18476103 equity research on fmcg

8/9/2019 18476103 Equity Research on FMCG

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A

PROJECT REPORT

ON

A Equity researchOn

Fast Moving Consumer Goods

In partial fulfillment of the requirement ofMasters In Management Studies

Through

Rizvi Institute of Management

Under the guidance of

Prof. FURQAN SHAIKH

SUBMITTED BY:

IMTIYAZ SIDDIQUE

MMS-FINANCE

2008-10

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DECLARATION

I Mr. Imtiyaz A. Siddique of Rizvi Institute of Managementhereby declare that I have completed the summer project on

A EQUITY RESEARCH ON FAST MOVING CONSUMER

GOODS in the academic year 2008-10. The information

submitted in the same is true & original of the best of my

knowledge.

Signature

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CERTIFICATE

I Mr. Kalim Khan hereby declare that Mr. Imtiyaz A.Sidddique of Rizvi Institute of Management has completed his

summer project in the academic year 2008-10. The information

submitted in the same is true & original of the best of my

knowledge.

Signature

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ACKNOWLEDGEMENT

There is joy in work. There is no happiness except in the

realization that we have accomplished something - Henry Ford

The making of any project requires contribution from many

people, right from inception till its completion. In my case also,

there had been a few people who have made this happen. It

was not only learning but also an enriching experience.

I am deeply indebted to Prof. Kalim Khan, Director, Rizvi

Institute of Management Studies for having allowed me to

carry out the project successfully. I specially thank my guideProf. Furqan Shaikh for his constant guidance, professional

help and support during the course of the project.

I thank my colleagues and friends for providing constant

encouragement and help. I am indebted to them for their

timely help & the enthusiasm they expressed in helping me

bring this project to the fruitful end. Finally, I am grateful to

my family for their moral support and understanding.

Teachers open the door, but you must enter by yourself

Signature

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TABLE OF CONTENTSr No TOPICS PAGE

NO.1.1 Introduction

1.2 Indian FMCG market size2.1 Industry Overview2.2 Structural Analysis of FMCG Industry2.3 FMCG Market Review2.4 Why FMCG Sector is Analyzed2.5 FMCG Sector Product and Category2.6 India- a large consumer goods spender2.7 Consumer expenditure on food at international level3.1 FMCG sector product and category

4.1 SWOT Analysis5.1 Hindustan Unilever LTD5.2 Product of HUL5.3 Distribution Network5.4 Fundamental Analysis5.5 Technical Analysis6.1 Dabur India6.2 Product of Dabur 6.3 Distribution Network

6.4 Fundamental Analysis6.5 Technical Analysis7.1 Sectoral opportunities8.1 Policy Issues9.1 Distinguishing Features of Indian FMCG Business10.1 Other Suggestions11.1 Salient Feature12.1 Conclusion

1.1 Introduction6


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The Indian FMCG sector is the fourth largest sector in the economywith a total market size in excess of US$ 13.1 billion. It has a strongMNC presence and is characterized by a well established distributionnetwork, intense competition between the organized and unorganizedsegments and low operational cost. Availability of key raw materials,cheaper labour costs and presence across the entire value chaingives India a competitive advantage.

The FMCG market is set to treble from US$ 11.6 billion in 2003 toUS$ 33.4 billion in 2015. Penetration level as well as per capitaconsumption in most product categories like jams, toothpaste, skincare, hair wash etc in India is low indicating the untapped marketpotential. Burgeoning Indian population, particularly the middle classand the rural segments, presents an opportunity to makers of

branded products to convert consumers to branded products.

Growth is also likely to come from consumer 'upgrading' in thematured product categories. With 200 million people expected to shiftto processed and packaged food by 2010, India needs around US$28 billion of investment in the food-processing industry.

Automatic investment approval (including foreign technologyagreements within specified norms), up to 100 per cent foreign equityor 100 per cent for NRI and Overseas Corporate Bodies (OCBs)

investment, is allowed for most of the food processing sector.

At the macro level, Indian economy is poised to remained buoyantand grow at more than 7%. The economic growth would impact largeproportions of the population thus leading to more money in thehands of the consumer. Changes in demographic composition of thepopulation and thus the market would also continue to impact theFMCG industry.

Recent survey conducted by a leading business weekly,approximately 47 per cent of India's 1 + billion people were under theage of 20, and teenagers among them numbered about 160 million.Together, they wielded INR 14000 Cr worth of discretionary income,

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and their families spent an additional INR 18500 Cr on them everyyear. By 2015, Indians under 20 are estimated to make up 55% of thepopulation - and wield proportionately higher spending power. Means,companies that are able to influence and excite such consumerswould be those that win in the market place.

The Indian FMCG market has been divided for a long time betweenthe organized sector and the unorganized sector. While the latter hasbeen crowded by a large number of local players, competing onmargins, the former has varied between a two-player-scenario to amulti-player one.

Unlike the U.S. market for fast moving consumer goods (FMCG),which is dominated by a handful of global players, India's Rs.460

billion FMCG market remains highly fragmented with roughly half themarket going to unbranded, unpackaged home made products. Thispresents a tremendous opportunity for makers of branded productswho can convert consumers to branded products. However,successfully launching and growing market share around a brandedproduct in India presents tremendous challenges. Take distribution asan example. India is home to six million retail outlets and supermarkets virtually do not exist. This makes logistics particularly for newplayers extremely difficult. Other challenges of similar magnitudeexist across the FMCG supply chain. The fact is that FMCG is a

structurally unattractive industry in which to participate. Even so, theopportunity keeps FMCG makers trying.

The FMCG sector in India is expected to grow at a compoundedannual growth rate (CAGR) of 9% to a size of Rs 1,43,000 crore by2010.

1.2 Indian FMCG Market Size

(In US $ Billion)

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(Source: IBEF FMCG Analysis)

According to estimates based on China's current per capitaconsumption, the Indian FMCG market is set to treble fromUS$ 11.6 billion in 2003 to US$ 33.4 billion in 2015. Thedominance of Indian markets by unbranded products,change in eating habits and the increased affordability of thegrowing Indian population presents an opportunity to makersof branded products, who can convert consumers to brandedproducts.

