Gruma Financial Analysis

Advanced Financial Management | Professor Fábio Santos

A16 | Spring 23/24
Advanced Financial Management I Assignment 1 I Group A16
The Team

4 7 2 6 5 4 6 9 1 6 4 6 9 8 1 4 7 1 6 5

Joana Alvarinho Ana Margarida Cuiça Constança Figueiredo João Reis

🇵🇹 🇵🇹 🇵🇹 🇵🇹
MSc in Management MSc in Management MSc in Management MSc in Management

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Advanced Financial Management I Assignment 1 I Group A16
Executive Summary
Gruma is a Mexican multinational company and global market leader in the production of corn flour, tortillas and other distinct corn-based food
products. The company’s success is attributed to its constant focus on quality, innovation and sustainability efforts throughout its value-chain. Gruma
currently operates in 100 countries, having 72 production plants located around the globe. Moreover, competition within the food sector may be
described as moderate due to diverse consumer preferences, varied company product offerings, segment and location variety, amongst others. For the
purpose of the analysis, Gruma’s performance was evaluated in comparison with industry multiples that share similar business model characteristics. – 1)
Tyson Foods is the largest producer of meat, poultry, and other protein-based products – 2) Group Bimbo one of the world's largest bakery product
manufacturing companies – 3) General Mills is globally acclaimed for its diverse portfolio of cereals and other baking products

Gruma has managed the adversities brought by the pandemic and the war in Ukraine well, as its margins remain largely unchanged, reflecting its robust
operational capabilities. This translates into a more comfortable liquidity position, in spite of trailing its closest peer by 30+ days in the Cash Conversion
Cycle. This trend is also observed in the recovery made by Gruma’s peers in terms of their margins after the pandemic, whereas our company is not efficiently
managing its marketing expenses (Gruma suffered a 1.5 p.p. decrease in EBITDA Margin compared to a 2.7 increase by competitors). To counter this, Gruma
has been investing in building new factories, as well as optimizing and modernizing its existing plants, to compensate for the closure of their Eastern
European facilities. Considering all the above, Gruma has consistently been yielding the greatest ROIC (not lower than 11,71%); however, the paradigm
may shift soon.

All in all, despite navigating the Covid-19 pandemic with great expertise, Gruma must revaluate specific operational strategies that are not allowing it to
grow at the same pace as its competitors. As such, the company should reduce its days on inventory, carefully manage their client expenditure
acquisitions, greatly revise the production dependence on Russian factories, and opt for a diversification of their portfolio, by leveraging its liquidity and
opting for countries that carry strong and stable currency. Nevertheless, we must take into account possible limitations to our analysis such as the atypical
evaluation period due to a global pandemic and the fact that the selected industry multiples are conglomerates whose product portfolios are far vaster than
Gruma’s and the significant small differences in business models.

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Advanced Financial Management I Assignment 1 I Group A16
Agenda

1. Gruma’s Business Model

2. Industry Overview

3. Financial Analysis
Revenue Analysis
Cost Analysis
Profitability Analysis
Liquidity Analysis
Investment Analysis

4. Recommendations

Advanced Financial Management I Assignment 1 I Group A16

Gruma's Business Model

Advanced Financial Management I Assignment 1 I Group A16

Business Model Overview

Founded in 1949, Gruma is a Mexican multinational corporation that has established itself as a
Context

leading player in the food processing industry. The company produces corn masa flour, tortillas,
wraps and other related products. It is the largest tortilla producer in the world, with operations in
over 110 countries across America, Asia, Europe, and Oceania with 72 production plants.

