final sa project final
TRANSCRIPT
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DABUR INDIA LTD
SECURITY ANALYSIS PROJECT
SUBMITTED BY:
CHARU ATTRIMANSIMRAN KAURKRITIKA SETHISAGAR ARORAVINEET JAINSAUMYA CHADHASHALINI SINGH
(GROUP -8)
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TABLE OF CONTENTS
PARTICULARS PAGE NO.Objective 4Introduction 5
Economic analysis 12Why is valuation required 17Calculation of intrinsic value using DCF method 21
Literature Review 24s
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OBJECTIVE
In our third semester as finance majors, we have been exposed to an important subject of
Security analysis. According to the curriculum we had to understand the nuances of the
valuation process of various types of securities. Keeping that in mind we have decided to pick
up a company and run the following analysis with the stated reasons:-
(1)EIC Analysis which helps us in building the foundation to the Fundamental Analysisof any firm. In our case we have focussed on the company dabur India Limited and
the industry of FMCG and the company Dabur India Ltd.
(2)Next we decided to calculate the intrinsic value of the firm using the Discounted CashFlow model, in order to decide whether the company is trading at par value or a
premium value.
(3)In India, the investment bankers Basically use the Relative Valuation , So weundertook a relative valuation to also understand the standing of our firm in
comparison of the firm
To sum it up the objective of the project was to gain practical knowledge in equity
valuation and understand whether the company is undervalued or overvalued.
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Introduction
Products which have a quick turnover, and relatively low cost are known as Fast Moving
Consumer Goods (FMCG). FMCG products are those that get replaced within a year. These
products are purchased by the customers in small quantity as per the need of individual or
family. These items are purchased repeatedly as these are daily use products. The price or
value of the products is not very high. These products are having short life also. It may
include perishable and non perishable products, durable and non durable goods. Examples of
FMCG generally include a wide range of frequently purchased consumer products such as
toiletries, soap, cosmetics, tooth cleaning products, shaving products and detergents, as well
as other non-durables such as glassware, bulbs, batteries, paper products, and plastic goods.
FMCG may also include pharmaceuticals; consumer electronics, packaged food products,
soft drinks, tissue paper, and chocolate bars. A subset of FMCGs is Fast Moving Consumer
Electronics which include innovative electronic products such as mobile phones, MP3players, digital cameras, GPS Systems and Laptops. These are replaced more frequently than
other electronic products. White goods in FMCG refer to household electronic items such as
Refrigerators, T.Vs, Music Systems, etc. The Indian FMCG sector is explained below in
detail:
(a) Fast Growing Sector
In 2005, the Rs. 48,000-crore FMCG segment was one of the fast growing industries in India.
According to the AC Nielsen India study, the industry grew 5.3% in value between 2004 and
2005. The Indian FMCG sector is the fourth largest in the economy and has a market size of
US$13.1 billion. Well-established distribution networks, as well as intense competition
between the organized and unorganized segments are the characteristics of this sector. FMCG
in India has a strong and competitive MNC presence across the entire value chain. The
middle class and the rural segments of the Indian population are the most promising market
for FMCG, and give brand makers the opportunity to convert them to branded products. Most
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9. Procter & Gamble Hygiene and Health Care
10. Marico Industries
The personal care category has the largest number of brands, i.e., 21, inclusive of Lux,
Lifebuoy, Fair and Lovely, Vicks, and Ponds. There are 11 HLL brands in the 21,
aggregating Rs.3, 799 crore or 54% of the personal care category. Cigarettes account for 17%
of the top 100 FMCG sales, and just below the personal care category. ITC alone accounts for
60% volume market share and 70% by value of all filter cigarettes in India. The foods
category in FMCG is gaining popularity with a swing of launches by HLL, ITC, Godrej, and
others. This category has 18 major brands, aggregating Rs. 4,637 crore. Nestle and Amul slug
it out in the powders segment. The food category has also seen innovations like softies in ice
creams, chapattis by HLL, ready to eat rice by HLL and pizzas by both GCMMF and Godrej
Pillsbury. This category seems to have faster development than the stagnating personal care
category. Amul, India's largest foods company has a good presence in the food category with
its ice-creams, curd, milk, butter, cheese, and so on. Britannia also ranks in the top 100
FMCG brands, dominates the biscuits category and has launched a series of products at
various prices.
In the household care category (like mosquito repellents), Godrej and Reckitt are two players.