2.1 Industry Overview

Products which have a quick turnover, and relatively low cost areknown as Fast Moving Consumer Goods (FMCG).The FMCG sectorseems to have finally joined India Inc's growth party by posting

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surprising double-digit growth in sales in the past couple of years.With annual revenues of Rs 72,000 crore, it is the one of the largestsectors in the Indian economy. The industry's future prospects lookbright, considering rising household incomes and the spread ofmodern retail. However, the per capita income level in India is stillvery low compared to the developed world. Besides, the penetrationlevel of many products is also relatively low and several categoriesremain fairly unbranded.

All these factors provide a huge untapped potential for the industry.In contrast to other manufacturing sectors, FMCG is relatively lesscapital-intensive, but demands immense skills and expenditure onbranding and distribution. Most companies in the sector create valuethrough product differentiation, package innovation, differential pricing

and highlighting the functional aspect of foods. While inflation restrictsthe industry's growth, many companies in the sector thrive underinflationary pressures. Most companies pass on the cost inflation toconsumers, via a judicious blend of price hikes, packaged sizereduction and change in product mix. Few consumers react by down-trading to lower priced products, but most hang on to their preferredbrands.

The top five FMCG companies constitute nearly 70% of the total

revenues generated by this sector. Multinational FMCG companieslike Hindustan Unilever, ITC, Nestle, Procter & Gamble, Dabur Indiaand GlaxoSmithKline Consumer Healthcare traditionally comprise thefirst category of FMCG companies. They tend to spend nearly 10% oftheir revenues on an average on advertising and promoting theirproducts, which is the highest ad spend figure in the industry.Justifying their high product pricing, these companies largely tend tocapture value by addressing a felt need.

FMCG products are those that get replaced within a year. Example ofFMCG generally include a wide range of frequently purchasedconsumer products such as toiletries, soap, cosmetics, tooth cleaningproducts, shaving products and detergents, as well as other non-durables such as glassware, bulbs, batteries, paper product, andplastic good. FMCG may also include pharmaceuticals, consumer

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electronics, packaged food products, soft drinks, tissue paper, andchocolate bars.

Subsets of FMCGs are Fast Moving Consumer Electronics whichinclude innovative electronic products such as mobile phones, MP3players, digital cameras, GPS Systems and Laptops. These arereplaced more frequently than other electronic products.

2.2 Structural Analysis of FMCG IndustryTypically, a consumer buys these goods at least once a month. The

sector covers a wide gamut of products such as detergents, toiletsoaps, toothpaste, shampoos, creams, powders, food products,

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confectioneries, beverages, and cigarettes. Typical characteristics ofFMCG products are: -

1. The products often cater to 3 very distinct but usually wantedfor aspects - necessity, comfort, luxury. They meet thedemands of the entire cross section of population. Price andincome elasticity of demand varies across products andconsumers.

2. Individual items are of small value (small SKU's) although allFMCG products put together account for a significant part of theconsumer's budget.

3. The consumer spends little time on the purchase decision. Heseldom ever looks at the technical specifications. Brand

loyalties or recommendations of reliable retailer/ dealer drivepurchase decisions.

4. Limited inventory of these products (many of which areperishable) are kept by consumer and prefers to purchase themfrequently, as and when required.

5. Brand switching is often induced by heavy advertisement,recommendation of the retailer or word of mouth.

2.3 FMCG Market Review

FY 09 Result Highlights

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2.4 Why FMCG Sector is Analyzed

TATA Investment Corporation Limited, non non-banking financialcompany registered with Reserve Bank of India under the 'Investment Company' category. The company's activities compriseprimarily of investing in long-term investments in equity shares andother securities of companies in a wide range of industries.

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TICL invested in almost all the sectors. TICLs portfolio proved to be avery successful portfolio. They had got a very good return from all thesectors. Among these sectors, Fast Moving Consumer Goods(FMCG) proved to be a very successful sector. It has a very goodpotentiality in long term in India. The overall cost of investment inFMCG sector was Rs. 13.69 crores on May 20, 2008, this investmentvalued Rs. 306.72 crores i.e. the cost of value of investment in FMCGsector was 5% of the overall investment that was increased in 2008to 15% of the overall investment. Thus from this, we can concludethat, there is a 2140.47% increase in value of investment. For thissignificant increase and also recent development of retails shops,malls, etc. in India, the FMCG sector is one of the booming sectors inIndia. For this reason, I had chosen this sector for my equity analysis.

Below, I had given a which explains, the detail investment of TICL inFMCG sector:

2.5 Why India

Large domestic marketIndia is one of the largest emerging markets, with a population of overone billion. India is one of the largest economies in the world in termsof purchasing power and has a strong middle class base of 300million.

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Around 70 per cent of the total households in India (188 million)resides in the rural areas. The total number of rural households areexpected to rise from 135 million in 2001-02 to 153 million in 2010-11.This presents the largest potential market in the world.

The annual size of the rural FMCG market was estimated at aroundUS$ 33.4 billion in 2015. With growing incomes at both the rural andthe urban level, the market potential is expected to expand further.

2.6 India - a large consumer goods spender

An average Indian spends around 40 per cent of his income ongrocery and 8 per cent on personal care products. The large share offast moving consumer goods (FMCG) in total individual spendingalong with the large population base is another factor that makesIndia one of the largest FMCG markets.

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(Source: KSA Technopak Consumer Outlook 2004.)

2.7 Consumer expenditure on food at International level

Even on an international scale, total consumer expenditure on foodin India at US$ 120 billion is amongst the largest in the emerging

Markets, next only to China.

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3.1 FMCG sector Product & Category

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4.1 SWOT Analysis: Whole Industry!

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Category Product

Household Care

Fabric wash (laundry soaps and syntheticdetergents); household cleaners (dish/utensilcleaners, floor cleaners, toilet cleaners, airfresheners, insecticides and mosquito repellents,metal polish and furniture polish).

Food andBeverages

Health beverages; soft drinks; staples/cereals;bakery products (biscuits, bread, cakes); snackfood; chocolates; ice cream; tea; coffee; softdrinks; processed fruits, vegetables; dairy

products; bottled water; branded flour; brandedrice; branded sugar; juices etc.

Personal Care

Oral care, hair care, skin care, personal wash(soaps); cosmetics and toiletries; deodorants;perfumes; feminine hygiene; paper products.


