Financial Analysis of HUL and GCPL

Financial
Analysis of HUL
and GCPL (FMCG
Sector)

Management
Accounting – I Project

12P139 – Ishpreet Singh

12P140 – J Abhinav

12P141 – Karan Jaidka

12P142 – Kshitij Agrawal

12P143 – Kshitij Ahuja

12P144 – Ladlee Rathore

Group 4 – Section C –PGPM
2012-14

Section C – Group 4 Page | 1

Table of Contents

Title Page No.

Acknowledgements 1

Introduction 2

Snapshot of the FMCG sector 3
Companies under study 4
Comparative financial analysis 5

Short term investment 6
Long term investment 12

Short term lending 19

Long term lending 23
Strategy 29
Altman Model 42
Appendix 46


Acknowledgements

We, as Group 4 of Section C, would collectively like to thank Prof. S.K Rai, who for his in-depth
analysis of various topics in Management Accounting I, arise in all of us a genuine curiosity and
interest in the subject. His guidance during the course helped us in the financial analysis of the
FMCG industry. Lastly, we thank the Almighty for guiding us through the implementation of this
project.


Introduction

Financial statement analysis is the process of reviewing and evaluating a company’s financial
statements thereby gaining an understanding the financial health of the company and enabling
effective decision making for owners and managers, prospective and present investors,
financial institutions, government entities etc. It involves analysis of past, current and projected
performance of the company.

Financial Statements are released by companies not only for acceding to the norms set up by
the exchanges on which they are listed and to follow the rules put down by the regulator of
that country but also to provide prospective investors and financial institutions a brief insight
into the company. It helps them take decision to make investment or give loan, both long term
and short term to the company.

Financial statements are normally available in company’s website, prospectus as also the
annual and the quarterly results declared by the company. These statements by themselves
contain a lot of numbers which are in comprehensible unless a proper analysis of such
documents is carried out to arrive at a conclusion on the company's financial health. The pages
that follow, aim to provide a simplified explanation of some of the basic analysis company for
different objectives of the investor/lender. The objectives include Short term and long term
investment, short term and long term lending and future strategy.

For executing this project, we selected two companies
a. Hindustan Unilever Limited
b. Godrej Consumer Products Limited
We took one Large Cap Company and a Mid Cap Company and compared the two.


Snapshot of the FMCG Sector

Fast Moving Consumer Goods (FMCG) – These are products that are sold quickly and at
relatively low. Examples include non-durable goods such as soft drinks, toiletries, and grocery
items. Though the absolute profit made on FMCG products is relatively small, they generally sell
in large quantities, so the cumulative profit on such products can be substantial.

The term FMCGs refers to those retail goods that are generally replaced or fully used up over a
short period of days, weeks, or months, and within one year. This contrasts with
durable or major appliances such as kitchen appliances, which are generally replaced over a
period of several years.
FMCG have a short shelf life, either as a result of high consumer demand or because the
product deteriorates rapidly. Some FMCGs – such as meat, fruits and vegetables, dairy products
and baked goods – are highly perishable. Other goods such as alcohol, toiletries, pre-packaged
foods, soft drinks and cleaning products have high turnover rates. The following are the main
characteristics of FMCGs:

 From the consumers' perspective:
 Frequent purchase
 Low involvement (little or no effort to choose the item – products with strong
brand loyalty are exceptions to this rule)
 Low price
 From the marketers' angle:
 High volumes
 Low contribution margins
 Extensive distribution networks
 High stock turnover


Companies under Study

Hindustan Unilever Limited (HUL) - It is India's largest consumer goods company based
in Mumbai, Maharashtra. It is owned by the British-Dutch company Unilever which controls
52% majority stake in HUL. Its products include foods, beverages, cleaning agents and personal
care products.
HUL was formed in 1933 as Lever Brothers India Limited and came into being in 1956 as
Hindustan Lever Limited through a merger of Lever, Hindustan Vanaspati Mfg. Co. Ltd. and
United Traders Ltd. It is headquartered in Mumbai, India and has employee strength of over
16,500 employees and contributes to indirect employment of over 65,000 people. The
company was renamed in June 2007 as “Hindustan Unilever Limited”.
Lever Brothers started its actual 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).
Hindustan Unilever's distribution covers over 2 million retail outlets across India directly and its
products are available in over 6.4 million outlets in the country. As per Nielsen market research
data, two out of three Indians use HUL products.

