An Investment Memorandum

By: Nishant Khanna

EXECUTIVE SUMMARY:

Hindustan Unilever Limited (HUL) (BSE: 500696) is India's largest fast moving consumer goods company. 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 Brothers, Hindustan Vanaspati Mfg. Co. Ltd. and United Traders Ltd. Hindustan Unilever's distribution covers over 1 million retail outlets across India directly and its products are available in over 6.3 million outlets in the country, nearly 80% of all retail outlets in India. A detailed analysis of HUL has been covered in respect of past growth and performance. Under this project to better understand the industry, the Fundamental & Technical Tools are used to make it more authentic and meaningful. A Top down (E.I.C.) The Economic Analysis has been done with the help of PESTEL analysis. The Industry Analysis has been done with the help of Michael Porters Five Forces Model. The company Analysis has been done with the help of SWOT Analysis and also includes the Management Team. The Financial Analysis has been done with the help of the Balance Sheet and Profit & loss A/c Statement of the company.

CONTENTS: Introduction Economic Overview Industry Overview Company Overview Financial Analysis Recommendations

INTRODUCTION:

Hindustan Lever Ltd (HUL) is India's largest Fast Moving Consumer Goods (FMCG) company touching the lives of two out of three Indians with over 20 distinct categories in home & personal care products and food & beverages. HUL's brands like Lifebuoy, Lux, Surf Excel, Rin, Wheel, Fair & Lovely, Pond's, Sunsilk, Clinic, Pepsodent, Close-up, Lakme, Brooke Bond, Kissan, KnorrAnnapurna, Kwality Wall's are household names across the country and span a host of categories, such as soaps, detergents, personal products, tea, coffee, branded staples, ice cream and culinary products. It is headquartered in Mumbai, India and has employee strength of over 16,000 employees, 1500 managers and contributes for indirect employment of over 52,000 people. In the late 19th and early 20th century Unilever used to export its products to India. This process began in 1888 with the export of Sunlight soap, which was followed by Lifebuoy in 1895 and other famous brands like Pears, Lux and Vim soon after.

HUL AT A GLANCE:

HUL is the market leader in Indian consumer products with presence in over 20 consumer categories such as soaps, tea, detergents and shampoos amongst others with over 700 million Indian consumers using its products. They endow the company with turnover of Rs.17,523 crores (for the 12 month period April 1, 2009 to March 31, 2010).The mission that inspires HUL's more than 15,000 employees, including over 1,400 managers, is to 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. It is a mission HUL shares with its parent company, Unilever, which holds about 52 % of the equity.

CONTENTS:
Introduction Economic Overview Industry Overview Company Overview Financial Analysis Recommendations

ECONOMIC OVERVIEW:

PESTLE ANALYSIS: Political/ Legal:

There was fear by foreign companies on certain issues such as knowledge leakage, loss of trademark etc.
There was fear by foreign companies on certain issues such as knowledge leakage, loss of trademark etc.

Economic:

There are so many discounters in the European market resulting from EU free trade policy.

In some developing countries, Nigeria to be precise, there was uncertainty about duties to be paid by companies due to inflation and fluctuation of currency.

Socio-Cultural:

The company is working relentlessly to bring improve hygiene and better nutrition to people in Asia, Africa and Latin America, especially the poor and obesity.Over 30% of Africa population lives on less than $1 per day. Unilever is focused on building an exclusive culture and embracing difference, which resulted in high demand of its products in the developing and emerging markets.

Technological:

Unilever has been spending on IT to improve its business especially in the area of e-business so as to improve brands communication and market through internet, making transaction simple along chain. Unilever is trying to minimize cost through IT efficiencies at global level.

Environment:

Unilever has respect for consumer health and safety. Training programs are being arranged in various regions/business groups to ensure compliance with the company Standard for Occupational Health and Safety Environmental Care (SHE). This framework is based on the ISO 14001 management standard.

CONTENTS:
Introduction Economic Overview Industry Overview Company Overview Financial Analysis Recommendations

PORTERS FIVE FORCES:

Bargaining power of buyers Bargaining power of suppliers Threat of new entrants Threat of substitutes Degree of rivalry within industry

CONTENTS:
Introduction Economic Overview Industry Overview Company Overview Financial Analysis Recommendations

COMPANY OVERVIEW:

SWOT ANALYSIS: Strengths:

HUL enjoys a formidable distribution network covering over 3400 distributors and 16 million outlets. This helps them maintain heavy volumes, and hence, fill the shelves of most outlets. Project Shakti - Rural India is spread across 627,000 villages and possesses a serious distribution challenge for FMCG Cos. HUL has come up with a unique and successful initiative wherein the women from the rural sector market HUL products, and hence, are able to reach the same wavelength as of the common man in village.