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Strengths

Well established distribution networks extending to the rural areas Backed by strong brands Low cost operations Presence of established distribution networks in both urban andrural areas Presence of well-known brands in FMCG sector

Weakness

Low export levels Small scale sector reservations limit ability to invest in technologyand achieve economies of scale

Several Me-Too products

Opportunities

Large domestic market Export potential Increasing income levels will result in faster revenue growth High consumer goods spending

Threats

Tax & Regulatory Structures Slowdown in Rural Demands Removal of import restriction resulting in replacing of domesticbrands

5.1 Hindustan Unilever Ltd19


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Hindustan Unilever Limited, erstwhile Hindustan Lever Limited (alsocalled HLL),Head quartered in Mumbai, is India's largest consumerproducts company, formed in 1933 as Lever Brothers India Limited.Its 41,000 employees are headed by Mr. Harish Manwani, the non-executive chairman of the board. HUL is the market leader in Indianproducts such as tea, soaps, detergents, as its products havebecome daily household name in India. The Anglo-Dutch companyUnilever owns a majority stake (52%) in Hindustan Lever Limited.

Recently in February 2007, the company has been renamed to"Hindustan Unilever Limited" to provide the optimum balancebetween maintaining the heritage of the Company and the futurebenefits and synergies of global alignment with the corporate name of"Unilever".

Hindustan Unilever distribution cover over 1 million retail outletsacross India directly and its products are available in over 6.3 millionoutlets in India, i.e. nearly 80% of the retail outlet in India. It has 39factories in the country. Two out of three use the companys productsand HUL product have the largest consumer reach being available inover 80 percent of consumer homes across India.

Unilever mission is to add Vitality to life. We meet everyday needs for

nutrition, hygiene, and personal care with brands that help people feelgood, look good and get more out of life.

Management Structure

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Hindustan Unilever Limited is India's largest Fast Moving ConsumerGoods (FMCG) Company. It is present in Home & Personal Care andFoods & Beverages categories.

Board

Chairman Harish Manwani

Managing Director &CEO

Nitin Paranjpe

Vice Chairman D Sundaram

Director

D S ParekhC K PrahaladA NarayanS RamadoraiR A Mashelkar

Executive Director Dhaval Buch

Executive Director Gopal Vittal

Executive Director & CS Ashok Gupta

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Listing Details of Equity Shares

Name of the Stock Exchange Stock Code

Bombay Stock Exchange Limited 500696

National Stock Exchange of IndiaLimited

HINDUNILVR

5.2 Products of HUL

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Share holding pattern

15%

15%

3%

51%

16%

Foreign

Institutions

Non Promoter

Promoters

Public & Others


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Home & Personal Care

Personal wash Laundry

Lux

Lifebuoy Liril Breeze Pears and Rexona Hamam

Surf Excel

Rin Wheel Ala bleech

Beauty Products Hair-Care

Fair & Lovely Lakme

Ponds

Sunsilk naturals Clinic

Dove

Deo spray Beauty Products Axe Rexona

Pepsodent Close-up

Foods

Ice-cream Foods

Kwality Wall's Annapurna(Aataand salt)

Kissan(Jam,Ketchup,Squashes) Knorr Soups

Tea Coffee

Brooke bond Lipton

Brooke bond Bru

5.3 Distribution Network23


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Hindustan Unilever's distribution network is recognised as one of itskey strengths. Its focus is not only to enable easy access to theirbrands, but also to touch consumers with a three-way convergence of

product availability,

brand communication,

higher levels of brand experience.

HUL's products, manufactured across the country, are distributedthrough a network of about 7,000 redistribution stockists coveringabout one million retail outlets. The distribution network directlycovers the entire urban population.

The general trade comprises grocery stores, chemists, wholesale,kiosks and general stores. Hindustan Unilever services each with atailor-made mix of services. The emphasis is equally on using storesfor direct contact with consumers, as much as is possible through in-store facilitators.

The distribution network in general trade is as follows:-

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The products that are manufactured are first brought to the JIT (JustIn Time) Depot from the factory. Then these products are delivered tothe Redistribution Stockiest according to the order placed by them,this is done through Permanent Dispatch Plan. Then this stock issend to either retailers or wholesalers, according to the channelfollowed by them. From there it reaches to the consumers.

At the supermarkets

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FACTORY

JUST IN TIME DEPOT

REDISTRIBUTION STOCKIST

MARKET ( CHANNEL WISE )

CONSUMER


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Self-service stores and supermarkets are fast emerging in metrosand large towns. To service modern retailing outlets in the metros,HUL has set up a full-scale sales organisation, exclusively for thischannel. The business system delivers excellent customer service,while driving growth for the company and the store. At the same time,innovative marketing initiatives are taken to provide consumers withexperience of our brands at the store itself, through product tests andin-store sampling.This is termed as Modern Trade. It has got different distributionnetwork and work differently. It is fast gaining pace as more and morepeople are turning to malls for shopping. Today shoppers dont justwant to buy their daily groceries but they also want a shoppingexperience. They want to spend time in air conditioned store, nomore they are ready to sweat for spending money. These big box

retailers provide them a platform where they can roam around, pick,compare and choose their products. These stores provide them awhole new experience of shopping without shedding any drop ofsweat.

Distribution Network

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5.4 Fundamental Analysis

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FACTORY

JUST IN TIME DEPOT

CUSTOMER SERVICE PROVIDER

BIG BOX RETAILER

CONSUMER


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09Inventory Turnover Ratio 9.26 7.20 8.02 8.57DebtorTurnover Ratio 41.83 31.41 25.42 22.12Asset Turnover Ratio 7.81 5.64 5.35 5.11

ManagementEfficency Ratio is also called as an Activity Ratio.

Inventory turnover ratio show that how many times in a year have thecompany converted its Inventory into debtor. As the Inventoryturnover ratio is high this year as compared to the previous 3 yearthis indicate the production and sales efficiency and show how fastthe goods are moving in the market. As greater the inventory turnoverratio is in times more beneficial to the company. Debtor turnover ratio

show how that how many times company can convert debtors intocash in a year.DTR has increased for all the four year taken in tocomparison this indicate that company is getting the cash from debtorlate in the year 2005 DTR was 22.12 it get increased to 41.83 incurrent financial year. It can be happened because company hasincreased its policy or Debtor are paying late to company this shouldbe low as possible. Asset turnover ratio is net sales/net asset hasATR is increasing for the four year taken in to comparison indicatingthat net sales of the company is increasing year on year.

