WMP15 – GROUP 1

FRA ASSIGNMENT
Group members
(Roll numbers)
1. Aavrit Singhal (WMP15002)
2. Bhavesh Verma (WMP15013)
3. Gaurav Keswani (WMP15018)
4. Jasmeet Kaur (WMP15025)
5. Nidhi Agarwal (WMP15033)
6. Pranjal Kwatra (WMP15038)

Page 1 of 33
Table of Contents
Why FMCG? ........................................................................................................................................................... 3

FMCG industry characteristics ............................................................................................................................... 6

Major Players ...........................................................................................................................................................6
Generic Business Model ...........................................................................................................................................7
Cost Structure ...........................................................................................................................................................7
Trends in FMCG Industry ..........................................................................................................................................9
Issues and Concerns related to the FMCG Sector ..................................................................................................13

Impact of macro-economic factors ...................................................................................................................... 14

Overview of Indian Economy .................................................................................................................................14
Macro-Economic Factors impacting FMCG universe .............................................................................................14
Government Policies, Regulation and Support......................................................................................................16

General Accounting Policies in the FMCG Industry .............................................................................................. 18

Basis of Preparation and Measurement ................................................................................................................18
Recent Accounting Developments .........................................................................................................................18
Significant Accounting Policies ..............................................................................................................................19

Financial Analysis ................................................................................................................................................. 25

Page 2 of 33
Why FMCG?

Top reasons for choosing FMCG Industry for the financial analysis include:

One of the biggest sectors (4th largest) and

amongst the fastest growing sector in India

Universal applicability with a humungous

range of products catering to everyday needs
of consumption

Covers a wide array of products under the

Make in India scheme (food processing
recognized as a focus sector)

Impacted directly by global advancements and

technology disruptions throughout the value
chain

Heavily influenced by government regulations

and policies such as safety and standards, FDI,
subsidies and incentives, taxes, etc.

A wide spectrum of listed companies – thus

facilitating availability of financials and other
company documents

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FMCG forms the livelihood of Indian Consumerism – the industry and prices of FMCG products
impact evert strata, age- group and cohort of the population group.

Indian FMCG industry 2012–2021F (In USD billion)

Modern retail in urban Growing demand for Ayurvedic

Modern retail including online is products
also expected to grow at 20 per Increasing demand for natural, herbal
cent for FMCG companies and Ayurvedic beauty and personal care
products

Increased spending in Rural Launch of premium products in urban

About half of the rural spending
goes into buying FMCG
products, indicating the strong
growth potential in the market
India
Increased number of premium variants
105.0
as per changes in consumer preferences
supported by increased disposable

What could
drive FMCG
51.5 53.2 sales in future
47.3 49.0
44.9 in the country?
36.8

~25% CAGR

2012 2013 2015 2016 2017 2018 2021F

 FMCG is the 4th largest sector in the Indian economy

 Household and Personal Care is the leading segment, accounting for 50 per cent of the overall
market. Hair care (23 per cent) and Food and Beverages (19 per cent) comes next in terms of
market share
 Growing awareness, easier access and changing lifestyles have been the key growth drivers for
the sector

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FMCG presents a digital opportunity worth USD 45 Billion in the country
 ~40% FMCG spend in 2020 will be digitally influenced

Urban internet users – 52% Rural internet users – 48% by

by 2020 2020

650+ million
60% Rural users
Indians to be 48% decrease in
access internet
online by 2020, Data price/GB in
via inexpensive
greater than the 1 year with entry
internet enabled
population of G7 of Jio
phones
countries

77% users Only 1/3 rural 8X increase in

access internet internet users have Average monthly
via Mobile smartphones vs 2/3 data consumption
of Urban users within 1 year of
Jio’s launch
 Digital will no longer remain a small targeted opportunity, but rather a way to reach the
masses, leading to the emergence of ‘The Rural Super Consumer’

# of Internet Users (in Mn)

650+ million

~390 million 52%

48%
67%
33%
Urban

2016 2020F Rural

— >50% of Internet growth in next 3-4 years will come from Rural India
— Rural internet penetration to rise to 35% by 2020 – driven by economical handsets &
access to cheap data

Page 5 of 33
FMCG industry characteristics

Major Players
In 2018, some of the leading Indian FMCG companies, by revenue, were:

Market Leaders Revenue (Rs. In rr.)

44,329.8

35,218.0

10,192.2

9,380.2

5,609.1

5,181.3

5,354.7

4,377.1

4,328.4

Page 6 of 33
Generic Business Model
Starting with consumer insights, changing consumer sentiments are
usually being tracked through active analysis of consumer and customer
trends. With close collaboration between marketing and Research and
Development (R&D), consumer insights are used to support innovations
and product development.
Companies have structure that work closely with suppliers of goods,
services and raw materials to assist in product development, which helps
create differentiated and value-added products. Products are then
distributed via a large network of stores, from large supermarkets,
hypermarkets, wholesalers and cash-and-carry to small convenience
stores, as well as other fast-growing channels such as e-commerce and
out-of-home. This is done through thousands of customers who help
distribute products across the channels.
Alongside more conventional advertising, an increasing amount of tailored
content are created to market our brands, using digital channels that are
better targeted and more personalized.