Godrej Consumer Products Limited (GCPL) – It is an Indian consumer goods company based in
Mumbai, India. GCPL’s product range includes soaps, hair colorants, toiletries and liquid
detergents. Some of the leading brands are ‘Cinthol’, ‘Godrej Fair Glow’, ‘Godrej No.1’ and
‘Godrej Shikakai’ in soaps, ‘Godrej Powder Hair Dye’, ‘Renew’, ‘ColourSoft’ in hair colorants and
‘Ezee’ liquid detergent. GCPL has five manufacturing facilities in India at Malanpur (Madhya
Pradesh), Guwahati (Assam), Baddi- Thana (Himachal Pradesh), Baddi- Katha (Himachal
Pradesh) and Sikkim.

The Consumer Products business was part of the erstwhile Godrej Soaps Limited (GSL) and was
demerged into Godrej Consumer Products Limited in April 2001, pursuant to a scheme of
demerger approved by the Hon’ble High Court of Judicature, Mumbai, dated March 14, 2001.


Comparative Financial Analysis

The following are various analysis metrics considered to compare the performance of HUL and
GCPL:-

Short Term Investment

Long Term Investment

Short Term Lending

Long Term Lending

Strategies for the Future


Short Term Investment

Short term investment can be considered as the continual buying and selling of stock of
companies, in an effort to have one's money grow faster than the general level of stock prices.
Normally investments are done for less than a year.
The main aim of Short term investment is to protect the capital by investing in low risk
instruments and simultaneously get a return which beats the benchmark.
Short term investment includes investment in stocks and other short term debt. They are
commonly used by investors to temporarily store funds while arranging for their transfer to
another investment vehicle that provides higher returns. The various ratios and factors to be
taken into consideration are:-
1. P/E ratio
2. P/BV ratio
3. EPS
4. Beta Value
5. Share price
Though there is no fixed definition for short term we are considering a period of six months
here.

Observation of the two firms Hindustan Unilever Ltd. and Godrej Consumer Products Ltd. for
Short Term Investment is depicted in the table below:-

Company FY12 FY11 FY10 FY09 FY08

41.15 26.65 24.77 24.44 26.72
P/E Ratio
40.53 27.18 32.48 21.13 21.60

P/BV 6.47 7.71 9.74 6.36 18.96
Ratio
44.17 86.33 226.79 28.87 25

12.45 10.68 10.09 11.47 8.12
EPS
17.76 13.44 8.05 6.29 6.56

1) P/E ratio


The P/E ratio expresses the relationship between the price per share and the amount of
earnings attributable to a single share. i.e., the P/E ratio tells us how much an investor in
common stock pays per rupee of current earnings.

PE Ratio = Market Value per share / Earning per share

What does P/E ratio say?
A higher P/E ratio means that investors are paying more for each unit of net income, so the
stock is more expensive, that is overvalued, compared to one with a lower P/E ratio.

45
40.53
40
41.15
35
32.48
30 27.18
26.72 24.44
25
26.65
24.77 HUL
20
21.6 GCPL
21.13
15

10

5

0
2008 2009 2010 2011 2012

Trend analysis
P/E ratios for both the companies are increasing with almost equal rate and the absolute values
are also more or less equal. Hence, we can’t conclude anything on the basis of this ratio alone.


2) P/BV ratio

A ratio used to compare a stock's market value to its book value; it is calculated by dividing the
market price of share by the book value per share.

Price to Book Value = Market price per share / book value per share

What does P/BV say?
A lower P/BV ratio could mean that the stock is undervalued. However, it could also mean that
something is fundamentally wrong with the company. As with most ratios, be aware that this
varies by industry.
This ratio also gives some idea of whether you're paying too much for what would be left if the
company went bankrupt immediately.

35
32.5
30

25.25 23.12
25 25.22
20.16
20
18.96
HUL
15 GCPL
9.74
10 6.36 7.71

6.47
5

0
2008 2009 2010 2011 2012

Trend analysis
P/BV ratio of GCPL is 6.46 and it is decreasing but for HUL, it is 25.22 and increasing. So, we can
say that GCPL share is under-valued as compared to HUL. This ratio for GPCL is not too low to
get tense about returns from investment


3) EPS

The earnings per share is a good measure of profitability and when compared with EPS of
similar companies, it gives a view of the comparative earnings or earnings power of the firm.
EPS ratio calculated for a number of years indicates whether or not the earning power of the
company has increased.
Earnings per share (EPS) Ratio = (Net profit after tax − Preference dividend) / No. of equity
shares (common shares)

20

18 17.76
16

14
13.44
12 12.45
11.47 10.09
10.68 HUL
10

8.12 GCPL
8 8.05

6 6.29
6.56
4

2

0
2008 2009 2010 2011 2012

Trend Analysis
EPS has been increasing for both the companies but GCPL is at a better position since the
percentage increase in EPS and the absolute value of EPS is much better as compared to HUL


4) Beta Value

Beta (β) of a stock or portfolio is a number describing the correlated volatility of an asset in
relation to the volatility of the benchmark that said asset is being compared to, the benchmark
being considered to be financial market.
Beta can be estimated for individual companies using regression analysis against a stock market
index. It describes how much risk that one can take to get a desirable return or vice versa.