Product Supply Chain Marketing Features

• In terms of value chain, it is well-defined, prioritizing • Gruma's marketing strategy targets both B2B and
sourcing quality corn from various regions, ensuring B2C segments, mainly serving households,
• Gruma’s offerings revolve around corn flour, wraps
sustainability and product consistency. In the restaurants, and food service firms.
and tortillas. Additionally, they also cater to evolving
facilities, they transform corn into final products,
consumer preferences through offerings like snacks,
meeting the demands of diverse markets. A robust • The company’s emphasis on continuous product
condiments, beans, pasta, and others.
distribution network ensures these products reach innovation catered to evolving consumer preferences
distributors across the globe. forces them to focus on the convenience, and cultural
• The company’s brand Maseca is the leading corn
relevance of their offerings.
flour brand globally, while Mission, Guerrero, and
• Gruma recognizes the importance of sustainability
Tortiricas brands provide consumers with diverse
and integrates ESG practices throughout its • Marketing channels include advertising, promotions,
tortilla options.
operations. The company also prioritizes continuous and social media engagement to connect with their
innovation through investments in R&D. audience effectively.

Sources: Gruma’s Website

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Advanced Financial Management I Assignment 1 I Group A16
Industry Overview

Advanced Financial Management I Assignment 1 I Group A16

Main Players
Market Share by Revenue Worldwide 2022 Main Peers

6% Grupo Bimbo
Grupo Bimbo is a Mexican multinational
company and one of the world's largest
19% bakery product manufacturing companies,
having products like bread, buns, tortillas, ...

General Mills
General Mills is a multinational food company
55% known for its diverse portfolio of cereals, baking
products, ... The company operates globally, with
its products being sold in numerous countries.

20%
Tyson Foods
Tyson Foods, Inc. is an American
multinational corporation and one of the
Tyson Foods Grupo Bimbo General Mills Gruma world's largest processors and marketers of
meat, poultry, and other food products.

Sources: Companies Annual Financial Reports

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Advanced Financial Management I Assignment 1 I Group A16
Financial Analysis

Advanced Financial Management I Assignment 1 I Group A16

Gruma shows great growth potential for the upcoming years, having the
USA as its biggest market, followed by Mexico with its brand GIMSA
REVENUE ANALYSIS

Gruma's revenue has grown steadily since 2019, outperforming peers like Bimbo, Tyson, and General Mills. This is even more
23% noteworthy considering the pandemic's disruptions and the ongoing war's uncertainties (i.e., Gruma had to temporarily suspend its
plant in Ukraine, and has still operating ones in Russia). While Gruma's sales volume remains lower than its peers, their resilience
and adaptability during challenging times are admirable. However, close monitoring is crucial to sustain their growth and
potentially close the sales volume gap with industry leaders.
18%
Growth Sales Breakdown per Geography It’s noteworthy that sales consistently grew when

Breakdown by Geography
25%
5%
6%
5%
6%
5%
6%
4%
6% measured in the local currency (pesos). However,
7% 7% 7% 8%
when converted to dollars, a decrease in growth is
17% 24% 25%
27% 26% evident. This is mainly due to a devaluation of 11%
13% 9% in the local currency from 2019 to 2020.
Revenue Growth

1% 58% 56% 57%

Consequently, the 2020 revenues, when expressed
55%
2020 2021 2022 in dollars, hold less value compared to the 2019
-7%
ones in real terms. The US are consistently Gruma’s
8% United States Mex ico 2019 2020 2021 2022 largest market, accounting for over half of its sales.
Europe Central America United States Mex ico Europe Moreover, Mexico also shows significancy, making
Asia and Oceania Central America Asia and Oceania up a large portion of revenues.

Sales Breakdown per Subsidiary

Breakdown by Subsidiary

Growth
3% 4% 3% 4% 3%
43% 6% 6% 6% 6%
7% 7% 7% 8%
32%
26% 26%
28% 26% Within the last 4 years, each subsidiary has
21%
maintained a consistent share of the total revenues.
10%
2019 2020 2021 2022
58% 56% 57%
As expected, Gruma USA is the company's largest
-1% 55%
-2% subsidiary, followed by GIMSA, Gruma’s Mexican
2020 2021 2022
-12%
Gruma Group Bimbo Gruma USA GIMSA
brand.
2019 2020 2021 2022
General Mills Tyson Foods Gruma Europe Gruma Centroamérica Gruma USA GIMSA
Gruma Europe Gruma Centroamérica
Others and Eliminations Others & E.

