ssrn-3989613

Download as pdf or txt
Download as pdf or txt
You are on page 1of 16

Financial appraisal of the Fast Moving Consumer Goods (FMCG) industry

of India

By: Solmaz Husain


Abstract-

FMCG industry is one of the most important industries of the world. India‟s FMCG sector is
the fourth largest industry in India. It provides employment for more than four million people
in downstream activities. Its principal components are Household care, Personal care
and Food and Beverages. The total F.M.C.G. market is of more than Rs. 200,000
Crore. Its current growth rate is in double digit and is expected to maintain a high
growth rate. The financial performance is an indicator of the overall soundness of a
business concern. In broader sense, financial performance refers to the degree to which
financial objectives have been accomplished. It is a technique of measuring the results
of a firm's policies and operations in monetary terms. It is used to measure firm‟s overall
financial performance over a given period of time. In the current study the overall
financial performance of selected FMCG Companies of India is analysed using Ratio
Analysis and various other statistical techniques. The study takes a fresh look at the
financial performance of the FMCG sector. It will help the future investors to choose a
safe investment and to identify the growth opportunities. The scope of the study is
limited because it is based in secondary data using financial statements and reports
published by the company.

Keywords: Financial Performance, FMCG, ratio analysis, investment

Introduction-

India is one of the largest economies in the world with a population of over one billion,
in terms of purchasing power and consumer spending. A country whose middle class
populace is as big as the entire populace of USA is a market which no FMCG player can
afford to overlook. As the fruits of economic growth become available to the masses and
more people start to move up the economic strata, the Indian market only keeps on growing.
Further, with a population where the median age is only 27, consumerism is on the rise
in India with growing aspiration levels. This has been further aided by government‟s
efforts to expand financial inclusion and creation of social security nets.

Electronic copy available at: https://ssrn.com/abstract=3989613


FMCG is the fourth largest sector in Indian economy and provides employment to around 3
million people accounting for approximately 5% of the total factory employment in India.
The sector has leading multinational companies, competition between organized and
unorganized players, well established distribution network, and low operational cost. Growth
in the country‟s FMCG sector is being fuelled by improving scenario in both demand as well
as supply side.

The FMCG sector in India has grown at an average of about 11 per cent over the last decade.
India‟s vigorous economic growth and rising household incomes are expected to increase
consumer spending to US$ 4 trillion by 2025.

Rural India accounting for more than 700 million consumers and accounting for 50 per cent
of the total FMCG market, there exists huge opportunity at the so called „bottom of the
pyramid‟. The market in India is unevenly fragmented with half the market being dominated
by unbranded, unpackaged, home-made products, operating mostly in the rural markets.

FMCG sector in India-

The Indian FMCG sector is the fourth largest sector of Indian economy with a market size of
US billion. This sector has strong presence of multinational companies and is characterised
by a well-established distribution network. There is intense competition between the
organised and unorganised segments and low operational cost.

Review of literature-

The researcher and financial advisors have observed that profitability is the main factor to
analyse and improve the financial performance of the sector. Many studies have been
conducted in the field of operation and financial performance of FMCG Companies. A brief
review of some of these studies has been presented.

Tawinder and Kaur (2020) in their research paper on “Economic Slowdown: An analysis of
rural distress and informal sector” have laid a massive emphasis on the employability of the
rural population and the informal sector workers who do not have secure jobs and are major
contributors to the consumption of FMCG products. They have included the unemployment
rate of the country in order to find the relation between it and the performance of the index.

Reeti Gaur, Rajinder Kaur (2018) in their research paper on the “Effect of Firm-Specific and
macroeconomic conditions on corporate cash holding: Evidence from FMCG companies in

Electronic copy available at: https://ssrn.com/abstract=3989613


India” concluded that the FMCG industry, producing products which are reasonably low in
cost and have shorter shelf life. It maintained large cash reserves and a booming economy
help these companies to generate more income. This showed that GDP growth has a positive
influence on the cash holding of the firms. In their research, they have included the GDP
figures at current prices and test the effect on the companies listed in NIFTY.