Cost Structure
Cost structure refers to the types and relative proportions of fixed and
variable costs that a business incurs. The concept can be defined in smaller
units, such as by product, service, product line, customer, division, or
geographic region. Cost structure is used as a tool to determine prices, if
you are using a cost-based pricing strategy, as well as to highlight areas in
which costs might potentially be reduced or at least subjected to better
control. Thus, the cost structure concept is a management accounting
concept; it has no applicability to financial accounting.
The following bullet points highlight key elements of the cost structures of
various cost objects:

Product cost structure

Fixed costs: Direct labor, manufacturing overhead
Variable costs: Direct materials, commissions, production supplies, piece
rate wages

Service cost structure

Fixed costs: Administrative overhead
Variable costs: Staff wages, bonuses, payroll taxes, travel and entertainment

Product line cost structure

Fixed costs: Administrative overhead, manufacturing overhead, direct labor
Variable costs: Direct materials, commissions, production supplies

Customer cost structure

Fixed costs: Administrative overhead for customer service, warranty claims

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Variable costs: Costs of products and services sold to the customer, product returns, credits taken, early
payment discounts taken

Other Costs:
Social & Relationship cost (CSR initiative cost)

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Trends in FMCG Industry

Rural consumption is witnessing faster growth, as compared to growth in urban consumption since FY16

 After witnessing subdued growth owing to droughts in 2014 and 2015, and thereafter, slowing
demand due to demonetization and the roll out of GST in 2016 and 2017, the rural FMCG growth
rebounded to new peaks (fastest in last three years) in FY18 both in value and volume

FMCG sales growth

- by volume (in %)

9.1%

6.5%
5.9% Rural
Urban
9.7%
8.2% 8.6% Total
5.4% 6.1% 5.7%

FY16 FY17 FY18

FMCG sales growth

- by value (in %)

13.5%

8.5%
8.7%
Rural
15.1% Urban
12.6%
Total
10.5% 9.6%
7.7% 7.9%

FY16 FY17 FY18

Page 9 of 33
  Companies are increasingly launching products in small packaging – to channelize and focus
their efforts towards the masses – New product launches and small packaging is expected to
be the way forward

Product category Salience of sub INR 10 CAGR (2015-17) of LUP*

packages within the versus category
category
Instant noodles 75% 1.8x
Salty snacks ~75% 2x
Biscuits 69% 1.2-1.9x
Shampoo 63% 2.2x
Coffee 42% 3.1x
#
Washing powder 33% 1.5x, 5.7x
Toothpaste 24% 2.4x
Tea 20% 1.2x
Hair oil 8% 16x
Mild food drinks 7% 3.5x

Note: LUP* stands for Low Unit Packs, # - INR 5 packs for washing powder witnessed 1.5x CAGR,
while INR 10 packs witnessed 5.7x CAGR

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With increasing consciousness regarding hygiene and beauty, personal care products, especially
naturals, are witnessing fastest growth amongst FMCG products

 India recorded 5.8 million deaths owing to Non-Communicable Diseases (NCD) in 2016,
constituting 61% of total deaths

Mortality causes in India

Others 11%
11%
3%
Non- Communicable 13% 7%
diseases 61%
27% CVD is one of the biggest causes
of mortality among Indians in
— non-communicable diseases
Communicable 28%
diseases

India CVD CRD Cancers Diabetes Others

Cardiovascular Chronic respiratory

— Naturals constitute ~41% of total personal care segment

— Further, natural personal care products are witnessing growth at nearly twice the pace
of growth for overall personal care segment and nearly thrice to that of non-natural
products

— Naturals portfolio of major FMCG companies are witnessing growth in the range of 1.5-
2.5x of overall product portfolio

Other trends

 Promotions and offers

o FMCG companies are trying to influence consumers with intelligent deals
o Firms like ITC offers combo deals to the consumers. For example, in the case of soaps and
cosmetics; 4 soap cases are offered at the price of 3, selling the range of deodorants for
men and women at a discounted price
o Amazon India is planning to invest significantly over the coming months for expanding its
grocery and food business, launching more products and categories and forming new
partnerships with huge grocery and supermarket chains
o In May 2018, Amazon India targets to capture 100 million customers in the next 5 years
by providing more features in Prime and Alexa.

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 Research online purchase offline
o The internet enables consumers to make their own research on the kind of products or
commodities they want to purchase. 1 in 3 FMCG shoppers goes online 1st and then to
the stores
o About 43 per cent of new car-buyers in cities select the model online and purchase it from
dealer.
 New product launches
o Keeping in mind the changing tastes of the Indian consumer, FMCG companies are
introducing new products to gain market share
o In February 2018, industry major Britannia announced that it will introduce 50 new
products by the end of 2019
o Godrej Consumer Products Limited (GCPL) is also planning to launch various new products
in 2019
o ITC is planning to launch 30-40 products every year to become India’s biggest Fast-Moving
Consumer Goods (FMCG) Company.
 Customization
o Product Flanking: Introduction of different combinations of products at different prices,
to cover as many market segments as possible
o Emami, has decided to rework on its overseas strategy by planning manufacturing and
acquisitions in overseas markets. The company plans to re-work on its product portfolio
by getting into new categories with higher buying preference and revamp its distribution
networks.
 Analytics
o Hindustan Unilever Ltd (HUL) implemented a transformational programme called
Connected 4 Growth (C4G) to help drive business growth by increased speed to market,
faster decision making, localised and swifter innovation
o Patanjali uses Oracle and SAP for Enterprise Resource Planning (ERP), they will further
standardise the application on SAP. It plans to use machine learning for quality control
and product enhancement. They are also in talks with Net App for big data solution

Page 12 of 33
Issues and Concerns related to the FMCG Sector

1. Technological changes – Technology is disrupting traditional brand communication models.

Ability to develop and deploy the right communication, both in terms of messaging content and
medium is critical to the continued strength of brands.

2. Legal & Regulatory Issues - Frequent changes in legal and regulatory regime and introduction of
newer regulations with multiple authorities regulating same areas lead to complexity in
compliance.