What does beta value say?
1. Negative beta, is a rare condition where the price of the stock moves in reverse
direction to the market movement.
2. Zero beta, is another rarity, where the price of stock stays same over time irrespective
of market movement. This can sometimes happen in sideways moving markets, where no major
economic/industry/company news is coming up.
3. A beta of less than 1 means that the security will be less volatile than the market. This is
when the stock price moves less in comparison of market. It makes them qualify for low-risk
investments, but is not so suitable for short-term trading.
4. A beta of 1 indicates that the security's price will move with the market. This is true for
many index-linked stocks and funds.
5. A beta of greater than 1 indicates that the security's price will be more volatile than the
market. This is when the stock price movement surpass market movement. These stocks tend
to offer better return for high-risk taken, but many of them are less suitable for long-term
investing. Very high beta levels may indicate low liquidity causing increase in volatility.

Trend analysis
Beta value for HUL is 0.389 and for GCPL is 0.27. Since, both of them are less, we can’t conclude
much on the basis of beta values of two companies.


5) Share price

Share price of HUL has increased by almost 35% in the past one year and the present market value of its
share is 518.25 while the increase in price of GCPL is by almost 55% with present market value being
690.6. But, in the last 3 months the percentage increase in price is almost the same at 20%.
So, for short term nothing significant can be concluded by share price.

Overall Analysis
In short term, based on EPS and P/BV, we can conclude that investment is better in GCPL as
compared to HUL since returns will be high from GCPL


Long Term Investment

Long Term Investing refers to the fact that investment is made for a period greater than 1 year.
The various factors to be considered are:-
1. Fixed asset turnover ratio
2. Return on Equity
3. Return on capital employed
4. Operating profit margin
5. Dividend yield ratio
6. Dividend payout ratio
Each of these factors has a role to play in the selection of the company for investment.
However, the degrees to which they affect the returns vary in response to the other factors as
well. Hence, for arriving at a decision for the investment, the entire basket needs to be
considered. Following is a brief discussion for each of them:-

0 0 0 0.2 0.06
D/E Ratio
0.09 0.18 0.01 0.12 0.89

Interest 2796.6 12238.54 404.94 119.5 92.3
Coverage
Ratio 44.17 86.33 226.79 28.87 25

76.62% 87.54% 85.25% 121.27% 122.91%
ROE
23.94% 28.36% 29.98% 30.08% 98.47%

Dividend 7.5 6.5 6.5 7.5 9
per share
4.75 4.5 4.25 4 4

25.22 23.12 20.16 25.25 32.5
P/BV Ratio
6.47 7.71 9.74 6.36 18.96


1) Fixed-asset Turnover Ratio:

The fixed-asset turnover ratio measures a company's ability to generate net sales from fixed-
asset investments - specifically property, plant and equipment (PP&E) - net of depreciation.

What does FA Turnover ratio say?
A higher fixed-asset turnover ratio shows that the company has been more effective in using
the investment in fixed assets to generate revenues.

12

10 9.8

8 7.81
7.49

6 6.09 6.26 HUL
5.63
5.35 GCPL
4.6 4.73
4 4.18

2

0
2008 2009 2010 2011 2012

Trend analysis
The ratio is increasing for both the companies but for GCPL, it is increasing at a higher rate as
compared to HUL, also, the absolute value for GCPL is higher than HUL. So, GCPL is more
efficient of the two


2) Return on Equity

It is the amount of net income as a percentage of shareholders equity.

Return on Equity = Net Income/Shareholder's Equity

What does it say?
Return on equity measures a corporation's profitability by revealing how much profit a
company generates with the money shareholders have invested. So higher the ROE, better is
the performance of the company

140.00%
122.91%
120.00% 121.27%

100.00% 98.47%
85.25% 87.54%
76.62%
80.00%
HUL
60.00% GCPL

40.00% 30.08% 29.98% 28.36%
23.94%
20.00%

0.00%
2008 2009 2010 2011 2012

Trend analysis
ROE for both the companies are decreasing but for HUL the absolute value is much higher as
compared to GCPL. Hence, of the two, HUL is a better option.


3) ROCE

It is the ratio that indicates the efficiency and profitability of a company's capital investments.