Sources: Companies Annual Financial Reports

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Advanced Financial Management I Assignment 1 I Group A16
Costs seem to be growing proportionally with revenues, with COGS
making up about 60% of net sales
COST ANALYSIS
Weight in Net Sales by Cost Item

COGS SG&A
85% 44%

65% 24%
Gruma presents an average COGS and SG&A as a weight of its Net Sales when
45% 4% compared to its peers. Bimbo and Tyson Foods have the most distinct cost
2019 2020 2021 2022 2019 2020 2021 2022 structures as the first has a better global integrated network that allows for better
efficiency, but also by far the biggest expenditure in marketing. The latter has
Gruma Group Bimbo Gruma Group Bimbo
COGS almost as high as its sales but spends far less in SG&A. Gruma’s cost
General Mills Tyson Foods General Mills Tyson Foods structure evolution as a weight in Net Sales has been fairly constant, indicating
that no improvement in efficiency along the value chain has been made as sales
have grown quite rapidly, but margins have remained the same. The same can be
Weight in Total Costs by Cost Item said for its peers, revealing the fact that the industry has not seen major supply
chain disruptions.

COGS SG&A This data shows again the resilience and adaptability of Gruma’s operation, as
having to temporary shut down its Ukraine factory and deal with the cereal siege
49% that happened at the beginning of the Russia-Ukraine war without suffering major
90%
34% changes in its margins is remarkable. However, it is to be noted that it is quite far
75%
19%
from achieving a gross margin close to the one Bimbo has been showing, which
60%
can be a sign that there is still a lot of room for improvement to cut costs and be
45% 4%
more efficient along its value chain.
2019 2020 2021 2022 2019 2020 2021 2022

Gruma Group Bimbo Gruma Group Bimbo

General Mills Tyson Foods General Mills Tyson Foods

Sources: Companies Annual Financial Reports

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Advanced Financial Management I Assignment 1 I Group A16
Gruma is in a comfortable position in covering its short-term obligations,
highly thanks to the high number of days on accounts receivable
LIQUIDITY ANALYSIS
Current Ratio Quick Ratio Cash Ratio

1,5 0,4
2,0

0,3
1,5 1,0

0,2
1,0
0,5
0,5 0,1

0,0 0,0 0,0

2019 2020 2021 2022 2019 2020 2021 2022 2019 2020 2021 2022

Gruma Group Bimbo General Mills Tyson Foods Gruma Group Bimbo General Mills Tyson Foods Gruma Group Bimbo General Mills Tyson Foods

Gruma presents higher quick and current ratios in all of the 4 years in analysis, except in 2020 regarding the current ratio, with Tyson Foods the closest to Gruma. This translates in a
more comfortable position of the firm to pay its short-term obligations, in both cases of needing or not to sell inventory.

Gruma's current and quick ratios reflect the higher number of days on accounts receivable that the firm has in comparison to its peers.

When analyzing the cash ratio of Gruma and its three peers, one can see that Gruma presents the highest cash ratios, except in the year of 2021, being surpassed by Tyson Foods.

With this, Gruma has a high ability to cover its short-term obligations using only cash and cash equivalents, when comparing with its peers.

Assumptions: Gruma’s exchange rate applied in 2019 was 0,053 and in 2020 of 0,050. For Bimbo was of 0,052 in 2019 , 0,047 in 2020, 0,049 in 2021 and 0,050 in 2022
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Sources: Companies Annual Financial Reports Advanced Financial Management I Assignment 1 I Group A16
On WCR and Cash Conversion Cycle, Gruma falls behind Group Bimbo
and General Mills, being harmed by its DIO and DPO
LIQUIDITY ANALYSIS
Working Capital Requirement (WCR) Cash Conversion Cycle