3. Systems & Information Issues - Company’s operations are increasingly dependent on IT systems
and the management of information. Increasing digital interactions with customers, suppliers and
consumers place even greater emphasis on the need for secure and reliable IT systems and
infrastructure, and careful management of the information that is in possession. The cyber-attack
threat of unauthorized access and misuse of sensitive information or disruption to operations
continues to increase.

4. Quality & Safety Issues - brands, product quality and safety are valuable assets and hence, the
risk that raw materials are accidentally or maliciously contaminated throughout the supply chain
or that other product defects occur due to human error, equipment failure or other factors cannot
be excluded.

5. Sustainability issue - Both consumer and customer responses to the environmental impact of
plastic waste and emerging regulation by different state governments to ban the use of certain
plastics, requires industry to find solutions to reduce the amount of plastic industry is using;
increase recycling post-consumer use; and to source recycled plastic for use in packaging.

All these lead to high impact on financial capital, manufactured capital, social capital, human capital etc.

Page 13 of 33
Impact of macro-economic factors

Overview of Indian Economy

India is the world’s largest democracy and has combined advantages of favorable macro-
economic parameters and encouraging demographic factors

Fastest growing economy

USD 2.7 trillion GDP growing at 6-7%

Significant service sector

~55% of GDP contributed by services sector

Attractive investment destination

USD 45 billion FDI inflows in the period 2018-19

Second largest smartphone market

Nearly 600 million users

Large, young population

Second largest population of 1.3 billion, with ~80% population under age of 45

Growing urbanization
483 million urban population by 2020, up from 430 million in 2015

Conducive Government policies

‘Make in India’ and ‘Digital India’ initiatives to increase innovation & manufacturing

Macro-Economic Factors impacting FMCG universe

These macro-economic factors are leading to encouraging demographics helping the growth
of FMCG sector:
 Increase in number of households
o The number of households are expected to increase from ~27 crores in 2015-16 to over
30 crores by 2025
o Further, nuclearization trend is leading to the decreasing household size with average
number of members in a household coming down from 4.9 in 2011 to an expected 4.6
by 2025
 Rising per capita income

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 o The country’s per capita income is expected to increase from INR 1,11,085 in 2016 to
INR 2,66,500 by 2025 at a CAGR of over 10%
 Increasing population of millennials
o India is one of the youngest major countries globally with a median age of ~27.8 years,
less than the median age of population in China, the US, the UK, Russia, and Brazil
o Further, the share of millennials in Indian population is significant, accounting for more
than one-third of the population
 Mobile and internet penetration
o The digital initiatives by the government has spurred the growth of internet and
smartphones in the country
o Internet penetration increased 3x in a 5-yr period from 10% in 2011 to more than 35% in
2016-17
o Similarly, smartphone usage increased more than 7x in the same period from 33 million
users to 225 million users
 Increasing urbanization is driving the consumption in India towards top of the pyramid:
o Current – ‘Fortune at the Bottom of the Pyramid’

Top
53
cities Purchasing power
1154 mn 25% ~75%
~85% of total 7,935 purchasing
population Small power Urban
towns
25%
6,50,000 Villages RUrban
50%

Rural

o 2025 – ‘Consumption moving to the top of the Pyramid’

Page 15 of 33
 20-25% of ~60%
total purchasing
population power
Top
120
cities
30%
7,935
Small
towns
30%
120 cities will have
6,50,000 Villages matched today’s metros in
average HH income
40%
Attractive markets, favorable demographic and macro-economic factors and conductive
policies have led to international companies investing in the country

FDI inflow in trade

(USD billion)
5.0 12 .0%

FDI inflow in trade has consistently 9.7%

9.6%
4.5

increased as a share of overall 9.0% 10 .0%

4.0

4.3
3.5
investments inflow
3.9
8.0 %

3.0

2.5
5.6% 5.3% 6.0 %

2.6
2.0

3.7% 2.3
4.0 %

1.5

2.6%
1.3
1.0

2.0 %

0.6 0.7
0.5

0.0 0.0 %

FY12 FY13 FY14 FY15 FY16 FY17 FY18

FDI inflow % of total FDI inflow

Government Policies, Regulation and Support

1. Union Budget 2019-2020

 The Government of India has provided a full tax rebate for an income up to Rs 5 lakh (US$
6,930), which is expected to boost disposable income in the hands of the common people

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2. Goods and Service Tax (GST)
 The rate of GST on services lies between 0-18 per cent and on goods lies between 0-28 per
cent
 Major consumer product manufacturing companies like PepsiCo, Dabur, Hindustan Unilever
etc. are aligning their supply chains, IT infrastructure and warehousing systems ahead of
unified GST regime, so as to facilitate seamless interstate movement of goods
 Prices of commodities in the FMCG sector, like soaps, shampoo, detergents, biscuits, savoury
snacks etc decreased after the implementation of GST

3. Food Security Bill (FSB)

 FSB would reduce prices of food grains for Below Poverty Line (BPL) households, allowing
them to spend resources on other goods and services, including FMCG products
 This is expected to trigger higher consumption spends, particularly in rural India, which is an
important market for most FMCG companies

4. FDI in organized retail

• The government approved 51% FDI in multi-brand retail in 2006, which will boost the
nascent organized retail market in the country
• It also allowed 100 per cent FDI in the cash and carry segment and in single-brand retail

5. SETU Scheme
• Government has initiated Self Employment and Talent Utilisation (SETU) scheme to boost
young entrepreneurs. Government has invested US$ 163.73 million for this scheme

6. Relaxation of license rule

• Industrial license is not required for almost all food and agro-processing industries, barring
certain items such as beer, potable alcohol and wines, cane sugar and hydrogenated animal
fats and oils as well as items reserved for exclusive manufacture in the small-scale sector