Goodknight from Godrej is worth above Rs 217 crore, followed by Reckitt's Mortein at Rs
149 crore. In the shampoo category, HLL's Clinic and Sunsilk make it to the top 100,
although P&G's Head and Shoulders and Pantene are also trying hard to be positioned on top.
Clinic is nearly double the size of Sunsilk. Dabur is among the top five FMCG companies in
India and is an herbal specialist. With a turnover of Rs. 19 billion (approx. US$ 420 million)
in 2005-2006, Dabur has brands like Dabur Amla, Dabur Chyawanprash, Vatika, Hajmola
and Real. Asian Paints is enjoying a formidable presence in the Indian sub-continent,
Southeast Asia, Far East, Middle East, South Pacific, Caribbean, Africa and Europe. Asian
Paints is India's largest paint company, with a turnover of Rs.22.6 billion (around USD 513
million). Forbes Global magazine, USA, ranked Asian Paints among the 200 Best Small
Companies in the World Cadbury India is the market leader in the chocolate confectionery
market with a 70% market share and is ranked number two in the total food drinks market. Its
popular brands include Cadbury's Dairy Milk, 5 Star, Eclairs, and Gems. The Rs.15.6 billion
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(USD 380 Million) Marico is a leading Indian group in consumer products and services in the
Global Beauty and Wellness space.
There is a huge growth potential for all the FMCG companies as the per capita consumption
of almost all products in the country is amongst the lowest in the world. Again the demand or
prospect could be increased further if these companies can change the consumer's mindset
and offer new generation products. Earlier, consumers were using non-branded apparel, but
today, clothes of different brands are available and the same consumers are willing to pay
more.
(b) Scope of the Sector
The Indian FMCG sector with a market size of US$13.1 billion is the fourth largest sector in
the economy. A well-established distribution network, intense competition between the
organized and unorganized segments characterizes the sector. FMCG Sector is expected to
grow by over 60% by 2010. That will translate into an annual growth of 10% over a 5-year
period. It has been estimated that FMCG sector will rise from around Rs 56,500 crores in
2005 to Rs 92,100 crores in 2010. Hair care, household care, male grooming, female hygiene,and the chocolates and confectionery categories are estimated to be the fastest growing
segments, says an HSBC report. Though the sector witnessed a slower growth in 2002-2004,
it has been able to make a fine recovery since then. For example, Hindustan Levers Limited
(HLL) has shown a healthy growth in the last quarter. An estimated double digit growth over
the next few years shows that the good times are likely to continue.
(c) Growth Prospects
With the presence of 12.2% of the world population in the villages of India, the Indian rural
FMCG market is something no one can overlook. Increased focus on farm sector will boost
rural incomes, hence providing better growth prospects to the FMCG companies. Better
infrastructure facilities will improve their supply chain. FMCG sector is also likely to benefit
from growing demand in the market. Because of the low per capita consumption for almost
all the products in the country, FMCG companies have immense possibilities for growth. And
if the companies are able to change the mindset of the consumers, i.e. if they are able to takethe consumers to branded products and offer new generation products, they would be able to
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generate higher growth in the near future. It is expected that the rural income will rise in
2007, boosting purchasing power in the countryside. However, the demand in urban areas
would be the key growth driver over the long term. Also, increase in the urban population,
along with increase in income levels and the availability of new categories, would help the
urban areas maintain their position in terms of consumption. At present, urban India accounts
for 66% of total FMCG consumption, with rural India accounting for the remaining 34%.
However, rural India accounts for more than 40% consumption in major FMCG categories
such as personal care, fabric care, and hot beverages. In urban areas, home and personal care
category, including skin care, household care and feminine hygiene, will keep growing at
relatively attractive rates.
(d) SWOT Analysis
SWOT analysis of this sector is carried as follows:
(I) Strengths:
Well-established distribution network extending to rural areas. Strong brands in the FMCG sector. Low cost operations
(ii) Weaknesses:
Low export levels. Small scale sector reservations limit ability to invest in technology and achieve
economies of scale.
Several "me-too products.(iii) Opportunities:
Large domestic market. Export potential Increasing income levels will result in faster revenue growth.
(iv) Threats:
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Imports Tax and regulatory structure Slowdown in rural demand
D) Pestle Analysis
Pest analysis of FMCG sector in India is carried out on political, economical, social and
technological aspects. It is explained below:
(I) Political:
Tax exemption in sales and excise duty for small scale industries. Transportation and infrastructure development in rural areas helps in distribution
network.