2019 2020 2021 2022

90
GRUMA $ 858 343 $ 784 341 $ 808 813 $ 1 159 760
70

50
GROUP BIMBO $ 677 662 $ 544 739 $ 252 735 $ 254 401
30

10
GENERAL MILLS $ 384 900 $ (206 300) $ (194 500) $ (422 900)
-10 2020 2021 2022

-30
TYSON FOODS $ 4 355 000 $ 4 220 000 $ 4 557 000 $ 5 608 000
Gruma Group Bimbo General Mills Tyson Foods

Gruma and its two peers, Group Bimbo and Tyson Foods, present all positive values
revealing a need to resort to its financial resources to fund its production cycle,
upcoming operational expenses and the repayments of debts.
By looking at the Working Capital Requirement, it's seen that General Mills exceeds on
this, as it has a lower value of inventories and accounts receivable comparing with the
accounts payable.
As these are absolute values, one should take into consideration the magnitude of
operations of each of the companies before taking conclusions on comparison.
Gruma has a much higher cash conversion cycle than its peers Group Bimbo and
General Mills given their lower days payable outstanding (DPO), translating the ability
of the other two companies of having better payment terms with their suppliers than
Gruma.
Besides this, Gruma also gets harmed on its high number of days of inventory
outstanding (DIO), comparing to its 3 peers in analysis, having more than double of
Group Bimbo and Tyson Foods in all 3 years.

Sources: Companies Annual Financial Reports

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Advanced Financial Management I Assignment 1 I Group A16
Gruma’s underperformance in its margins relative to its peers yields the
only declining Return on Assets (%) over the period
PROFITABILITY ANALYSIS
Gross Margin (%) EBITDA Margin (%) Return on Assets

60% 20%
18% 15%
50% 16%
14%
40%
12% 10%
30% 10%
8%
20% 6% 5%
4%
10%
2%
0% 0% 0%
2019 2020 2021 2022 2019 2020 2021 2022 2019 2020 2021 2022

Gruma Group Bimbo General Mills Tyson Foods Gruma Group Bimbo General Mills Tyson Foods Gruma Group Bimbo Tyson General Mills

Bimbo Group displays the highest capital accumulation
retention from manufacturing activities. This will allow the
company to benefit from a more comfortable position to
cover additional costs and satisfy debt obligations.
Furthermore, the industry's noticeable decline in Gross
Margin (%) since the Covid-19 pandemic was due to a
simultaneous increase in variable costs, and an overall
decrease in Net Sales. This effect was felt by all firms
excluding Tyson Foods, but nevertheless
disproportionately affected Gruma which registered the
largest p.p decrease in Gross Margin (2 p.p decrease).
Looking at the evaluation period, Gruma performed the
worst compared to its peers, suffering a 1.5 p.p decrease
in its EBITDA margin whereas competitors registered a 2.7
p.p increase in this metric. Such performance is stark
considering Gruma’s performance in line with its peers at
the level of the Gross Margin. A likely suspect of this
underperformance boils down to the strong evolution of
SG&A expenses, having increased 34% in the period under
analysis. Such negative performance indicates that the
company broke away from the industry's norm of being
able to utilize the 2019 pandemic to strengthen a
company's ability to make profits out of sales, registering
diminishing operational financial returns.
Over the years, Gruma has solidified its position as the
company with the highest ROA (%) when comparing
with its industry multiples. This implies that Gruma was
more productive in managing its financial assets in
order to generate profits within this period. As such, in
the period from 2019 to 2022, the company managed
to increase its profits for each dollar invested, albeit
suffering from a slight decrease in 2022 driven by a
large accumulation of inventories (34% increase),
whereas Net Income increased 6%. Such declining
performance is not seen by the competitors.