ROCE = EBIT / (Total asset – current liabilities)

What does ROCE say?
ROCE measures a corporation's profitability by revealing how much profit a company generates
with respect to the total investment made. So higher the ROCE, better is the performance of
the company

160

140 138.72

120 118.59
106.78
100 102.47
93.08
80 HUL

66.03 GCPL
60

40
32.65 35.73
28.43
20 21.42

0
2008 2009 2010 2011 2012

Trend analysis
ROCE has been decreasing for both the companies but the absolute value of ROCE for HUL is
more than 4 times than GCPL, which shows that HUL is performing much better and hence, it is
a better option


4) Operating Profit Margins

A ratio used to measure a company's pricing strategy and operating efficiency.

Operating Profit Margin = Operating Income / Net Sales

What does it say?
Operating margin gives analysts an idea of how much a company makes (before interest and
taxes) on each dollar of sales. When looking at operating margin to determine the quality of a
company, it is best to look at the change in operating margin over time and to compare the
company's yearly or quarterly figures to those of its competitors. If a company's margin is
increasing, it is earning more per dollar of sales. Higher the operating profit margin, the better
the performance of the company.

0.2

0.18
0.175
0.16

0.14 0.142
0.136
0.127 0.131 0.128
0.12 0.122 0.12
0.118 0.111
0.1 HUL
GCPL
0.08

0.06

0.04

0.02

0
2008 2009 2010 2011 2012

Trend analysis
HUL is a better option as its operating margin is high as well as it is increasing from the last year
which is not the case with GCPL


5) Dividend Yield

A financial ratio that shows how much a company pays out in dividends each year relative to its
share price. In the absence of any capital gains, the dividend yield is the return on investment
for a stock. Dividend yield is calculated as follows:

Dividend Yield = Annual Dividends per share / price per share

What does it say?
Dividend yield is a way to measure how much cash flow you are getting for each dollar invested
in an equity position - in other words, how much "bang for your buck" you are getting from
dividends. Investors who require a minimum stream of cash flow from their investment
portfolio can secure this cash flow by investing in stocks paying relatively high, stable dividend
yields.

4.5
4.2
4

3.5
3.2 3.1
3
3.01
2.7
2.5
HUL
2.2
2 GCPL
1.8
1.62
1.5
1.23
1 0.99

0.5

0
2008 2009 2010 2011 2012

Trend analysis
HUL is better option since the absolute value of Dividend yield is greater than GCPL but for both
the companies dividend yield is decreasing.


6) Dividend Payout Ratio

The percentage of earnings paid to shareholders in dividends.

Dividend Payout Ratio = Dividends / Net Income
What does it say?
The payout ratio provides an idea of how well earnings support the dividend payments. More
mature companies tend to have a higher payout ratio. This is because they do not retain the
earnings for re investing in business.

140
131.8
120

100

80
73.26 76.47 75.2
74.58 71.2 69.99 HUL
60 59.34 GCPL

45.19
40
30.11
20

0
2008 2009 2010 2011 2012

Trend analysis
HUL is a better option since it doesn’t retain much of its earnings for the purpose of expansion
as compared to GCPL

Overall Analysis
After considering all the parameters, we can say that HUL is better for long term investment
since it provides better dividends as compared to GCPL. Not only that, in terms of ROE, ROCL
and operating profit margin, HUL is a better company to invest for the long term.


Short Term Lending

The analysis of short term will depend on how much returns our investment will give us in the short run.
A bank will thus lend only to the company, which is more efficient in running business, and will have
higher sales in the near future that will ensure that the loan will be repaid on time. Thus we must
analyze why the company is borrowing money and what will be the application of funds. We must find
out whether the company will apply the funds to pay back loans (principal or interest) or to raise fixed
assets or to increase current assets. For short term lending the primary concern for any bank are the
liquidity ratios of the company(s) concerned. So the parameters that we will take into consideration
are:-
1. Current Ratio
2. Receivables Turnover Ratio
3. Inventory Turnover Ratio

0.86 0.88 1.01 1.32 0.85
Current
Ratio 1.20 0.74 1.46 2.23 0.95

Receivables 27.27 24.28 29.24 41.83 31.41
Turnover
Ratio 30.17 35.1 59.25 99.37 81.10

Inventory 9.93 7.91 8.99 9.26 7.2
Turnover
Ratio 7.16 8.2 7.93 9.25 5.7


1) Current Ratio

A liquidity ratio that measures a company's ability to pay short-term obligations.

The Current Ratio formula is:

What does current ratio say?
The higher the current ratio, the more capable the company is of paying its obligations. A ratio
under 1 suggests that the company would be unable to pay off its obligations if they came due at
that point. While this shows the company is not in good financial health, it does not necessarily
mean that it will go bankrupt - as there are many ways to access financing - but it is definitely
not a good sign.