Restrictions in import policies.
Help for agricultural sector.(ii) Economical:
The GDP rate of Indian economy is increasing every year. It is expected in future itwould be better only in comparison with other countries.
Inflation rate is increasing across the world and India is also no exception. Thegovernment and Reserve Bank of India both are trying to control the inflation ratewith the help of different measures.
Increase in disposable income has taken place due to higher GDP rate. The per capita Income is increasing so the customers are having more income to spend for various
reasons.
Indian FMCG sector recorded 16% sales growth in last fiscal year and it is expected itwould further improve in the forthcoming years.
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The FMCG sector is a 4th largest sector of Indian economy with market size of morethan 60,000 crore. The Indian Territory is very large and number of customers is also
very high.
(iii) Social:
Demographical analysis The Indian culture, social & life styles are changing drastically. The total population
is nearly 115 crores and population includes rich, poor, middle class, male, female,
located in rural, urban and sub urban areas, different level of education etc.
(iv) Technology:
Technology has been simplified and available in the industry, where technology is notavailable then it is brought from foreign countries to meet FMCG sector requirements.
Foreign players help in high technological development. With research anddevelopment facilities the new technologies are developed alone or with the help of
foreign players.
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ECONOMIC ANALYSIS
Indian Economy
Indian economy is likely to see the lowest growth in fiscal 2012-13 since the 3.8% growth
recorded in 2002-03. The trends in the first five months of fiscal 2012-13 suggest a sharp
growth slowdown in the economy and there are no positives on the horizon going forward.
However the silver lining is that efforts to stabilize the economy by policy makers will bear
fruit down the line and growth could get back on track from fiscal 2013-14 onwards.
The first quarter 2012-13 GDP growth came in at 5.5%, which was above the 5.3% growth
seen in the last quarter of 2011-12 and above consensus estimates of 5% growth.
The 5.5% growth for first quarter 2012-13 is well below RBIs and governments revised
GDP growth estimates of 6.5% and 6.7% respectively.
The IIP (Index of Industrial Production) growth for the April- July 2012 period is -0.1% with
manufacturing growth at -0.6%. The negative IIP growth for the first four months of the year
does not bode well for overall economic growth.
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Trade numbers are not positive with exports showing a negative 5% growth for the first five
months of the year. Weak growth in economies of the US and Euro zone are hitting exports
despite a sharp rupee depreciation of over 20% over a one year period.
Direct tax collections are up by just 6.5% in the April-August 2012 period on a year on year
basis against a target growth of over 15% for the full year. Net of refunds direct tax collection
are up by 28%. Corporate tax collection has grown by just 0.16% in the first five months of
the year. Tax collections are reinforcing the slowdown in the economy.
Bank credit growth is up by just 0.36% in the April-August 2012 period. The weak bank
credit growth is due to worries of rising NPAs of public sector banks (Non-Performing
Assets have gone up by 50% in full year 2011-12).
Monsoons are below normal for 2012 though good rains in August and September have
reduced the rainfall deficit. Agricultural growth will be hit on below normal monsoons.
The coal block allocation scam, popularly known, as Coalgate will lead to a sharp fall in
mining activity as well as cancellations of many power projects. Companies such a BHEL
that supply power equipment will see orders being cancelled. Investment activity will be hit
on cancellation of the projects and will lead to deterioration in economic growth.
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Fall of rupee against major currencies, new norms of standard-size packaging, increase in raw
material costs due to upward spiralling interest rates and inflation together might dent the
performance of the fast moving consumer goods (FMCG) sector.
Input cost inflation, persistent rise in raw material price, rising fuel costs, fluctuation in the
currency, dipping industrial growth, slowing global economy together with an overall
moderating consumer sentiment might lead to a slow volume growth of FMCG segment in
2013.
The sector might take a hit of about 10 to 15 per cent in sales including the semi-urban and
rural market as the burden might be shifted to the price-conscious end consumers or else
companies will have to opt for down trading.
Based on emerging market scenario and overall macro-economic expectations the Reserve
Bank of India (RBI) may go in for a reduction in interest rates to boost the sagging economy,
improve demand momentum and investment climate.
FMCG will turn out to be the biggest beneficiary of the reduction in CRR rate.