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General Accounting Policies in the FMCG Industry
Basis of Preparation and Measurement

The financial statements are prepared in accordance with the Indian Accounting Standards (‘Ind
AS’) as notified by Ministry of Corporate Affairs pursuant to Section 133 of the Companies Act,
2013 read with Rule 3 of the Companies Rules, 2015 and Companies Amendment Rules, 2016.
• The financial statements are prepared on accrual and going concern basis
• The accounting policies are applied consistently to all the periods presented in the financial
statements
• All assets and liabilities are classified as current or non-current as per the Company’s normal
operating cycle and other criteria as set out in the Division II of Schedule III to the Companies Act,
2013
• Based on the nature of products and the time between acquisition of assets for processing and
their realization in cash and cash equivalents, a company ascertained its operating cycle as 12
months for the purpose of current or non-current classification of assets and liabilities

Recent Accounting Developments

IND AS 115: Revenue from Contracts with Customers

• In March 2018, the Ministry of Corporate Affairs issued the Companies (Indian Accounting
Standards) (Amendments) Rules, 2017, notifying Ind AS 115, ‘Revenue from Contracts with
Customers’
• Revenue from Contracts with Customers Ind AS 115 establishes a single comprehensive model for
entities to use in accounting for revenue arising from contracts with customers
• Ind AS 115 supersede the revenue recognition standard Ind AS 18 Revenue, Ind AS 11
Construction Contracts
• Under Ind AS 115, an entity recognises revenue when (or as) a performance obligation is satisfied,
i.e. when ‘control’ of the goods or services underlying the particular performance obligation is
transferred to the customer

IND AS 116: Lessee Accounting

• Ind AS 116 sets out the principles for the recognition, measurement, presentation, and disclosure
of leases. The objective is to ensure that lessees and lessors provide relevant information in a
manner that faithfully represents those transactions. This information gives a basis for users of
financial statements to assess the effect that leases have on the financial position, financial
performance and cash flows of an entity
• Ind AS 116 replaced current Ind AS 17 Leases, effective date April 1, 2019
• Ind AS 116 requires detailed disclosure for lessees as compared to Ind AS 17
• Ind AS 116 contains additional disclosure requirements for lessors as compared to Ind AS 17, such
as, disclosure of maturity analysis of lease payments; quantitative and qualitative explanation of
significant changes in carrying amount of new investment in finance leases etc
• Ind AS 116 contains specific provision for lease modification for lessor and lessee
• Impact on the FMCG sector:
o Ind AS 116 will affect commonly used financial ratios and performance metrics such as
the gearing ratio, current ratio, asset turnover ratio, interest coverage ratio, earnings

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 before interest, tax and depreciation (EBITDA), operating profit, net income, earning per
share (EPS), return on capital employed (ROCE), return on equity (ROE) and operating
cash flows
o Another impact area will be the treatment of initial direct costs, such as commissions, as
some costs might need to be included as part of the right of use asset and amortized over
the anticipated lease term
o A third significant impact consumer sector will be the arrangements with non-lease
components such as property management, maintenance, security distribution and
power services which in some cases may have been clubbed together as “operating lease”
expense

Significant Accounting Policies

1. Property, Plant and Equipment:

• Acquisitions: Property, plant and equipment is stated at acquisition cost (which includes
capitalized borrowing costs, if any) less accumulated depreciation and accumulated impairment
losses, if any
• Subsequent expenditure: All other repairs and maintenance cost are charged to the Statement
of Profit and Loss during the period in which they are incurred. Any gain or loss on disposal of an
item of property, plant and equipment is recognized in profit or loss
• Capital work-in-progress: Property, plant and equipment which are not ready for intended use as
on the date of Balance Sheet are disclosed as “Capital work-in-progress”.
• Depreciation: Depreciation is provided on a pro-rata basis on the straight-line method based on
estimated useful life prescribed under Schedule II to the Companies Act, 2013 with the exception
of the following:
o Plant and equipment are depreciated over n number of years based on the technical
evaluation of useful life done by the management
o Low cost assets [max limit decided by management] are fully depreciated in the year of
purchase

2. Intangible Assets:
• Intangible assets with finite useful life
o Intangible assets with finite useful life are stated at cost of acquisition
o Amortization is recognized in profit or loss on a straight-line basis over the estimated
useful lives of respective intangible assets, but not exceeding the useful lives
• Intangible assets with indefinite useful life
o Intangible assets with indefinite useful lives are measured at cost of acquisition
o Amortization is not recognized but are tested for impairment annually or more frequently
if events or changes in circumstances indicate that it might be impaired
• Goodwill
o Goodwill is measure at acquisition cost. The Company recognizes any non-controlling
interest in the acquired entity on an acquisition-by-acquisition basis either at fair value or
at the non-controlling interest’s proportionate share of the acquired entity’s net

3. Investments in Subsidiaries, Associates and Joint Ventures:

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 • Investments in Subsidiaries, Associates and Joint Ventures are carried at cost less accumulated
impairment losses, if any. Where an indication of impairment exists, the carrying amount of the
investment is assessed and written down immediately to its recoverable amount
• On disposal of investments in subsidiaries, associates and joint venture, the difference between
net disposal proceeds and the carrying amounts are recognized in the Statement of Profit and
Loss

4. Inventories:
• Inventories are valued at the lower of cost and net realizable value
• Cost is calculated on the basis of weighted average method
• Work-in-progress finished goods and stock-in-trade (traded goods) are valued at lower of cost and
net realizable value

5. Cash and Cash Equivalents:

Cash and cash equivalents include:
• Cash on hand
• Balances with bank
• Short-term liquid investments
• Highly liquid investments that are readily convertible into cash which are subject to an
insignificant risk of changes

6. Assets Held for Sale:

Non-current assets or disposal groups comprising of assets and liabilities are classified as ‘held for
sale’ when all of the following criteria are met:
• Decision has been made to sell
• The assets are available for immediate sale in its present condition
• The assets are being actively marketed
• Sale has been agreed or is expected to be concluded within 12 months of the Balance Sheet date
Subsequently, such non-current assets and disposal groups are measured at the lower of it carrying
value and fair value less costs to sell and are not depreciated or amortized.