Beaver (2017) contented that standard financial ratios can predict the financial performance
of firms; many subsequent studies have attempted to demonstrate the predictive value of
various techniques for estimating actual business performance.

Sarvanan and Abarna (2014) conducted study on liquidity analysis of selected FMCG
companies in India using ANOVA. They concluded that there is significant difference among
the absolute liquid ratios of the selected companies.

Selected FMCG companies-

Britannia Industries Limited:


Britannia Industries is one of India‟s leading food companies with a 100 year legacy and
annual revenues in excess of Rs. 9000 Cr. Britannia is among the most trusted food brands,
and manufactures India‟s favourite brands like Good Day, Tiger, Nutri Choice, Milk Bikis
and Marie Gold which are household names in India. The product portfolio includes Biscuits,
Bread, Cakes, Rusk, and Dairy products including Cheese, Beverages, Milk and Yoghurt. Its
products are available in all corners in India through 6 million retail outlets and reach to 60%
of Indian homes.

ITC Limited:

ITC's wholly-owned subsidiary and India‟s leading FMCG Company. It is leader in the
Indian paperboard and packaging industry. It has developed wide-reaching Agri Business in
India and pioneer in farmer‟s empowerment. It also has eminent hotel chain in India. ITC
InfoTech provides digital solution at the global level. ITC's new Consumer Goods
Businesses, during the last few years have established a popular portfolio of 25 world- class
Indian brands that create and retain value in India. Its world class FMCG brands including
Aashirvaad, Sunfeast, Yippee!, Bingo!, B Natural, ITC Master Chef, Fabelle, Sunbean,
Fiama, Engage, Vivel, Savlon, and others have garnered encouraging consumer franchise
within a short span of time. Most of these brands are market leaders in their segments.

Electronic copy available at: https://ssrn.com/abstract=3989613


Hindustan Unilever Limited:
HUL is a subsidiary of Unilever; HUL is India‟s largest fast-moving consumer goods
company with a history of 86 years. Nine out of ten FMCG products in Indian households use
products are from HUL. The Company is employing more than 21,000 employees and total
sales is of INR 45,311 crores (financial year 2020-21). It is largest leading suppliers of Food,
Home Care, Personal Care and Refreshment products with sales in over 200 countries and an
annual sales turnover of €53 billion in 2021.

OBJECTIVES OF THE STUDY:


 To assess the financial performance of selected companies of FMCG sector of India
in terms of profitability.
 To compare the profitability of selected companies of FMCG sector of India

RESEARCH METHODOLOGY:
The study is about profitability and financial performance of selected FMCG companies
listed in BSE. The selected Companies for the study are Britannia, HUL and ITC. This study
is based on the secondary data obtained from the Annual reports of these companies for
financial years 2014 to 2019. For more information different Journals and related Websites
are also taken into consideration as and when required for the study. The collected data is
analysed with the help of ratio analysis and ANOVA.

SOURCES OF DATA
The study is based on secondary data. Information required for the study has been collected
from the Annual Reports of Britannia Industries, ITC Ltd, and Hindustan Unilever and
different books, journal, magazines, and data collected from various websites. The study
covers years from 2014 to 2019.

TOOLS APPLIED
In this study various tools: Financial Tools – Ratio Analysis and Statistical Tools (i.e.) Mean
and ANOVA test have been used for data analysis.

Electronic copy available at: https://ssrn.com/abstract=3989613


Mean = Sum of variable / N
Standard Deviation (SD) = √ΣX 2 / N - (ΣX/N)
Coefficient of Variation (COV) = SD / Mean * 100

Performance appraisal –
Analysing a company‟s profitability is an important part of financial statement analysis.
Profitability of a company measures the ability to earn more. Profitability ratios are classified
into two main categories namely:
 Margin Ratio
 Rate of Return Ratio.
Margin Ratio: It shows the relationship between Profit and Net Sales.