Sources: Companies Annual Financial Reports

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Advanced Financial Management I Assignment 1 I Group A16
Gruma’s superior ROE (%), driven by an increase in the company’s leverage
position and high Asset Turnover (%), may be under threat by competitors
PROFITABILITY ANALYSIS
Return on Equity (%)

Gruma's gradual increase in ROE (%) from 2019 to 2022 (although considering a slight decline in 2020), indicates
25,00% that the company increased its attractiveness to potential shareholders due a 23 p.p. increase in consolidated Net
20,00% Income compared to 4 pp in shareholders equity. Accordingly, in comparison with competitors’ ROE (%) over the
15,00% evaluated period, Gruma is efficiently generating shareholder value by expertly reinvesting its earnings to increase
profits and its subsequent business productivity. Nevertheless, this position could potentially be under threat by
10,00%
competitors, particularly following Group Bimbo’s outstanding increase in the aforementioned metric (19 p.p.
5,00% compared to Gruma’s 4 p.p. increase). Furthermore, according to a DUPONT analysis, the main driver of Gruma’s
0,00% prominent position of ROE (%) is the ability of the company to lever up the firm to levels not sustained by its peers,
-5,00% 2019 2020 2021 2022 therefore yielding a spread over the unlevered return to shareholders, albeit carrying more risk. Additionally, whilst
not the best performer amongst the peer group, Gruma’s second highest Asset Turnover ratio (%) showcases the
-10,00% company’s efficiency in delivering sales per extra euro invested into the balance sheet. Such efficiency naturally
-15,00% translates into better returns for its shareholders, particularly following its attractive margins as seen in the previous
Gruma Group Bimbo General Mills Tyson Foods slide. However, there is still scope for improvement.

DUPONT Analysis

Tax Burden (%) x Interest Burden (%) x Return on Sales (%) x Asset Turnover (%) x Financial Leverage (%)
1000,00% 120,00% 200,00% 500,00%
20,00%
750,00% 80,00%
150,00% 400,00%
15,00%
500,00% 40,00%
100,00% 300,00%
10,00%
250,00% 0,00%
50,00% 200,00%
0,00% -40,00% 5,00%
2019 2020 2021 2022 0,00%
-250,00% -80,00% 0,00% 100,00%
2019 2020 2021 2022 2019 2020 2021 2022 2019 2020 2021 2022
Gruma Group Bimbo Gruma Group Bimbo
Gruma Group Bimbo Gruma Group Bimbo Gruma Group Bimbo
General Mills Ty son Foods General Mills Ty son Foods General Mills Ty son Foods
General Mills Ty son Foods General Mills Ty son Foods

Sources: Companies Annual Financial Reports

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Advanced Financial Management I Assignment 1 I Group A16
All four firms have been increasingly operating with lower leverage,
which is a promising indicator for potential investors’ risk assessment
INVESTMENT ANALYSIS
Debt/Equity Ratio Net Debt-to-EBITDA Ratio

3,50 5,00
3,00
4,00
2,50
2,00 3,00

1,50 2,00
1,00
1,00
0,50
0,00 0,00
2019 2020 2021 2022 2019 2020 2021 2022

Gruma Group Bimbo General Mills Tyson Foods Gruma Group Bimbo General Mills Tyson Foods

The Net Debt-to-EBITDA ratio corroborates the conclusions from the D/E ratio. It
Looking at the historical evolution of this metric, Gruma and Tyson Foods tended not
would not take long for these firms to repay their debt obligations (and growingly so),
to rely on debt to finance activities, unlike the previously highly leveraged Bimbo and
by exclusively relying on their operational performance. The exception, though, is
General Mills. However, the latter have been retaining more earnings to mitigate
General Mills, which yields both the highest D/E and Net Debt-to-EBITDA ratios, thus
potential risks of such dependence on creditors for investments.
being the apparently riskiest company.