7. Financial Instruments:
Financial assets are recognized when the Company becomes a party to the contractual provisions of
the instrument. On initial recognition, a financial asset is recognized at fair value. In case of Financial
assets which are recognized at fair value through profit and loss (FVTPL), its transaction cost is
recognized in the statement of profit and loss. In other cases, the transaction cost is attributed to the
acquisition value of the financial asset.
Financial assets are subsequently classified and measured at
 Amortized cost
 Fair value through profit and loss (FVTPL)
 Fair value through other comprehensive income (FVOCI)
Financial assets are not reclassified subsequent to their recognition, except during the period the
Company changes its business model for managing financial assets.

Page 20 of 33
8. Provisions and Contingent Liabilities:
 Provisions are recognised when the company has a present obligation (legal or constructive) as a
result of a past event, it is probable that the company may have to use its economic resources to
settle the obligation and a reliable estimate can be made for the same. Provisions are measured
at the best estimate of the expenditure required to settle the present obligation at the Balance
Sheet date. If the effect of the time value of money is material, provisions are discounted to reflect
its present value using a current pre-tax rate that reflects the current market assessments of the
time value of money and the risks specific to the obligation. When discounting is used, the
increase in the provision due to the passage of time is recognised as a finance cost
 Contingent liabilities are disclosed when there is a possible obligation arising from past events,
the existence of which will be confirmed only by the occurrence or non-occurrence of one or more
uncertain future events. Here, it is either not probable that an outflow of resources will be
required to settle the obligation, or a reliable estimate of the amount cannot be made

9. Revenue Recognition:
 Revenue from sale of goods is recognized when all the significant risks and rewards of ownership
in the goods are transferred to the buyer as per the terms of the contract, there is no continuing
managerial involvement with the goods and the amount of revenue can be measured reliably
 Revenue is measured at fair value of the consideration received or receivable, after deduction of
any trade discounts, volume rebates and any taxes or duties collected on behalf of the
government such as sales tax, value added tax, goods and services tax, etc
 Income from export incentives such as duty drawback and premium on sale of import licenses
and lease license fee are recognized on accrual basis
 Income from services is recognised based on agreements/ arrangements with the customers as
the service is performed in proportion to the stage of completion of the transaction at the
reporting date and the amount of revenue can be measured reliably
 Interest income is recognized using the effective interest rate (EIR) method
 Dividend income on investments is recognised when the right to receive dividend is established

10. Government Grant:

 Some of the companies are entitled to ‘Scheme of budgetary support’ under Goods and Service
Tax Regime in respect of eligible manufacturing units located in specified regions. Such grants are
recognised where there is reasonable assurance that the grant will be received and all attached
conditions will be complied with
 When the grant relates to revenue, it is recognised in the Statement of Profit and Loss on a
systematic basis over the periods to which they relate
 When the grant relates to an asset, it is treated as deferred income and recognised in the
Statement of Profit and Loss on a systematic basis over the useful life of the asset
 Income from export incentives such as premium on sale of import licenses, duty drawback etc.
are recognized on accrual basis to the extent the ultimate realization is reasonably certain

11. Expenditure:
 Revenue expenditure is charged off in the year in which it is incurred

Page 21 of 33
  Expenditure on research activities is recognized in the Statement of Profit and Loss as
incurred
 Development expenditure is capitalized as part of the cost of the resulting intangible asset
only if the expenditure can be measured reliably, the product or process is technically and
commercially feasible, future economic benefits are probable, and the Company intends to
and has sufficient resources to complete development and to use or sell the asset

12. Employee Benefits:

 Short-term employee benefits
All employee benefits falling due wholly within twelve months of rendering the services are
classified as short-term employee benefits, which include benefits like salaries, wages, short-term
compensated absences and performance incentives and are recognized as expenses in the period
in which the employee renders the related service.
 Post-employment benefits
Contributions to defined contribution schemes such as Provident Fund, Pension Fund, etc., are
recognized as expenses in the period in which the employee renders the related service. In respect
of certain employees, Provident Fund contributions are made to a Trust administered by the
Company. The interest rate payable to the members of the Trust shall not be lower than the
statutory rate of interest declared by the Central Government under the Employees'' Provident
Funds and Miscellaneous Provisions Act, 1952 and shortfall, if any, after considering the
accumulated reserves with the Trust, shall be made good by the Company. The effect of any plan
amendments is recognized in net profit in the Statement of Profit and Loss.