Profitability Ratios

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March09

Dec 07 Dec 06 Dec 05

Operating Margin (%) 14.46 14.95 14.74 14.14Gross Profit Margin (%) 13.50 15.86 15.80 15.03

Net Profit Margin (%) 12.05 12.58 14.94 12.42Return On Net Worth (%) 121.34 122.97 68.14 61.09Return on CapitalEmployed (%)

121.06 138.72 65.89 67.66

Earning Per Share 11.47 8.12 8.41 6.40Dividend Per Share 7.50 9.00 6.00 5.00CFO/PBIT(%) 13.35 13.78 13.50 12.87

PBIT as percentage of sales is moderately good and there has beensignificant change in it during last three years. There has not beenany significant change in operating Margin in comparison with the lastthree years. The profit distributing ability of the firm is excellent withreturn on net worth (RONW) being around 121.34% and more for lasttwo year. The profit generating ability similar to the profit distributingability is pretty good with ROCE over 121.06% during the year 2009.ROCE in year 2007 has increased from the figure of 2006, perhapsbecause of the decrease in debt (change in capital structure) andincrease in current liability (non interest bearing item). The face valueof Equity Share of HUL is Rs. 1. Analyzing the EPS and DPS, which

are profit distributing ability ratios, for HUL we can see that it hasbeen generating more than 500% times profit for its shareholdersover the years. The EPS increased over the years from Rs.6.40 inyear 2005 to Rs. 11.47 in year 2009. It has been generous indistributing the profit in form of dividend with DPS Rs. 5.00 in year2005 and Rs. 7.50 in year 2009.

Market Based Return

March Dec 07 Dec 06 Dec 05

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09Price to Earning Ratio 29.26 29.67 28.61 34.79Market Capitalization 2.40 3.16 3.67 3.63Price to book value 25.21 32.36 17.55 18.84

PE ratio for HUL is not so good with values over 30. In the year 2009,2007 and 2006 and somewhat better with value around 30. It meansan investor will get return around 1/30 times on his actual investment.If you multiply EPS & PER of 2009 you get Rs 336 and the currentmarket share of Hul is Rs 272 this means that the company isundervalued. Market capitalization of HUL has increased after 2005,but there is a small decrease in the year 2007, and now it is 2.40 incurrent financial year it has decreased over here management shouldplay a vital role to increase market capitalization.

5.5 Technical Analysis

Moving Average Crossover Chart

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This is the Moving Average Crossover Chart where,- Price Line - 50 days moving average

- 20 days moving average

From the above Moving Average Crossover Chart we can see that inthe month of January HUL stock was very volatile we cannot predictwhat is going to happen because price line is not able to cut 20 daysmoving average nor it is able to cut 50 days moving average fromdown or from up as it can be see from the chart that at the end ofJanuary price line has cut 20 days moving average from down soprice has raise little bit but in march 20 days moving average has cut50 days moving average from up this is the clear indication that priceis going to fall and this is the time to sell the stock and we can seethat in march price has gone down to the low as compared fromJanuary to june and for 3 month (march, april, may) price line and 20days moving average was below 50 days moving average so pricewas low for that period but in the start of june price line and 20 daysmoving average has cut 50 days moving average from down so this

is clear indication that price is going to go up and this is the right timeto buy the stock.

MACD Chart

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This is MACD Chart

- Price Line - 9 days signal line

- MACD line

Moving Average Convergence Divergence chart means that when asMACD falls below the signal line, it is a bearish signal.When the MACD rises above the signal line, the indicator gives a bullish

signal.

From the above MACD chart we can make out that in the month ofJanuary MACD was above the signal line that means the price will also goup and till end of February the stock price that was indicated in the chart ismore or less up. At the start of march MACD line has touch signal line andthen it has gone down this is a signal to come out if you have a stockbecause the price is going to go down and till the end of march MACD wasbelow the signal line in April it has try to cut signal line but it was not ableto cut it so it is advice not to enter in this market we need to wait. As seen

from the chart that at the start of June MACD line has cut signal line andgone up so stock price has also gone up and till now it is showing upwardtrend this is a good time to enter in the market.

Recommended to Hold

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By going through Technical chart i.e. the Moving Average CrossoverChart and MACD chart of HUL it clearly state that the stock price is

going to go up and this time you need to hold the stock or if you donthave the stock right time to invest in the stock. You can book yourprofit if you are and investor or a trader i.e if you are a short termplayer or a long term player you can book your profit.

6.1 Dabur India

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Dabur was started as a small pharmacy by Dr. S.K Burman. Aftermore than 120 years, Dabur is a renowned brand in India and knownfor its trustworthiness more than anything else.Dabur, the fourthlargest FMCG company of India, has recorded a 27.63 per cent surgein its consolidated net profit at Rs 105.3 crore for the fourth quarterended March 31, 2009, as compared to Rs 82.5 crore in the sameperiod a year ago. DIL operates under three categories, ConsumerCare Division, Consumer Health Care division, and Dabur Food. InJuly 2007 Dabur Food became the separate identity, 2008).

Dabur went through many structural and strategic changes tomaintain its market strength. During the early 1900s Dabur emergeas the first company to provide scientifically tested health careproduct. After setting up of R&D and automation of manufacturing

Dabur achieved significant growth. Dabur Amla hair oil and DaburChyawanprash launch gave the company an opportunity to expandthe business. To match with the changing time Dabur computerisedits operation (Capitaline, 2008).Dabur consists of large array of products and it had to maintain theoperational efficiency. To make sure it adjusted to the businessenvironment it became public limited company in 1986 followed bydiversification in Spain in 1992 (Vakhariya, 2004-2009).

Dabur further divided its business into three separate groups:

Health Care Products Division

Family Products Division

Dabur Ayurvedic Specialties Limited (Capitaline, 2008)

Successful implementation of procedure, and adapt with the changingtime and maintaining its essence Dabur achieved its highest eversales figure of Rs 1166.5 crores in 2000-01.

As FMCG sector was struggling with the slow growth in the Indianeconomy, Dabur decided to take numerous strategic initiatives,reorganize operations and improve on its brand architecturebeginning 2002. It decided to concentrate its marketing efforts on

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Dabur, Vatika, Amla, Real and Hajmola to strengthen their brandequity, create differentiation and emerge as a pure FMCG playerrecognized as an herbal brand. This was chosen after a study withAccenture, which revealed that Dabur was mainly perceived as anHerbal brand and connected more with the age group above 35(Naukrihub, 2007).

