BALANCE SHEET
Common Size
FY13A FY14A FY15A FY16E
EQUITY & LIABILITIES
Shareholder Funds
Share Capital 2 2 2 1
Reserves & Surpluses 51 54 57 55
Non Current Liabilities
Long Term Borrowings 2 0 0 0
Deferred Tax Liabilities (Net) 3 3 3 2
Other Long Term Liabilities 1 0 0 0
Long Term Provisions 4 4 4 4
Current Liabilities
Short Term Borrowings 0 0 0 0
Trade Payables 14 14 12 14
Other Current Liabilities 9 9 8 9
Short Term Provisions 14 14 14 15
TOTAL 100 100 100 100
ASSETS
Non Current Assets
Tangible Assets 32 30 30 30
Intangible Assets 0 0 1 1
Capital Work in Progress 4 5 4 2
Intangible Assets Under Development 0 0 0 0
Non Current Investments 5 6 5 7
Long Term Loans & Advances 4 4 3 3
Other Non Current Assets 1 0 0 0
Current Assets
Current Investments 14 16 15 9
Inventories 19 19 18 19
Trade Receivables 4 5 4 4
Cash & Bank Balances 12 10 17 23
Short Term Loans & Advances 2 2 2 2
Other Current Assets 2 2 1 1
TOTAL 100 100 100 100
20. SECTOR COMMON SIZE CASH FLOW STATEMENT
Common Size
FY13A FY14A FY15A FY16E
Cash Flow From Operating Activities
Profit Before Tax 102 107 102 91
Various Adjustments (0) (1) (2) 1
Operating Profit Before WC Changes (FGFO) 102 106 99 92
Working Capital Changes (2) (6) 1 (6)
Miscellaneous Inflows/(Outflows) (6) (0) (14) 14
Cash Generated from Operations 100 100 100 100
(Direct Tax Paid) (27) (31) (33) (28)
Deferred Tax Liability
Net Cash Generated From Operating Activities 73 69 67 72
Cash Flow from Investing activities
Purchase of Fixed Asset (17) (18) (19) (15)
Sale of Fixed Asset 0 0 0 0
Purchase and Sale of Investments (Net) (7) (9) 2 4
Interest Received 3 4 4 3
Dividend Received 2 3 3 4
Net Cash Flow from Investing Activities (18) (21) (8) (4)
Cash Flow From Financing Activities
Issue of Shares 6 4 5 0
Increase/(Decrease) in Borrowings (Net) (0) (5) (0) 0
Interest Paid (1) (0) (0) (0)
Dividend and Dividend Tax Paid (53) (4) (47) (44)
Miscellaneous Inflows/(Outflows) 0 (43) 0 0
Net Cash Flow from Financing Activities (49) (48) (43) (44)
Changes in Cash and Cash Equivalents 6 (1) 17 24
21. SECTOR CASH CONVERSION CYCLE
Details
Simple Average
FY13A FY14A FY15A FY16E
Raw Material Inventory 70 76 73 67
WIP Inventory 7 8 8 8
Finished Goods Inventory 57 49 56 57
Inventory of trading goods 3 4 4 4
Inventory Conversion Cycle 137 135 141 136
Receivables Conversion Period 10 13 10 10
(Trade Payables Payment Period) (101) (101) (102) (96)
Cash Conversion Cycle (CCC) 46 47 49 50
SECTOR FINANCIAL RATIOS
SECTOR AVERAGE
FY13A FY14A FY15A FY16E
Activity Ratios
Receivables Turnover 37.29 28.75 36.50 36.50
Days of Sales Outstanding 9.79 12.69 10.00 10.00
Inventory Turnover 2.66 2.70 2.59 2.69
Days Inventory 137.20 135.38 141.04 135.67
Payable Turnover 3.60 3.60 3.57 3.80
Days Payable 101.35 101.38 102.23 96.02
Total Asset Turnover 1.25 1.23 1.18 1.29
Fixed Asset Turnover 3.87 4.06 3.95 4.34
Liquidity
Ratios
Current Ratio 1.43 1.49 1.64 1.55
Quick Ratio 0.92 0.98 1.12 1.04
Cash Conversion Cycle 45.64 46.70 48.82 49.66
Solvency
Ratios
Debt to Equity 0.06 0.01 0.01 0.01
Long Term Debt to Equity 0.05 0.00 0.00 0.00
Debt to Capital Employed 0.04 0.00 0.00 0.00
Debt to Asset 0.02 0.00 0.00 0.00
Interest Coverage 113.72 362.49 270.00 322.88
Profitability
Ratio
EBITDA Margin 27.40 28.50 28.97 27.19
Operating Margin 25.35 26.45 26.92 25.15
Pre-Tax Margin 26.07 26.69 27.00 25.75
Net Profit Margin 18.56 18.97 18.63 17.88
ROA 23.79 23.84 22.67 23.52
ROCE 43.14 42.65 38.80 41.81
ROE 45.12 42.74 38.86 41.87
Other Ratios
Capital Turnover 2.32 2.25 2.08 2.34
EBITDA / CGFO 1.11 1.16 1.13 0.97
DSCR 81.25 214.59 172.13 254.12