 Voluntary retirement scheme benefits

Termination benefits, in the nature of voluntary retirement benefits or termination benefits
arising from restructuring. The Company recognizes termination benefits at the earlier of the
following dates:

o When the Company can no longer withdraw the offer of those or

o When the Company recognizes costs for a restructuring that is within the scope of Ind AS
37: Provisions, Contingent Liabilities and Contingent Assets and involves the payment of
termination benefits
13. Impairment of Non-Financial Assets:
Non-financial assets other than goodwill that suffered impairment are reviewed for possible reversal
of the impairment at the end of each reporting period

14. Income Taxes:

Income tax expense for the year comprises of current tax and deferred tax. It is recognised in the
Statement of Profit and Loss except for the tax related with acquisition or anything which is
recognised directly in equity or in other comprehensive income.
• Current tax is the expected tax payable/receivable on the taxable income/loss for the year using
applicable tax rates at the Balance Sheet date, and any adjustment to taxes in respect of previous
years. Interest expenses and penalties, if any, related to income tax are included in finance cost

Page 22 of 33
 and other expenses respectively. Interest Income, if any, related to Income tax is included in
current tax expense
o Current tax assets and current tax liabilities are offset when there is a legally enforceable
right to set off the recognised amounts and there is an intention to settle the asset and
the liability on a net basis
• Deferred tax is recognised in respect of temporary differences between the carrying amount of
assets and liabilities for financial reporting purposes and the corresponding amounts used for
taxation purposes. A deferred tax liability is recognised based on the expected manner of
realization or settlement of the carrying amount of assets and liabilities, using tax rates enacted,
or substantively enacted, by the end of the reporting period
o Deferred tax assets are recognised only to the extent that it is probable that future taxable
profits will be available against which the asset can be utilized
o Deferred tax assets are reviewed at each reporting date and reduced to the extent that it
is no longer probable that the related tax benefit will be realized
o Deferred tax assets and deferred tax liabilities are offset when there is a legally
enforceable right to set off current tax assets against current tax liabilities; and the
deferred tax assets and the deferred tax liabilities relate to income taxes levied by the
same taxation authority

15. Leases:
• Leases in which a substantial portion of the risks and rewards of ownership are retained by the
lessor are classified as operating leases
• Payments and receipts under such leases are recognised to the Statement of Profit and Loss on a
straight-line basis over the term of the lease
• Leases are classified as finance leases whenever the terms of the lease transfer substantially all
the risks and rewards incidental to ownership to the lessee

16. Foreign Currencies:

• Foreign currency transactions are translated into the functional currency using exchange rates at
the date of the transaction
• Foreign exchange gains and losses from settlement of these transactions, and from translation of
monetary assets and liabilities at the reporting date exchange rates are recognized in the
Statement of Profit and Loss

17. Earnings Per Share:

• Basic earnings per share is computed by dividing the net profit for the period attributable to the
equity shareholders of the Company by the weighted average number of equities shares
outstanding during the period
• The weighted average number of equity shares outstanding during the period and for all periods
presented is adjusted for events, such as bonus shares, other than the conversion of potential
equity shares that have changed the number of equity shares outstanding, without a
corresponding change in resources

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 • For the purpose of calculating diluted earnings per share, the net profit for the period attributable
to equity shareholders and the weighted average number of shares outstanding during the period
is adjusted for the effects of all dilutive potential equity shares

18. Business Combination:

• Business combinations are accounted for using the acquisition accounting method as at the date
of the acquisition. The consideration transferred in the acquisition and the identifiable assets
acquired and liabilities assumed are recognized at fair values on their acquisition date
• Goodwill is initially measured at cost, being the excess of the aggregate of the consideration
transferred and the amount recognized for non-controlling interests, and any previous interest
held, over the net identifiable assets acquired and liabilities assumed
• The Company recognises any non-controlling interest in the acquired entity on an acquisition-by-
acquisition basis either at fair value or at the non-controlling interest’s proportionate share of the
acquired entity’s net identifiable assets
• Consideration transferred does not include amounts related to settlement of pre-existing
relationships. Such amounts are recognized in the Statement of Profit and Loss
• Transaction costs are expensed as incurred, other than those incurred in relation to the issue of
debt or equity securities. Any contingent consideration payable is measured at fair value at the
acquisition date. Subsequent changes in the fair value of contingent consideration are recognized
in the Statement of Profit and Loss

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Financial Analysis

Following 3 major player from the FMCG industry have been considered for this project –
 Hindustan Unilever
 Britannia Industries
 Marico

For this analysis, financial reports and other data was extracted using the Capitaline Plus
database.

This analysis is broken in 3 parts –

1. Identifying Best Investment Option

For this, we have broadly analysed the Y-o-Y grown in sales and Net Profitability of these
companies and also compared the net profit margins to assess the most promising
investment option

2. Impact of Selling Cost on Sales

Since FMCG products are generally low involvement purchases, the effect of marketing
activities, especially advertisements, is expected to be higher in influencing customer decision
than other industries. For this analysis, we have compared the Selling Cost against Growth in
Sales

3. Impact of Efficiency on Profitability

Since FMCG is typically a high-volume, low margin industry, it is important to assess how well
an organisation utilises its resources and converts them into output. For this, we have
compared the past 5-year asset turnover and inventory turnover ratios with that of growth
in Net Income.

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Identifying Best Investment Option

A broad overview of the three companies is presented below in terms of Sales (Rs. In `000 crores)
and Net Profit Margin.

Sales and Net Margin Overview

45,000.00 20.0%

40,000.00 18.0%

16.0%
35,000.00

14.0%
30,000.00
12.0%
25,000.00
10.0%
20,000.00
8.0%
15,000.00
6.0%

10,000.00
4.0%

5,000.00 2.0%

0.00 0.0%
2015 2016 2017 2018 2019
Mar-15 Mar-16 Mar-17 Mar-18 Mar-19
Marico Sales 4,689.45 4,867.99 4,868.88 5,181.00 5,971.00
Britannia Sales 7,344.79 7,960.62 8,684.39 9,380.17 10,482.45
HUL Sales 32,721.44 33,491.00 34,487.00 35,218.00 38,224.00
Marico Net Margin 11.6% 14.2% 17.3% 13.9% 19.0%
Britannia Net Margin 6.9% 9.6% 9.7% 10.1% 10.7%
HUL Net Margin 11.1% 12.4% 13.0% 14.9% 15.8%

Marico Sales Britannia Sales HUL Sales

Marico Net Margin Britannia Net Margin HUL Net Margin

As is evident, HUL has sales than Marico and Britannia (HUL and ITC are the largest players in the
Indian FMCG Industry), whereas Marico is the smallest of the three. However, in terms of Profit
Margin, Marico has generally outperformed both Britannia and HUL, whereas Britannia’s margins
have been considerably lower than those of other two companies.