Large retailers were fighting for their market share in this lucrativeFMCG sector. Apart from HUL, P&G, Marico and Himalaya, ITC wasalso posing a challenge. Because of the large number of products,supply chain was became complex.

Management Structure

Dabur India's Fast Moving Consumer Goods (FMCG) Company. It ispresent in Home & Personal Care & Food categories.

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Board

Chairman Anand Burman

Vice Chairman Amit Burman

Executive Director Pradip Burman

Additional Director Mohit Burman

Director

P D NarangSunil DuggalR C Bhargava

P N VijayS NarayanAlbert Wiseman PatersonAnaljit Singh

Company Secretary Ashok Kumar Jain

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Listing Details of Equity Shares

Name of the Stock Exchange Stock Code

Bombay Stock Exchange Limited 500096National Stock Exchange of IndiaLimited

DABUR

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Share holding pattern

9%

14%

1%

70%

6%

Foreign

Institutions

Non Promoter

Promoters

Public & other


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6.2 Products of Dabur

Home & Personal Care

Hairoil Shampoo

Vatika Amla Sarso

Vatika heenaconditioning

Anmol-natural shine

silky

Skin Care Oral Care

Vatika fairness

Gulabari

Olive oil Dabur lal tel

Babool

Meswak

promise Binaca

Home Care

Odomos

Odonil Sanifresh Odopic

Foods

Digestive Health Supplements

Hajmola range Hingoli Pudin hara

Chyawanprash Dabur Honey Glucose

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6.3 Distribution Network

In 2001, Dabur decided to tackle its extended supply chain of over 30factories, six key warehouses, and 52 stocking points distributingover 1,000 SKUs to 10,000 stockists countrywide. The companyneeded a system to accurately control distribution and salesforecasting to reduce inventory in the pipeline.

Dabur went ahead and built a system using Visual Basic and ASPwith SQL Server 2000 as the database. It decided not to use apackaged SCM solution due to the high cost and relative lack ofcomplications in its supply chain.

The initiativeAn in-house developed, easy-to-use, Intranet based data-warehousedisplays as-of-yesterday sales, stock, receivables, banking, and otherMIS. Over 5,000 ASP pages meet almost all reporting requirementsand make this a single source of MIS for all levels of decision makers.

This success paved the ground for the company's supply chaininitiative. Fifty-five Ku Band TDMA VSATs were used to link primarydistributors to the system. Factories were hooked up using PAMA

(Permanent Assigned Multiple Access) VSATs. At some locationsVPNs had to be used because it was not possible to set up a dish.The zonal offices in Mumbai were hooked up in a similar manner.

The hardware is mostly owned by the primary CFA (Carry andForward Agent) except for the networking equipment, which is ownedby Dabur. In the case of the secondary systems, stockists wholly ownthe hardware.

The primary rollout began in April 2001 and took 16 months. The firstsix months were used to create a business model common to alldivisions (family products, healthcare, ayurvedic products, andpharmaceuticals), and testing and piloting the same.

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The Innovation

The integrated primary and secondary system has a number ofunique features. The features like tight integration of schemes,

stockists credit limit control, automated banking of cheques, andonline cheque reconciliation have obvious advantages in the primarydistribution. These are basically extensions to the MFG/PRO ERPsystem and not core customizations.

Dabur's stockists supply to 1.5 million retailers. Seventy percent ofthe sales are accounted for by the top 500 stockists. Theincorporation of these top stockists into its supply chain is a first forany FMCG company in India. The average sale of each stockist andthe current stock are the two parameters.

A 'My Page' allows the stockist to see the 'as-of-yesterday' detailspertaining to the in-transit shipments, transporter details, back-orders,account statement, cheque status, credit notes, and claimsettlements.

Details are collected from stockists on a weekly basis. In case ofprimary distribution points, an incremental backup is sent to thecentral location when the CFA closes operations for the day. Theseare computed at night in a process called cubing. And whenmanagers come into office in the morning the information is ready forthem.

The integrated system allows each Area Manager to plan for themonth's sales forecasts, stockists performance, and sales officers'performance. The integration allows better control on pipelines inprimaries and secondaries, brings down inventories, and offers bettercontrol on production and sales against a confirmed forecast.

The company has added an SMS interface that lets authorizedphones query the system for aspects like stock status, credit limits,current outstanding and division-wide sales. An control list of mobilephone numbers is used to restrict access to the system. Salespeoplecan get responses to their queries in a minute with this system," saidGopal Shukla, Chief Information Officer, Dabur India Limited.

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6.4 Fundamental Analysis

Liquidity & Leverage Ratios

March09

March08

March07

March06

Current Ratio 1.19 0.91 0.97 0.82Quick ratio 0.99 0.58 0.63 0.52Total Debt/Equity 0.19 0.03 0.05 0.05Interest Coverage 38.34 46.79 140.69 70.12

Current Ratio of dabur for last 3 year is near to 1 and for this financial

year it is more then 1 this indicate that the company is in goodposition as Current Ratio standard for FMCG industry is 1:1.There isless difference between CR and LR which indicates that the currentasset of Dabur consists of less amount of inventory. Value of sundrydebtors is quite high. The liquidity ratios have increase from previousyear which shows that dabur has increase its liquidity further.

Debt/Equity ratio means the ratio of finance coming from Debtscompared to shareholders. A ratio exceeding 1 may be cause for

concern. As it can be seen that the Debt/Equity ratio is near to 0.03 &0.05 for the last three year this means that company operate thebusiness mainly through owner funds but this financial yearDebt/Equity ratio has increased from 0.03 to 0.19 this indicate thatcompany has taken loan from market to finance the business withDebt/Equity ratio we can say that in this financial year 2009 companyis investing Rs 1 from there pocket and 19 paisa from out side. Asthey have taken loan from market then there Interest coverage ratiohas decreased. Interest Coverage Ratio show that how Leverage thecompany is the higher the ratio the less leverage

Management Efficiency Ratio42


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March09

March08

March07

March06

Inventory turnover 10.94 12.52 11.11 11.65

Debtor turnover 22.63 25.94 39.70 35.30Asset turnover 4.84 4.67 4.50 4.24

ManagementEfficiency Ratio is also called as an Activity Ratio.