2.5

2.23
2

1.5 1.46
1.32
HUL
1.2
0.95 GCPL
1 0.88
0.85 1.01 0.86
0.74

0.5

0
2008 2009 2010 2011 2012

Trend Analysis
When we compare the ratios for both the companies, HUL has a lower current ratio as compared to
GCPL. The current ratio for HUL is decreasing as well unlike GCPL. This means that GCPL is a better
company in paying off its obligations


2) Receivables Turnover Ratio

This ratio shows how efficiently the company is making its credit sales and thereby making use
of its assets.

Receivable Turnover ratio = Sales / Average account receivable

What does receivable turnover ratio say?
A high ratio indicates the company is doing well at lending credit and collecting debts. A low
ratio indicates that company has to look back its credit policies.

120

100 99.37
81.1
80

60 59.25 HUL
GCPL

40 35.1 30.17
41.83
31.41
20 29.24 27.27
24.28

0
2008 2009 2010 2011 2012

Trend analysis
In the last 5 years, the ratio has decreased for both the companies but it is decreasing at a
much faster rate for GCPL as compared to HUL. The absolute value of GCPL is, however,
marginally more than HUL. But, according to the trend HUL is doing better at lending credit and
collecting debts.


3) Inventory Turnover Ratio

This ratio gives number of times inventory is sold i.e. for it is sales to inventory ratio.

Inventory turnover ratio= sales/inventory

What does Inventory turnover ratio say?
High value of this ratio indicates that a lot of inventory is either being sold or there is ineffective
buying because of low prices. Low value indicates high inventory which is not good. It shows
that sales are not happening.

12

10 9.25 8.99 9.93

9.26 8.2
8 7.2
7.93 7.91
7.16
6 HUL
5.7
GCPL

4

2

0
2008 2009 2010 2011 2012

Trend analysis
Inventory turnover ratio of GCPL is low and decreasing from last year but for HUL, it is
increasing which shows that HUL is more efficient in utilising inventory

Overall Analysis
HUL is better at Receivable turnover ratio and Inventory turnover ratio signifying that for
providing short term loans, HUL is a better company as compared to GCPL


Long Term Lending

The main purpose of long term lending is
a. Steady return for a long period of time
b. Reduce risk
The lender generally looks at four ratios apart from the above analysis
1. Debt equity ratio
2. Interest coverage ratio
3. Fixed asset turnover ratio
4. ROCE
5. Gross block


0 0 0 0 0
D/E Ratio
0.09 0.17 0 0.10 0.83

Interest 2796.6 12238.54 404.94 119.5 92.3
Coverage
Ratio 44.17 86.33 226.79 28.87 25
Fixed
Assets 6.26 5.63 5.35 7.81 9.8
Turnover
Ratio 7.49 6.09 4.73 4.18 4.6

93.08 102.47 106.78 118.59 138.72
ROCE
21.42 28.43 35.73 32.65 66.03

Gross 3574.67 3759.62 3581.76 2881.73 2669.08
Block
1363.43 1461.06 273.81 266.54 265.56


1) D/E Ratio

It is a measure of a company's financial leverage. It indicates what proportion of equity and
debt the company is using to finance its assets.

D/E = Total liabilities / Net worth

What does D/E ratio says?
While a lower total debt to equity ratio generally reflects conservative financial policies and
mean diluted earnings for equity investors as it probably suggests that the company is not
leveraging itself optimally to achieve growth in return on equity funds.
A high debt/equity ratio generally means that a company has been aggressive in financing its
growth with debt. This can result in volatile earnings as a result of the additional interest
expense.

0.9
0.83
0.8

0.7

0.6

0.5
HUL
0.4 GCPL

0.3

0.2
0.1 0.17
0.1 0.09

0 0 0 0 0 0
2008 2009 2010 2011 2012

Trend analysis
D/E ratio is low for both the companies and it is decreasing further for GCPL. Since, this ratio is lower for
HUL, so, this company is a better option for long term lending.


2) Interest Coverage Ratio

A ratio used to determine how easily a company can pay interest on outstanding debt. The
interest coverage ratio is calculated by dividing a company's earnings before interest and taxes
(EBIT) of one period by the company's interest expenses of the same period:

What does interest coverage ratio say?
The lower the ratio, the more the company is burdened by debt expense. When a company's
interest coverage ratio is 1.5 or lower, its ability to meet interest expenses may be
questionable. An interest coverage ratio below 1 indicates the company is not generating
sufficient revenues to satisfy interest expenses.