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Further, when we look at the Annual Sales Growth Rate, we see that HUL has the lowest growth
rate with an average growth rate of only 5.3%. This may be attributed to the fact that owing to
its huge size, the company is reaching its saturation. However, in the most recent financial year
ending 2019, HUL sales have again picked up.

The average Sales growth of both Marico and Britannia are similar at 10.5% and 10.3%
respectively by Britannia’s growth has been more stable making this a more reliable investment.

Growth in Sales
45,000.00 30.0%

40,000.00
25.0%
35,000.00

30,000.00 20.0%

25,000.00
15.0%
20,000.00

15,000.00 10.0%

10,000.00
5.0%
5,000.00

0.00 0.0%
2015 2016 2017 2018 2019
Mar-15 Mar-16 Mar-17 Mar-18 Mar-19
Marico Sales 4,689.45 4,867.99 4,868.88 5,181.00 5,971.00
Britannia Sales 7,344.79 7,960.62 8,684.39 9,380.17 10,482.45
HUL Sales 32,721.44 33,491.00 34,487.00 35,218.00 38,224.00
Marico Sales Growth 27.1% 3.8% 0.0% 6.4% 15.3%
Britannia Sales Growth 14.4% 8.4% 9.1% 8.0% 11.8%
HUL Sales Growth 10.7% 2.4% 3.0% 2.1% 8.5%

Marico Sales Britannia Sales HUL Sales

Marico Sales Growth Britannia Sales Growth HUL Sales Growth

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Further, when the Net Profit is analysed, the following trends emerge –

Growth in Net Profit

7,000.00 80.0%

70.0%
6,000.00
60.0%

5,000.00 50.0%

40.0%
4,000.00
30.0%
3,000.00
20.0%

2,000.00 10.0%

0.0%
1,000.00
-10.0%

0.00 -20.0%
2015 2016 2017 2018 2019

Mar-15 Mar-16 Mar-17 Mar-18 Mar-19

Marico Net Profit 545.17 691.26 842.70 718.00 1,132.00
Britannia Net Profit 622.41 763.31 843.69 947.89 1,122.20
HUL Net Profit 4,315.26 4,137.00 4,490.00 5,237.00 6,036.00
Marico Net Profit Growth -5.6% 26.8% 21.9% -14.8% 57.7%
Britannia Net Profit Growth 68.3% 22.6% 10.5% 12.4% 18.4%
HUL Net Profit Growth 11.6% -4.1% 8.5% 16.6% 15.3%

Marico Net Profit Britannia Net Profit HUL Net Profit

Marico Net Profit Growth Britannia Net Profit Growth HUL Net Profit Growth

As expected, the average growth in net profit for HUL is lowest at 9.6%. However, in terms of net
profit Britannia far exceeds Marico with an average growth of 26.4% as compared to Marico’s
17.2%. This combined with the relatively stable growth rate of Britannia makes it the most
promising investment option.

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Impact of Selling Cost on Sales

In this analysis, we have compared the selling cost margin ratio against growth in sales for all 3
companies. Selling cost refers to the cost of marketing and selling, including advertising costs.

Impact of Selling Cost on Sales

18.0% 30.0%
16.0%
25.0%
14.0%
12.0% 20.0%
10.0%
15.0%
8.0%
6.0% 10.0%
4.0%
5.0%
2.0%
0.0% 0.0%
2015 2016 2017 2018 2019
Mar-15 Mar-16 Mar-17 Mar-18 Mar-19
Marico Selling Cost Margin 14.3% 14.2% 13.1% 12.0% 11.7%
Britannia Selling Cost Margin 13.1% 9.9% 8.6% 8.7% 9.3%
HUL Selling Cost Margin 16.1% 15.2% 14.3% 15.9% 16.0%
Marico Sales Growth 27.1% 3.8% 0.0% 6.4% 15.3%
Britannia Sales Growth 14.4% 8.4% 9.1% 8.0% 11.8%
HUL Sales Growth 10.7% 2.4% 3.0% 2.1% 8.5%

Marico Selling Cost Margin Britannia Selling Cost Margin HUL Selling Cost Margin
Marico Sales Growth Britannia Sales Growth HUL Sales Growth

Here we see that despite spending the highest proportion of sales on advertising and marketing
expenses, HUL’s growth has been the lowest. This can be attributed to the fact that already being
one of the largest players in the industry, a considerable amount of HUL’s selling expenditure
goes towards retaining its market share rather than tapping new growth.

One interesting trend here is that Britannia spends an average of 9.9% of its sales in selling cost
while achieving 10.3% average annual growth. However, Marico utilises 13.1% of its sales in
selling cost while achieving 10.5% average annual growth. Given similar sizes of both the firms, it
may be inferred that the selling strategy of Britannia is superior than that of Marico’s – which
may be attributed to one of the factors leading to higher profitability of Britannia.

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Impact of Efficiency on Profitability

Efficiency Ratios indicate on how well a company’s resources are utilised. Two efficiency ratios
have been considered for this analysis –

 Inventory Turnover Ratio (Average Inventory/Sales) – This indicates how many times a
company has sold and replaced inventory during a given period. The inverse of this number
indicates the time it takes a company to sell inventory at hand.

Higher Inventory Turnover Ratio suggests higher efficiency.