Sources: Companies Annual Financial Reports

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Advanced Financial Management I Assignment 1 I Group A16
Yet, a thorough analysis shows Gruma is the best investment due to its
consistently greater returns vs cost of capital
INVESTMENT ANALYSIS
Net Working Capital Evolution Capital Expenditure ROIC vs WACC Difference

$6000 000 $2000 000 20%

$4500 000
$1500 000 15%
$3000 000
$1500 000 $1000 000 10%
$-
2019 2020 2021 2022 $500 000 5%
$-1500 000
$-3000 000 $- 0%
2019 2020 2021 2022 2019 2020 2021 2022
$-4500 000
Gruma Group Bimbo General Mills Tyson Foods Gruma Group Bimbo General Mills Tyson Foods Gruma Group Bimbo General Mills Tyson Foods

NWC sheds light on the previous results. Bimbo and
General Mills are the most leveraged, as they have
not been able to meet their working capital needs,
which can be explained by the inflation effects in
accounts payable. Conversely, Tyson Foods appears
to be the least efficient, considering their extremely
high NWC. Their high inventory levels are explained
by inflation and the volatility in supply. So, Gruma
comes across as the healthiest firm, enabling future
investments to be funded with internal resources.
CAPEX is explained by the general strategies
followed by each firm. Gruma is more preoccupied
with developing its core business to meet future
demand & consolidate its market leading position, by
building new plants & modernizing its existing ones.
Bimbo has been acquiring companies worldwide that
operate in related industries. General Mills has been
divesting from multiple subsidiaries. Tyson is doing
the opposite, by acquiring large stakes in companies
operating in the poultry business.
Gruma was the most consistent performer, being
mostly explained by their desire to maintain their
market leading position, improving and modernizing
their production, while maintaining a low degree of
leverage. Considering the previous conclusions
about their industry multiples, it is no wonder the gap
between them and the rest was not lower than 4%
until 2022. In this year, Gruma was overtaken because
(1) Bimbo's profits doubled and (2) Tyson Foods
benefited from a negative WACC.

Assumptions: CAPM was used to compute Cost of Equity; Pre-tax Cost of Debt calculated based on risk-free rate (German 30Y bonds) and default spread, based on market capitalization and interest coverage ratio
17
Sources: Companies Annual Financial Reports, Grupo BMV, S&P500, KPMG Advanced Financial Management I Assignment 1 I Group A16
Recommendations

Advanced Financial Management I Assignment 1 I Group A16

Gruma can improve on diversification and better management of both
inventory and client exp. acquisitions, bearing in mind geopolitical context
RECOMMENDATIONS

In terms of liquidity, Gruma should try to reduce its days on For future operational strategy efficiency, Gruma must reevaluate its
inventory as this ends up harming its cash conversion cycle, production dependence on Russian factories, following the Russia-
which reveals to be much higher than its peers. Ukraine War’s sanctions that harmed production cycles.

Gruma’s post-pandemic underperforming margins and declining Gruma should bear in consideration the benefits of transitioning its
ROA, indicate that the company should be careful in managing their operational activities to countries that carry strong and stable
client expenditure acquisitions (i.e. Marketing Expenses). currency (i.e. promotes efficient budgeting and earnings stability).

Gruma may be exhausting its potential for organic growth if it

continues with its CAPEX trends. So, diversification may be a better
growth strategy, using its liquidity to counter rivals’ recent M&A
activity.

Limitations to our Analysis

Though the assessment of Gruma’s business model, alongside a financial statement analysis, allowed us with valuable insight over the company’s operational activities and
performance, we must bear in mind possible limitations to our analysis: 1) The time period evaluated (2019-2022) was an atypical operational period for the company due to the
Covid-19 pandemic., thereby not representative of normal company performance. 2) The ratios evaluated are based on past performance, thus not significantly indicative for
Gruma’s future performance. 3) The mere reliance on financial ratios to assess the company’s performance may be an oversimplification of its actual financial history and
operational status. (4) The chosen industry multiples are large conglomerates that go beyond Gruma’s offerings: Bimbo and General Mills have vast product portfolios that also
cover pastry and bakery, and Tyson Foods operates in the meat industry

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Advanced Financial Management I Assignment 1 I Group A16
Appendix

Advanced Financial Management I Assignment 1 I Group A16

Cash Conversion Cycle Components

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Advanced Financial Management I Assignment 1 I Group A16