14000

12000 12238.54

10000

8000
HUL
6000 GCPL

4000
2796.6
2000
92.3 119.5 404.94 86.33
0 25 226.79 44.17
28.87
2008 2009 2010 2011 2012

Trend analysis
Interest coverage ratio of HUL is higher than GCPL and it has increased by almost 3000% and for
GCPL, it has increased by almost 90% which clearly tells that HUL will be in better condition to
repay interest on loans.


3) Fixed Asset Turnover Ratio

asset investments - specifically property, plant and equipment (PP&E) - net of depreciation.

What does FA Turnover ratio say?
A higher fixed-asset turnover ratio shows that the company has been more effective in using
the investment in fixed assets to generate revenues.

12

9.8
10

8 7.81
7.49

6 5.35 6.09 6.26 HUL
GCPL
5.63
4 4.6 4.73
4.18

2

0
2008 2009 2010 2011 2012

Trend Analysis
From the last 3 years, the ratio is increasing for both the companies but the increase in
percentage of GCPL as well as absolute value is greater as compared to HUL and hence, GCPL is
a better option


4) Return on Capital Employed

It is a ratio that indicates the efficiency and profitability of a company's capital investments.

ROCE = EBIT / (Total asset – current liabilities)
What does ROCE say?
ROCE measures a corporation's profitability by revealing how much profit a company generates
with respect to the total investment made. So higher the ROCE, better is the performance of
the company

160

140 138.72
118.59
120
106.78 102.47
100
93.08
80 HUL

66.03 GCPL
60
35.73
40 28.43

20 32.65 21.42

0
2008 2009 2010 2011 2012

Trend Analysis
ROCE has been decreasing for both the companies but the absolute value of ROCE for HUL is
more than 4 times than GCPL, which shows that HUL is performing much better and hence, it is
a better option


5) Gross Block

The total value of all of the assets that a company owns. Value is determined by the amount it
cost to acquire these assets, and it is not decreased to take into account the effects of
depreciation.

4000
3759.62
3500 3581.16 3574.67

3000
2881.73
2669.08
2500

2000 HUL
GCPL
1500 1461.06
1363.43
1000

500
265.56 266.54 273.8
0
2008 2009 2010 2011 2012

Trend Analysis
Gross block for both the companies has decreased between 2011 and 2012. It increased
significantly for GCPL in 2010-11 implying that the company has expanded rapidly. But, for now,
both the companies seem to be stable.

Overall analysis
While comparing the two companies, we can see that HUL is better than GCPL for long term
lending on parameters like ROCE, Interest coverage which signify that HUL is doing well in
business


Strategy
Short term operations

1) Inventory turnover ratio

This ratio gives number of times inventory is sold i.e. for it is sales to inventory ratio.
Inventory turnover ratio= sales/inventory
What does Inventory turnover ratio say?
High value of this ratio indicates that a lot of inventory is either being sold or there is ineffective
buying because of low prices. Low value indicates high inventory which is not good. It shows
that sales are not happening.

12

10 9.26 9.93
8.99 8.2
9.25
8
7.2 7.91 7.16
7.93
6 HUL
5.7
GCPL
4

2

0
2008 2009 2010 2011 2012

Trend Analysis
The inventory turnover ratio is higher for GCPL which shows the high amount of sales are happening in
the company and the company is able to sell its inventory at a much faster rate as compared to HUL
showing better short term operational efficiency. Over the last 5 years, we notice that both companies
have followed a similar trend maintaining inventory. We see that both companies are efficiently their
inventory over time and their operational strategy based on inventory is sound.


2) Days of Inventory: 365/turnover ratio

A financial measure of a company's performance that gives investors an idea of how long it
takes a company to turn its inventory (including goods that are work in progress, if applicable)
into sales.
Days of Inventory = 365/turnover ratio

What does it Say?
Generally, the lower (shorter) the DSI the better, but it is important to note that the average
DSI varies from one industry to another.

140

120 122.49

100
89.57 91.46
85.8 87.17
80 80.04 82.84
73.63 71.76 HUL
69.5
60 GCPL

40

20

0
2008 2009 2010 2011 2012

Trend analysis
The days of inventory of HUL are substantially lower as compared to GCPL, which shows that HUL
takes lesser time to turn its inventory (including goods that are work in progress, if applicable) into sales,
and hence is more operationally efficient than GCPL.


Long Term Operational Strategy

1) Return on Assets/Assets Turnover Ratio
Return on Assets: An indicator of how profitable a company is relative to its total assets. It is calculated
as:

Asset Turnover is the amount of sales generated for every dollar's worth of assets. It is calculated by
dividing sales in dollars by assets in dollars.