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Revised norms for packaging of FMCG products will propel the companies to increase their
prices due to high raw material costs eating into their already stressed profit margins.
Many industry experts said that the consumption pattern will moderate as price sensitive
Indian consumers will tighten their budget and keep a close watch on their expenses and
might even switch over to cheaper variants, regional or local brands to save money.
While nearly 35 out of 100 respondents agreed that soaring inflation and rising interest rates
have been adversely impacting the margins of FMCG companies.
Growth Prospect of FMCG sector:
Large Market
According to the estimates, by 2030 India population will be around 1.450
Billion and will surpass China to become the World largest in terms of
Population. FMCG Industry which is directly related to the population is
Expected to maintain a robust growth rate
Spending Pattern
An increase is spending pattern has been witnessed in Indian FMCG market.
There is an upward trend in urban as well as rural market.
An increase in disposable income has leads to growth rate in FMCG goods.
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Changing Profile and Mind Set of Consumer
People are becoming conscious about health and hygienic. There is a change in
The mind-set of the Consumer and now looking at Money for Value rather
Than Value for Money
Advantages to the Sector:
Governmental Policy:Indian Government has enacted policies aimed at attaining international competitiveness
through lifting of the quantitative restrictions, reducing excise duties, and automatic foreign
in-vestment and food laws.
Foreign Direct Investment (FDI)Automatic investment approval (including foreign technology agreement within
specified norms), up to 100 per cent foreign equity or 100 per cent for NRI and
Overseas Corporate Bodies (OCBs) investment, is allowed for most of the food
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processing sector except malted food, alcoholic beverages and those reserved for small
scale industries (SSI).
Why is Valuation Required?
It helps us to take investment decisions.
If Estimated Value > Market Price, Buy If Estimated Value < Market Price, Dont Buy
Relative valuation is pervasive. Most valuations on Wall Street are relative valuations.
Almost 85% of equity research reports are based upon a multiple and comparable. More than 50% of all acquisition valuations are based upon multiples
The popularity of relative valuation is due below mentioned advantages of it;
It is less time and resource intensive than discounted cash flow valuation. It is easier to sell. It is easy to defend. Market Imperatives.
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The strengths of relative valuation are also its weaknesses.
The ease with which a relative valuation can be put together, pulling together amultiple and a group of comparable firms can also result in inconsistent estimates
of value where key variables such as risk, growth or cash flow potential are
ignored.
Biases in Estimating Multiples: Example: P/E becomes meaningless when we havenegative or zero EPS
Time Variation in Multiples: Multiples change over time for the entire market andfor individual sectors.
To do relative valuation, we need to identify comparable assets and obtain market values for
these assets, convert these market values into standardized values, since the absolute prices
cannot be compared. This process of standardizing creates price multiples, compare the
standardized value or multiple for the asset being analyzed to the standardized values for
comparable asset, controlling for any differences between the firms that might affect the
multiple, to judge whether the asset is under or overvalued.
Earnings Multiples
It is a term that measures some aspect of a company's financial well-being, determined by
dividing one metric by another metric. The metric in the numerator is typically larger than the
one in the denominator, because the top metric is usually supposed to be many times larger
than the bottom metric.
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Dabur:
Average Price per
share 95.03326737
No. of shares (MN) 174.2101
Mkt val. Of equity 16555.75501
As we can see that by using earnings multiples, the average price per share of Dabur is
95.033 but the market price is 132.90.So we can easily interpret that the stock is overpriced.
Value Multiples
It is a ratio used to determine the value of a company. The enterprise multiple looks at a firm
as a potential acquirer would, because it takes debt into account - an item which other
multiples like the P/E ratio do not include. Enterprise multiple is calculated as:
Marico Godrej Colgate
EV/Sales 4.52 7.98 6.23
Multiples Marico Godrej Colgate
P/E 37.10 38.23 36.70
P/S 4.20 7.75 6.08
P/CF 33.92 36.67 33.73
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EV/EBITDA 29.69 29.81 26.68
EV/EBIT 31.91 30.80 28.46
Dabur:
Average Mkt value of equity 17,559.34
No. of shares (MN) 174.2101
Per Share Price 100.7940259
The price per share of Dabur is 100.79 by using value multiple. But the market price is 132.90. So we
can easily interpret that it is overpriced.