Inventory turnover ratio show that how many times in a year havethe company converted its Inventory into debtor. As the Inventoryturnover ratio has decreased as compared to the previous 3 year this

show how slow the goods are moving in the market of Dabur this alsoindicate the production and sales efficiency of the company. Asgreater the inventory turnover ratio is in times more beneficial to thecompany. But in case of Dabur Inventory Turnover Ratio hasdecreased this Is a cost of concern to the company they have theinventory but it is not turning in to debtor. Debtor turnover ratio showhow that how many times company can convert debtors into cash in ayear.DTR has decreased as compared to the previous 3 year whichis good on behalf of the company because they are recovering

money faster from debtor. Asset turnover ratio is net sales/net assethas ATR is increasing marginally for all the 4 year this show thatcompany net sales is increasing year on year which is good fromcompany point of view.

Profitability Ratios

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March09

March08

March07

March06

Operating Margin (%) 18.33 18.60 17.45 17.90

Gross Profit Margin (%) 17.19 17.37 17.49 17.74Net Profit Margin (%) 15.44 15.06 14.41 14.04Return On Net Worth (%) 51.20 61.58 62.52 42.22Return on CapitalEmployed (%)

47.98 67.51 66.07 46.69

Earning Per Share 4.32 3.67 2.92 3.30Dividend Per Share 1.75 1.50 1.75 2.50CFO/PBIT(%) 17.11 17.29 16.16 16.47

PBIT as percentage of sales is good and there has been significantchange in it during last three years from 16.47 in 2006 it is 17.11 in2009. There has been a significant change in operating Margin ascompared to the last three years, In year 2009 it is 18.33% ascompared to 2006 it was 17.90%. The profit distributing ability of thefirm is not so good with return on net worth (RONW) beingdecreasing from 61.58%in year 2008 to 51.20% in year 2009. Theprofit generating ability similar to the profit distributing ability is not sogood as fall in (RONM) there is a fall in (ROCE) it has reduce to47.98% in year 2009 as compared to 67.51% in 2008. ROCE in year

2009 has decreased from the figure of 2008, perhaps because of theincreased in debt (change in capital structure) and decreased incurrent liability (non interest bearing item). The face value of EquityShare of Dabur is Rs. 1. Analyzing the EPS and DPS, which are profitdistributing ability ratios. The EPS increased over the years fromRs.3.30 in year 2006 to Rs. 4.32 in year 2009. It has been not sogenerous in distributing the profit in form of dividend with DPS Rs.2.50 in year 2006 and Rs. 1.75 in year 2009.

Market Based Return

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March09

March08

March07

March06

Price Earning Ratio 24.55 32.23 34.91 40.64Market Capitalization 3.52 4.48 5.00 5.19

Price to book value 11.57 17.99 20.33 15.87

PER ratio for Dabur is not so good with values over 30 In the year2006, 2007 and 2008. But for this financial year it is 24.55 that meansit is decreasing the PER should be as low as possible. This meansthat the market is valuing the company 24.55 times then its EPS ifyou multiply EPS & PER for 2009 you get Rs 106 and the currentmarket share of Dabur is Rs 124 this means that the company isovervalued. Market capitalization of Dabur is decreasing from 2006which was 5.19 and for 2009 it is 3.52 every year it is decreasingManagement need to look forward to increased their marketcapitalization.

6.5 Technical Analysis

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Moving Average Crossover Chart

This is the Moving Average Crossover Chart where,

- Price Line - 50 days moving average

- 20 days moving average

From the above Moving Average Crossover Chart we can see that in the

month of January to June Dabur price line has shown upward trend as theprice was moving along with 20 days moving average and 50 days movingaverage. In the mid of march 20 days moving average is suppose to cut 50days moving average but it does not happen if suppose it has cut the 50days moving average then the price should have fall. As from April the gapbetween 20 days moving average and 50 days moving average goes onincreasing so from April to June price of Dabur stock has also gone up itcan be seen that the stock price of Dabur is going to raise further and it isseems that it will go further up so if you have the stock you hold and if youdont you buy it.

MACD Chart

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This is MACD Chart

- Price Line - 50 days moving average

- 20 days moving averageMoving Average Convergence Divergence chart means that when asMACD falls below the signal line, it is a bearish signal.When the MACD rises above the signal line, the indicator gives abullish signal.

When the security price diverge from the MACD. It signals the end ofthe current trend.

From the above MACD chart we can make out that from January to JuneMACD was above the signal line that means the price will also go up andthe price line has gone up if you see the price line chart In the start ofMarch MACD was almost equal to signal line at this point we cant predictany think because it may go up or also it can come down but as in the midof march MACD goes on increasing and gone above the signal line theprice goes on increasing and the price is showing the upward trend.

Recommended to Hold

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By going through the Technical chart i.e. Moving Average CrossoverChart and MACD chart of Dabur India it clearly state that the stock

price is going to go up and this time you need to hold the stock or ifyou dont have the stock right time to invest in the stock with the pointof view of trader if you are an investor this stock would not be theright decision to make as in the Moving Average Crossover Chart 20days moving average line is bit closer to 50 days moving average lineand at any time 20 days moving average may cut 50 days movingaverage from up so the stock price will fall and even stock price isshowing a little bit downward trend it would be not safe for a longterm investor to enter in this stock but trader can book profit.

7.1 Sectoral opportunities

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According to the Ministry of Food Processing, with 200 million peopleexpected to shift to processed and packaged food by 2010, Indianeeds around US$ 28 billion of investment to raise food processinglevels by 8-10 per cent. In the personal care segment, the lowerpenetration rates also presents an untapped potential. Key sectoralopportunities are mentioned below:

Staple: branded and unbranded: While the expenditure on mass-based, high volume, low margin basic foods such as wheat, wheatflour and homogenised milk is expected to increase substantially withthe rise in population, there is also a market for branded staples isalso expected to emerge. Investment in branded staples is likely torise with the popularity of branded rice and flour among urban

population.

Dairy based products: India is the largest milk producer in theworld, yet only 15 per cent of the milk is processed. The US$ 2.4billion organized dairy industry requires huge investment forconversion and growth. Investment opportunities exist in value-added products like desserts, puddings etc. The organized liquid milkbusiness is in its infancy and also has large long-term growthpotential.