Formula:

What does it say?
A high value of ROA or Assets Turnover Ratio measures how efficiently the assets are used in making a
profit.
ROA
80
74.17
70

60

50
47.4
40 HUL
GCPL
30
26.85
20 20.9
16.25
11.84 12.2
10 9.46
6.61
6.54
0
2008 2009 2010 2011 2012


Asset Turnover

9

8
7.81
7.49
7

6.09 6.26
6
5.64 5.63
5.35
5
4.6 4.73 HUL
4 4.18
GCPL

3

2

1

0
2008 2009 2010 2011 2012

Trend Analysis
The return on assets as well as the asset turnover ratio is substantially higher in case of GCPL,
which shows that the company is able to use its assets more efficiently as compared to the
other company i.e, HUL and hence is able to generate more revenues per unit of assets. HUL’s
Return on Assets is marginally increasing over the years, but it is not a significant increase,
hence the company should try and utilize its assets more efficiently.


2) Fixed Assets

A long-term tangible piece of property that a firm owns and uses in the production of its
income and is not expected to be consumed or converted into cash any sooner than at least one
year's time.

4500
4185.74
4000 4061.16
3854.15
3667.24
3500 3455.14

3000 2959.14
2727.26
2500
HUL
2000 GCPL
1500

1000
726.74
500 550.2
389.28
0
2008 2009 2010 2011 2012

Trend Analysis
We see that both companies have been increasing their assets over the last 5 years. However,
between 2010 and 2011, GCPL increased their assets approximately 5 times. One of the major
reasons for the sharp increase in fixed assets between 2010 and 2011 was GCPL’s extensive
expansion of operations in countries in Africa and Latin America during this period.


Financial Efficiency
Short Term Financial Strategy

1) Working Capital

Working Capital measures a company's efficiency in its short term financial health.
Working capital = Current Assets - Current Liabilities

What does it say?
A positive working capital denotes that the company is able to pay off its short term liabilities
while a negative value means that the company is unable to pay off its short term liabilities.

500

104.83
0 -58.95 -84.47 -96.67
2008 2009 2010-127.05 2011 2012
-500

-1000
-1183.74 HUL

-1500 -1431.33 GCPL

-2000 -1982.75
-2227.84
-2404.23
-2500

-3000

Trend Analysis
The working capital in case of GCPL has been substantially increasing over the years as
compared to HUL which shows that the company is able to pay its short term liabilities over
time. HUL’s working capital is negative indicating that company is not able to pay off short term
liabilities.



This ratio signifies how easily a company can pay interest on outstanding debt.

What does it say?
The lower the ratio, the more the company is burdened by the debt expense. For example, an
ICR of less than one signifies that the company is unable to generate sufficient revenues to
satisfy interest expenses.

12000
11243.63

10000

8000

6000 HUL
GCPL

4000

2636.53
2000
23.07 26.89 82.78 44.17
395.13
0 83.09 116.28
216.85
2008 2009 2010 2011 2012

Trend analysis
In case of HUL we see a sharp increase in the ICR from 2010 to 2011. This is due to the steep
drop in the interest paid which falls from 6.98 crore to 0.24 crore during this period. From 2011
to 2012 the interest increases from 0.24 crore to 1.24 crore which explains the steep decrease
in the ICR.


Long Term Financial Strategy

1) Sales Growth
Sales Growth of a company is used to find out the rate at which sales grows as compared to the
industry.

Sales for the Companies

30000

25000 24506.4
21912.02
20939.38
20000
18461.08

15000 14912.06 HUL
GCPL

10000

5000 4986.61
3775.89
1438.9 2084.27
1134.43
0
2008 2009 2010 2011 2012

Trend Analysis
As it can be inferred from the graph, the sales for HUL has been rising at a faster rate as
compared to GCPL which shows a strong order book and hence higher expectations of growth
in the near future.


2) Long Term Loan

Long-term loan is debt due in one year or more. It appears on a company's balance sheet.
For example many banks have term-loan programs that can offer small businesses the
cash they need to operate from month to month. Often a small business will use the cash from
a term loan to purchase fixed assets such as equipment used in its production process.

450
421.95
400

350

300
272.49
250
237.51 HUL
200 GCPL

150
134.59
100
88.53
62.89
50
12.4
0 0 0 0
2008 2009 2010 2011 2012

Trend Analysis
The long term loans in case of HUL have been negligible, whereas in case of GCPL have been
fluctuating. GCPL should therefore try and reduce its secured loans. One of the major reasons
for the sharp increase in secured loans between 2010 and 2011 was GCPL’s extensive expansion
of operations in countries in Africa and Latin America during this period.


3) Unsecured Loan

These are loans that are not backed by any underlying asset. It is high risk for the lenders since
there is a chance of default. This generally comes at a high interest rate.