Weakness:

HUL's market dominance, originating from its extensive reach and strong brand presence, allowed it to raise the prices even as raw materials were getting cheaper. HUL's weakness was its inability to transform its strategies at the right time. They continued with the same old strategy which helped them gain profits but were not genuine in this changed environment.

Opportunities:

An expansion of horizons towards more and more countries would help HUL grow its consumer base and henceforth the revenues. Opportunity in Food Sector - The advent of modern trade has opened up greater opportunities for HUL to diversify its brand and strength its food division.

Threats:

ITC has reduced its dependence on the cigarettes business Contribution of the core business in revenues has come down from 87% in FY99 to 70% in FY05. Over a period of five years, ITC has extended its presence into areas like foods, retailing, hotels, greetings, agri, paper, etc. These are businesses that can give it growth impetus in the long run. With ITC gaining momentum in each of these businesses, it is turning into a consumer monolith, and hence, the greatest threat to HUL's Business.

MANAGEMENT TEAM

BOARD OF DIRECTORS: Mr. Harish Manwani - Chairman Mr. Nitin Paranjpe - CEO and Managing Director Mr. R. Sridhar - Chief Financial Officer Mr. Gopal Vittal - Executive Director, Home & Personal Care Mr Pradeep Banerjee - Executive Director, Supply Chain Mr. D. S. Parekh - Independent Director Mr. A. Narayan - Independent Director Mr. S. Ramadorai - Independent Director Dr. R. A. Mashelkar - Independent Director

CONTENTS:
Introduction Economic Overview Industry Overview Company Overview Financial Analysis Recommendations

FINANCIAL ANALYSIS: ANALYSIS OF THE BALANCE SHEET:

Gross Block and Net Block has remained constant for the first 2 years but increased in 2007 and then declined in 2009 whereas the Sales in the same period have increased constantly. This may be due to the fact that certain fixed assets may have been sold which would have generated cash, thus increasing the figure of current assets. The Net Current Liability remained fairly constant in initial 2 years but has decreased drastically in the current year. This is due to the disproportionate increase in the current asset in the form of cash at hand and at bank. Net Worth has increased from 0.64 in 2007 to 0.84 in 2009. It is not in line with the growth in Gross Block. The Fixed Asset Turnover over the period of 2009-10 has been on decline. This has been mainly due to decline in Sales. In 2007 earnings per share just surpassed dividend per share. In 2010 there has been a great decline in both EPS and DPS which implies that company is not making much profit which come from the fact that there is decline in sales.

ANALYSIS OF PROFIT AND LOSS A/C:

There has been a constant increase in Sales from 2005 to 2009 but decrease in sales figures is seen in 2010. The expenditure has been on increase until in 2010 there has been a decrease in the expenditure. There was less demand so there was decrease in production and net sales. Gross Profit has been increasing constantly and so is the trend seen for Operating profit figure with a small decline in 2010. PBT shot up abruptly from 1.00 in 2005 to 1.35 in 2006 but after that there has been a steady growth. The increase in PBT is showing a direct relationship to the growth in Sales. But PAT has been increasing constantly from year 2005 to 2009 and a small dip in 2010. This difference between the growth pattern of PBT and PAT can be attributed to Extra-ordinary items whose value is much more in 2006 as compared to 2005. Therefore PAT has increased to 1.13 only in 2006 from 1.00 in 2005. Again the value of Extraordinary items decreased in 2009, therefore the PAT value increased from 1.26 in 2007 to 1.45 in 2010. There has been a steady increase in the value of Dividends paid till year 2007 after which there has been a decline from 1.8 in 2007 to 1.19 in 2009. This may be due to the fact that since total debts has increased, management has decided to pay lower dividends in the current year

CONTENTS:
Introduction Economic Overview Industry Overview Company Overview Financial Analysis Recommendations

RECOMMENDATIONS:

Increase presence in market by means of correcting price. The price of loosing brands should be less than the other brands which are in competition. New offer which attracts the customer to buy the products. New advertising strategy for the loosing bands. Re-launching of the loosing products with some new features and specifications. Increase presence in modern trade. Improve the distribution network of the loosing brands. Improve the quality of the loosing brands. Make analysis and surveys of the loosing brands and try to know why the brands are loosing there value.