Per Share Price 97.91
Mkt Value of equity 17057.55
Enterprise Value 17571.41
If we take the average of95.03326737 and 100.7940259, it is 97.91 and it is still overpriced.
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CALCULATION OF INTRINSIC VALUE USING THE DCF
MODEL
Formulae used:
1. Growth rate = Roce * capital employed2. ROCE= Operating profit/ capital employed3. Reinvestment rate =( Capex + change in working capital depreciation)/ operating
profit
4. Capital employed = FA+CA- CLAssumptions made:
The sales growth rate used is based on the industry average i.e. 18.08%. it hasbeen recorded above 20 % in recent years which will ultimately come down to the
in industry average of 18.35 % at the end of 5 years.
Excise duty is based on the trend seen in the past three years as a percentage ofsales.
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Other income is not based on sales so it is calculated by taking natural log. Stock adjustment has been taken at an average rate of previous 10 years. Raw material, power and fuel and manufacturing expenses are based on trend in
the percentage of sales calculated i.e. Slope taken.
Material cost increased disproportionately during the year thereby putting pressureon gross margins of the company.
Energy conservation measures taken 209 lakhs saved due to new conservationproject Dabur India adopted initiatives to increase efficiency in inventory
management; this was reflected in reduction in days of inventory. As quoted in the
annual report.
Other manufacturing expenses include: Product improvement, Increasedproductivity, Improved quality, Resulted in cost saving, Reduced Steam
consumption, Safe working condition, Healthy environment, Manufacturing and
packaging capacity enhanced, Manpower cost reduced.
Interest rate calculations are done on an average rate of 7.403%. It is assumed that dabur would like to bring down its debt equity ratio to a
comparable ratio of 0.22 that is same as that of the industry.
Depreciation has been charged using straight line method at the rate of 5.504%. The gross block in the coming years would be at the rate of 40% of the sales
amount.
Receivables and payables for the company remained at almost similar levels as inthe previous year.
The change in working capital is negative which can be interpreted as highmanagerial efficiency in their business as projected by low inventory and accounts
receivables. Dabur has enough cash to pay its bills as in when they become due,
hence maximizing their efficiency.
WACC used was calculated based on the BSE index data which helped us todetermine the Beta of the Company
Return on Market 0.12
Risk Free Rate 0.0821Beta 0.27
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cost of Equity (ke) 0.09
Cost of Debt (kd) 0.11
Growth rate for the Terminal Value calculated as below:As per 2012
G 0.050256
ROCE 0.58426
REINVESTMENTRATE 0.09
CAPITALEMPLOYED 3,556.05
RESULT:
According to the assumptions made and the DCF model used we were able to infer
the following:
Present value of
FCFF 641.8749199 537.0602033 595.5124444 694.3462092 790.336704
Terminal Value 17552.20276Total Value 20811.33325
No. Of shares 1742100854
Value per share 119.4611276
PARTICULARS SHARE PRICE(Rs.)
MARKET 132.90
DCF 119.4611276
RELATIVE 92.91
As you can see the share price of Dabur India Ltd seem to be overvalued in comparison to the
intrinsic value and also the relative value, which means that it might be suggested to either
sell or postpone buying of such securities.
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Literature Review
Intrinsic value
The actual value of a security, as opposed to its market price or book value. The intrinsic
value includes other variables such as brand name, trademarks, and copyrights that are often
difficult to calculate and sometimes not accurately reflected in the market price. One way to
look at it is that the market capitalization is the price (i.e. what investors are willing to pay for
the company) and intrinsic value is the value (i.e. what the company is really worth).
Different investors use different techniques to calculate intrinsic value
Methods of computing intrinsic value of a share
A Few Assumptions
The method of calculation that we are about to summarize relies on making some basic
assumptions about a stock and its future direction. Before beginning the calculation, you will
need to:
1.Have a specific investment time horizon in mind and2.Be able to estimate the future earnings per share over a specific time horizon.
Here are some assumptions for Dabur
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You have an investment horizon of 5 years. The company's EPS (Earnings Per Share) is currently You estimate that the company's EPS will grow at a steady rate of 18.35 % per year
over the next 5 years.
FORMULA
Forecasted Stock Price in 2017 = Earnings per Share after the 5th year * Average PE Ratio
This formula is actually fairly straightforward when you break it down. We're basically trying
to determine how much the company earns per share, and then multiply that amount by the
amount that investors are typically willing to pay for those earnings.