300
277.3
262.43
250
235.24

200

150 HUL
GCPL

100 94

63.01
50 48

0 0 0 0
2008 2009 2010 2011 2012

Trend Analysis
The unsecured loans in case of GCPL have been significantly higher as compared to HUL which
show that the company has to pay huge amounts of unsecured loans which attract a higher
amount of interest and hence would affect its profits in the long run. GCPL should therefore try
and reduce its unsecured loans. One of the major reasons for the sharp increase in unsecured
loans between 2010 and 2011 was GCPL’s extensive expansion of operations in countries in
Africa and Latin America during this period.


4) Debt Equity Ratio

A measure of a company's financial leverage calculated by dividing its total
liabilities by stockholders' equity. It indicates what proportion of equity and debt the company
is using to finance its assets.
It is calculated as:

What does it say?
A high Debt/Equity ratio generally means that the company is aggressive in financing its growth
with debt. This can result in volatile earnings as a result of additional expense. If a lot of debt is
used to finance operations, the company could generate more earnings than it would have
without the debt. If the earnings are more than the interest on the debts then the
shareholders benefit. However, the reverse - when the interest outweighs the expense could
lead the company to bankruptcy.

0.9
0.83
0.8

0.7

0.6

0.5
HUL
0.4 GCPL

0.3

0.2
0.17
0.1 0.1 0.09

0 0 0 0 0 0
2008 2009 2010 2011 2012

Trend Analysis
We notice that over the last three years, HUL is maintaining zero debt.



14000

12000 12238.54

10000

8000
HUL
6000 GCPL

4000
2796.6
2000
92.3 119.5 404.94 86.33
0 25 226.79 44.17
28.87
2008 2009 2010 2011 2012

Trend analysis
In case of HUL we see a sharp increase in the ICR from 2010 to 2011. This is due to the steep
drop in the interest paid which falls from 6.98 crore to 0.24 crore during this period. From 2011
to 2012 the interest increases from 0.24 crore to 1.24 crore which explains the steep decrease
in the ICR.


6) Fixed Assets Turnover Ratio

A financial ratio of net sales to fixed assets. The fixed-asset turnover ratio is calculated as:

What does it Say?
asset investments - specifically property, plant and equipment (PP&E) - net of depreciation. A
higher fixed-asset turnover ratio shows that the company has been more effective in using the
investment in fixed assets to generate revenues. When companies make these large purchases,
prudent investors watch this ratio in following years to see how effective the investment in the
fixed assets was.

12

10 9.8

8 7.81 7.49

6 6.09 6.26 HUL
5.35 5.63
4.73 GCPL
4.6
4 4.18

2

0
2008 2009 2010 2011 2012

Trend Analysis
We notice that the Fixed Assets Turnover Ratio of GCPL has been steadily increasing over the
years, and this shows that GCPL has been utilising its fixed assets very efficiently to convert
them into sales and in the long run, it will be very beneficial for investors to invest in GCPL. In
the case of HUL, we notice that their Fixed Assets Turnover Ratio decreased initially and then
picked up in 2011 and 2012. Both companies have very promising long term investment
options.


Altman Model

A predictive model created by Edward Altman in the 1960s. This model combines five different
financial ratios to determine the likelihood of bankruptcy amongst companies.

Formula to calculate Altman's Z-Score:
z-score = 1.2 a + 1.4 b + 3.3 c + d + .6 f
e g
where :
a = working capital,
b = retained earnings,
c = operating income,
d = sales,
e = total assets,
f = net worth and
g = total debt

Altman z-score definition and explanation:
The Altman z-score is a bankruptcy prediction calculation.
The z-score measures the probability of insolvency (inability to pay debts as they become due).
1.8 or less indicates a very high probability of insolvency.
1.8 to 2.7 indicates a high probability of insolvency.
2.7 to 3.0 indicates possible insolvency.
3.0 or higher indicates that insolvency is not likely.


16
14.64
14
13.48
12 12.19
11.27 11.48
10

8 HUL
7.18 GCPL
6
5.55
5.03 4.7 4.48
4

2

0
2008 2009 2010 2011 2012

Analysis
Altman score for both the companies are greater than 3 which means that they both are safe in
terms of bankruptcy level. Since, HUL’s score is much higher than GCPL signifying that it is more
safe as compared to GCPL


Appendix

Hindustan Unilever Limited – Balance Sheets


Hindustan Unilever Limited – Profit and Loss Accounts


Godrej Consumer Products Limited – Balance Sheets


Godrej Consumer Products Limited – Profit and Loss Accounts


Source: livemint.com


Financial Analysis of HUL and GCPL

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