Packaged food: Only about 8-10 per cent of output is processedand consumed in packaged form, thus highlighting the huge potentialfor expansion of this industry. Currently, the semi processed andready to eat packaged food segment has a size of over US$ 70 billionand is growing at 15 per cent per annum. Growth of dual incomehouseholds, where both spouses are earning, has given rise todemand for instant foods, especially in urban areas. Increased healthconsciousness and abundant production of quality soyabean alsoindicates a growing demand for soya food segment.

Personal care and hygiene: The oral care industry, especiallytoothpastes, remains under penetrated in India with penetration ratesbelow 45 per cent. With rise in per capita incomes and awareness oforal hygiene, the growth potential is huge. Lower price and smaller

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packs are also likely to drive potential up trading. In the personal caresegment, according to forecasts made by the Centre for Industrialand Economic Research (CIER), detergent demand is likely to rise to4,180, 000 metric tonnes by 2011-12 with an annual growth rate of 7per cent between 2006 and 2012. The demand for toilet soap isexpected to grow at an annual rate of 4 per cent between 2006-12 to870,000 metric tones by 2011-12. Rapidurbanization is expected to propel the demand for cosmetics to100,000 metric tonnes by 2011-12, with an annual growth rate of 10per cent.

Beverages: The US$ 2 billion Indian tea market has been growingat 1.5 to 2 per cent annually and is likely to see a further rise asIndian consumers convert from loose tea to branded tea products. In

the aerated drinks segment, the per capita consumption of soft drinksin India is 6 bottles compared to Pakistan's 17 bottles, Sri Lanka's 21,Thailand's 73, the Philippines 173 and Mexico's 605. The demand forsoft drink in India is expected to grow at an annual rate of 10 per centper annum between 2006-12 with demand at 805 million cases by2011-12. Per capita coffee consumption in India is being promoted bythe coffee chains and by the emergence of instant cold coffee.According to CIER, demand for coffee is expected to rise to 535,000metric tonnes by 2012, with an annual growth rate of 5 per cent

between 2006-12.

Edible oil: The demand for edible oil in India, according to CIER, isexpected to rise to 21 million tonnes by 2011-12 with an annualgrowth rate of 7 per centper annum.

Confectionary: The explosion of the young age population in Indiawill trigger a spurt in confectionary products. In the long run theindustry is slated to grow at 8 to 10 per cent annually to 870,000

metric tonnes by 2011-12.

8.1 Policy issues

Tax reforms

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The government has gradually removed the restrictions on imports ofconsumer goods in the country and also significantly reduced customduties. The domestic tax structure of these products, however, hasnot been rationalized to provide level playing field for competition.This is adversely affecting the growth of the FMCG industry and couldhave far reaching adverse impact. The following taxation issues needurgent attention of the government:

1) Extremely high incidence of tax on certain product categories

Some FMCG products such as shampoos, processed food, softdrinks and toiletries containing alcohol attract high rates of exciseduty and sales tax. The total tax incidence in some cases is morethan 60 per cent of the cost or more than 30 per cent of MRP. Such

high tax incidence hampers growth of these product categoriesbesides encouraging manufacture of spurious products andsmuggling.

It is recommended that the total excise incidence of FMCG productsshould not exceed 16 per cent in the case of non food items and eightper cent in the case of processed foods. Similarly, the marginal ratesof sales tax, which is currently in the range of 10 to 25 per cent,should not exceed 12 per cent.

2) Irrational domestic tax structure encouraging imports

Significant reduction in custom duty rates of consumer goods hasmade imported product cheaper as compared to indigenouslymanufactured products, due to irrational domestic tax structure. Forinstance, goods manufactured in India suffer from cascading effectsof taxes on inputs as additional cost compared to imports.

The cascading effect of sales tax and local levies on inputs used indomestic manufacture should be eliminated by providing eitherMODVAT credit or by introducing notional VAT covering both centraland state taxes on an urgent basis.

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Moreover, MRP-based excise duty is levied on a large number ofFMCG products. Countervailing duty on the same product whenimported is charged on CIF value. The MRP based assessable valuefor excise duty does not allow abatement for post manufacturingcosts such as advertising and selling expenses whereas CIF valueconsidered for the purpose of import duty does not include costs ofthese elements incurred subsequently by importers.

This differential basis creates unfair competition as tax incidence ondomestic manufacture could be considerably higher in case of thoseproducts which incur significant marketing and distribution cost. Thereis a need to bring parity in tax incidence between domesticmanufacture and imports by including all such elements of postmanufacturing costs while deciding the abatement percentage of

MRP based duty.

3) Inverted Duty structure for selected inputs

Duty on certain raw materials is higher or the same as compared tofinished products in which these materials are used. Such rawmaterials include oils and chemicals like Soda ash, caustic soda andLAB. In addition to customs duty, raw materials are also subject toSAD/sales tax and octroi and therefore total tax incidence and cost ofindigenous manufacture goes up. The import duty on raw materials

needs to be rationalized so that it does not exceed 60 to 70 per centof the duty on finished goods.

4) Need for rationalization of taxes on processed foods

Processed food industry, with its vertical integration with theagricultural sector has significant potential for employment generationand economic growth. The existing tax structure and its high overallincidence, however, has been hampering the growth of the processedindustry.

The increase in excise duty in last years budget from eight per centto 16 per cent has adversely affected the growth of processed foodsindustry. It is recommended that marginal rate of excise duty onprocessed foods should not be more than eight per cent and thesales tax should be levied at four per cent.

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5) Cascading effect of Special Excise Duty

The special excise duty introduced last year is not "cenvatableexcept in the case of selected products. Most FMCG productscovered by tariff such as shampoos, ice creams and cosmetics aresubject to SED. This tariff also contains very wide definition of theterm "manufacture which includes labeling, relabeling or conversionof large packs into small packs. The levy of SED on such productstherefore leads to double taxation when goods are labeled orconverted into small packs after manufacture. It is recommended thatSED should be made "cenvatable; alternatively the term"manufacture needs modification , atleast for the purpose of SED byexcluding labeling, relabeling or conversioninto small packs.