Impact of Inventory Turnover on Net Profit

25.00 80.0%

20.00 60.0%

15.00 40.0%

10.00 20.0%

5.00 0.0%

0.00 -20.0%
2015 2016 2017 2018 2019

Mar-15 Mar-16 Mar-17 Mar-18 Mar-19

Marico Inventory Turnover 6.44 6.24 5.26 4.32 4.69
Britannia Inventory Turnover 20.61 21.81 17.60 15.67 15.96
HUL Inventory Turnover 12.23 13.06 14.11 14.92 15.99
Marico Net Profit Growth -5.6% 26.8% 21.9% -14.8% 57.7%
Britannia Net Profit Growth 68.3% 22.6% 10.5% 12.4% 18.4%
HUL Net Profit Growth 11.6% -4.1% 8.5% 16.6% 15.3%

Marico Inventory Turnover Britannia Inventory Turnover HUL Inventory Turnover

Marico Net Profit Growth Britannia Net Profit Growth HUL Net Profit Growth

Britannia far exceeds both other companies in term of inventory turnover with an average of
18.3, whereas Marico has an average of only 5.4. HUL sits somewhere in between with an average
turnover ratio of 14.1. This measure clearly highlights the reason behind the stable growth of
Britannia and a cause of concern for Marico.

However, it may be noted that this ratio may also depend on the specific product mix of each of
the three companies and would need a detailed product-line specific analysis to better compare
each company’s performance

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 The other efficiency ratio that has been considered is the Fixed Assets Turnover Ratio (Sales
/Average Fixed Assets) – This indicates measures a company’s return on their investment in
property, plant, and equipment. In other words, it calculates how efficiently a company is
producing sales with its machines and equipment. Higher Fixed Assets Turnover Ratio
suggests higher efficiency.

Impact of Fixed Asset Turnover on Net Profit

12.00 80.0%
10.00 60.0%
8.00
40.0%
6.00
20.0%
4.00
2.00 0.0%

0.00 -20.0%
2015 2016 2017 2018 2019
Mar-15 Mar-16 Mar-17 Mar-18 Mar-19
Marico Fixed Assets Turnover 6.36 7.60 8.27 7.66 7.95
Britannia Fixed Assets Turnover 7.57 9.24 9.96 7.97 6.79
HUL Fixed Assets Turnover 7.14 8.44 8.70 7.06 6.81
Marico Net Profit Growth -5.6% 26.8% 21.9% -14.8% 57.7%
Britannia Net Profit Growth 68.3% 22.6% 10.5% 12.4% 18.4%
HUL Net Profit Growth 11.6% -4.1% 8.5% 16.6% 15.3%

Marico Fixed Assets Turnover Britannia Fixed Assets Turnover HUL Fixed Assets Turnover
Marico Net Profit Growth Britannia Net Profit Growth HUL Net Profit Growth

As can be seen again, Britannia outperforms the other two companies in utilisation of its fixed
assets whereas Marico is the least efficient of all three.

With the above observations, it can be seen that the operational efficiency of a company plays a
huge role in the overall profitability.

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Ratio Analysis of HUL

Hindustan Unilever Ltd

Industry : Personal Care - Multinational
Financial Performance
Year End Mar-19 Mar-18 Mar-17 Mar-16 Mar-15
Ratio Analysis
Debt-Equity 0 0 0 0 0
Current Ratio 1.03 0.92 0.96 0.92 0.78
Invtry Turnover 15.99 14.92 14.11 13.06 12.23
Debtors Turnover 27.11 33.95 34.63 36.27 40.92
Interest Cover 305.36 365.25 291.73 397.4 311.7
PBIDTM (%) 23.74 22.1 19.76 18.76 16.9
PBDTM (%) 23.67 22.04 19.69 18.71 16.85
APATM (%) 15.79 14.87 13.02 12.35 11.14
ROCE (%) 94.87 90.96 86.63 98.38 112.39
RONW (%) 81.93 77.21 70.33 82.71 104.12
EV/EBIDTA 40.34 36.72 28.65 29.51 28.7
Rate of Growth (%)
Net Worth 8.25 9.01 3.36 68.6 13.67
Sales 8.54 2.12 2.97 2.35 10.7
PAT 15.26 16.64 8.53 -4.13 11.58
M Cap 27.85 46.85 4.65 -0.37 44.66

1. Debt Equity Ratio

A low debt-to-equity ratio indicates a lower amount of financing by debt via lenders,
versus funding through equity via shareholders.
Analysis shows that HUL Primarily Finances its operations via Equity.
2. Current Ratio
The current ratio is a liquidity ratio that measures a company's ability to pay short-term
obligations or those due within one year.
Analysis shows current ratio for HUL has improved from 0.78 to 1.03 in the last 5 years with a
positive trend indicating that now HUL is able to meet all its current liabilities with its current
assets which could mean better collections for HUL.
3. Inventory Turnover
Inventory turnover is a ratio showing how many times a company has sold and replaced inventory
during a given period.
Analysis shows that HUL has increased its inventory turnover from 12.23 in 2015 to 15.99 in
2016 which means HUL is now able to turn out more inventory i.e more goods in a single
financial year.

4. Debtors Turnover

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 The Debtors turnover ratio is an accounting measure used to quantify a company's effectiveness
in collecting its receivables or money owed by clients.
Analysis shows that the debtors ratio follows a negative trend and is decreasing which indicates
that the company has become more restrictive in extending credit.

5. Interest Cover
The interest coverage ratio is a debt ratio and profitability ratio used to determine how easily a
company can pay interest on its outstanding debt.
Analysis shows that HUL’s Interest coverage ratio is very high indicating that it will have no
problems in servicing its debt, which is at it is very minimal.

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