FDI Policy

Automatic investment approval (including foreign technologyagreements within specified norms), up to 100 per cent foreign equityor 100 per cent for NRI and Overseas Corporate Bodies (OCBs)investment, is allowed for most of the food processing sector exceptmalted food, alcoholic beverages and those reserved for small scaleindustries (SSI). 24 per cent foreign equity is permitted in the small-scale sector. Temporary approvals for imports for test marketing canalso be obtained from the Director General of Foreign Trade. Theevolution of a more liberal FDI policy environment in India is clearlysupported by the successful operation of some of the global majorslike PepsiCo in India.

9.1 Distinguishing features of Indian FMCG

Business

FMCG companies sell their products directly to consumers. Majorfeatures that distinguish this sector from the others include thefollowing: -

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1. Design and Manufacturing

1. Low Capital Intensity - Most product categories in FMCGrequire relatively minor investment in plan and machinery andother fixed assets. Also, the business has low working capitalintensity as bulk of sales from manufacturing take place on acash basis.

2. Technology - Basic technology for manufacturing is easilyavailable. Also, technology for most products has been fairlystable. Modifications and improvements rarely change the basicprocess.

3. Third-party Manufacturing - Manufacturing of products bythird party vendors is quite common. Benefits associated withthird party manufacturing include (1) flexibility in production and

inventory planning; (2) flexibility in controlling labor costs; and(3) logistics - sometimes its essential to get certain productsmanufactured near the market.

2. Marketing and Distribution

Marketing function is sacrosanct in case of FMCG companies. Majorfeatures of the marketing function include the following: -

1. High Initial Launch Cost - New products require a large front-

ended investment in product development, market research,test marketing and launch. Creating awareness and developfranchise for a new brand requires enormous initial expenditureon launch advertisements, free samples and productpromotions. Launch costs are as high as 50-100% of revenuein the first year. For established brands, advertisementexpenditure varies from 5 - 12% depending on the categories.

2. Limited Mass Media Options - The challenge associated withthe launch and/or brand-building initiatives is that few no massmedia options. TV reaches 67% of urban consumers and 35%of rural consumers. Alternatives like wall paintings, theatres,video vehicles, special packaging and consumer promotionsbecome an expensive but required activity associated with asuccessful FMCG.

3. Huge Distribution Network - India is home to six million retailoutlets, including 2 million in 5,160 towns and four million in

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627,000 villages. Super markets virtually do not exist in India.This makes logistics particularly for new players extremelydifficult. It also makes new product launches difficult sinceretailers are reluctant to allocate resources and time to slowmoving products. Critical factors for success are the ability tobuild, develop, and maintain a robust distribution network

3. Competition

1. Significant Presence of Unorganized Sector - Factors thatenable small, unorganized players with local presence toflourish include the following:

2. Basic technology for most products is fairly simple and easilyavailable.

3. The small-scale sector in India enjoys exemption/ lower rates ofexcise duty, sales tax etc. This makes them more pricecompetitive vis--vis the organized sector.

4. A highly scattered market and poor transport infrastructurelimits the ability of MNCs and national players to reach out toremote rural areas and small towns.

5. Low brand awareness enables local players to market theirspurious look-alike brands.

6. Lower overheads due to limited geography, familymanagement, focused product lines and minimal expenditure

on marketing.

10.1 Other suggestions

1. A joint industry government initiative for building a "Made in

India brand for FMCG products is required. With manymultinationals moving into the Indian FMCG market, aconcerted marketing strategy which creates strong brands willbe needed for Indian FMCGs to gain recognition in the market.

2. Better packaging materials are necessary as a large number ofFMCG products are perishable . The government must facilitate

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more R&D in packaging materials as this will help in cuttingwastes and costs in the sector. The possibility of a longer shelflife will encourage production of goods of higher value additionby companies in the sector.

3. While import of most items has been allowed, the governmentis not geared to prevent import of spurious products. In othercountries, FMCG goods have to be cleared by regulatoryauthorities before they are allowed to enter domestic stores.This is not happening in India and the government needs toundertake a comprehensive crackdown on these products.

4. The small-scale reservation policy should be reviewed as ithampers the growth of this sector. Many reserved products,

including several FMCG products can be freely imported. Underthe current policy, not only are Indian producers of many FMCGproducts restricted from attaining economies of scale, they alsohave to compete against import that do not face constraints onsmall scale reservations.

11.1 Salient feature

The FMCG sector is a key component of Indias GDP and is asignificant direct and indirect employer. It is the fourth largest sectorin the economy and is responsible for five per cent of total factoryemployment in the country. The sector also creates employment forthree million people in downstream activities, much of which isdisbursed in small towns and rural India.

Unlike the perception that the FMCG sector is a producer of luxuryitems targeted at the elite, in reality the sector meets the every day

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needs of the masses, across the country. Low-priced productscontribute the majority of the sales volume and lower income andlower middle income groups account for over 60 per cent of thesectors sales. Moreover, rural markets account for 56 per cent oftotal domestic FMCG demand and FMCG outlets reach more villagesthan any other basic facility such as primary schools or bus facilities.

The FMCG sector has several other salient features. It has stronglinks with agriculture and 71 per cent of sales come from agro-basedproducts; it is a significant value creator with a market capitalisationsecond only to the IT sector and it is a key contributor to theexchequer. In 1998-99, it accounted for eight per cent of totalcorporate tax; six per cent of central excise revenue and seven percent of state tax revenues.

12.1 Conclusion

The FMCG sector has traditionally grown at a very fast rate and hasgenerally out performed the rest of the industry. Over the last oneyear, however the rate of growth has slowed down and the sector has

recorded sales growth of just five per cent in the last four quarters.

The outlook in the short term does not appear to be very positive forthe sector. Rural demand is on the decline and the Centre forMonitoring Indian Economy (CMIE) has already downscaled itsprojection for agriculture growth in the current fiscal. Poor monsoon insome states, too, is unlikely to help matters. Moreover, the general

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slowdown in the economy is also likely to have an adverse impact ondisposable income and purchasing power as a whole. The growth ofimports constitutes another problem area and while so far imports inthis sector have been confined to the premium segment, FMCGcompanies estimate they have already cornered a four to six per centmarket share. The high burden of local taxes is another reasonattributed for the slowdown in the industry

At the same time, the long term outlook for revenue growth ispositive. Give the large market and the requirement for continuousrepurchase of these products, FMCG companies should continue todo well in the long run. Moreover, most of the companies areconcentrating on cost reduction and supply chain management. Thisshould yield positive results for them.

18476103 equity research on fmcg

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