Gross Margin Ratio: It shows the profit left after meeting the manufacturing expenses. It
also reflects the efficiency of production by a firm.
Gross Margin Ratio = Gross Profit / Sales

Table.1. Gross Profit Margin (%)


Year Britannia ITC Ltd HUL
Industries
2014 34.03 63.37 47.85
2015 35.31 63.16 44.94
2016 37.07 61.31 48.93
2017 38.92 62.15 48.84
2018 39.66 61.56 50.54
2019 39.96 64.66 51.42
Mean 37.49 62.70 48.75
SD 2.44 1.27 2.27
COV 0.07 0.02 0.047

The Table.1 depicts that ITC Ltd has the highest Mean Value while Britannia Industries has
lowest Mean Value in comparison to other Companies. Standard deviation of Britannia
Industries is 2.44, the highest while Coefficient of Variation of Britannia Industries is
maximum and ITC Ltd the minimum.

Electronic copy available at: https://ssrn.com/abstract=3989613


Hypothesis:
An ANOVA is statistical tool. Null hypotheses have been set and used for the analysis of
data. The null hypotheses are represented by H0. It is a negative statement which avoids
biases of investigator during data collection. It also helps in drawing unbiased and accurate
conclusion.

H0: μ1 = μ2 = μ3 (There is no significant relationship between Gross Profit Margin of the


above Companies)
H1: μ1 ≠ μ2 ≠ μ3 (There is significant relationship between Gross Profit Margin of the above
Companies)

Table.2. Gross Profit Margin - ANOVA Single Factor


SUMMARY
Groups Count Sum Average Variance
Britannia industries 5 190.92 38.184 3.84383
ITC ltd 5 312.84 62.568 1.87507
HUL 5 244.67 48.934 6.18008

Table.3. ANOVA Variation


ANOVA
Source of SS df MS F P-value F crit
Variation
Between 1493.38 2 746.6899267 188.2573 8.68E-10 3.88529383
Groups 5
Within 47.59592 12 3.966326667
Groups

Total 1540.976 14
Above analysis shows that the F-value (188.2573) is more than the table value (3.88529383)
therefore null hypothesis is rejected. Therefore it is concluded that there is significant
relationship between Gross Profit Margin of the above FMCG Companies.

Electronic copy available at: https://ssrn.com/abstract=3989613


Operating Margin Ratio: It shows the profit left after meeting the Operating expenses. It also
reflects the Operating efficiency of a firm.

Operating Margin Ratio = PBITDA/Net Sales

Table.4. Operating Profit Margin (%)


Year Britannia ITC Ltd HUL
Industries
2014 4.73 36.83 15.92
2015 5.24 38.18 16.46
2016 6.05 38.48 19.79
2017 7.96 40.08 18.99
2018 10.04 40.22 20.83
2019 13.87 42.50 19.00
Mean 7.98 39.38 18.50
SD 3.48 1.99 1.92
COV 0.44 0.05 0.10

The Table.4 depicts that ITC Ltd has the highest Mean Value while Britannia Industries has
lowest Mean Value in comparison to other FMCG Companies. Standard deviation of
Britannia Industries is 3.48, the highest while Coefficient of Variation of Britannia Industries
is maximum and ITC Ltd the minimum.

Hypothesis:
H0: μ1 = μ2 = μ3 (There is no significant relationship between Operating Profit Margin of
the above Companies)
H1: μ1 ≠ μ2 ≠ μ3 (There is significant relationship between Operating Profit Margin of the
above Companies).

Electronic copy available at: https://ssrn.com/abstract=3989613


Table.5. Operating Profit Margin - ANOVA Single Factor
SUMMARY
Groups Count Sum Average Variance
Britannia industries 5 43.16 8.632 12.01077
ITC Ltd 5 199.46 39.892 2.96732
HUL 5 95.07 19.014 2.60593

Table.6. ANOVA Variation


Source of SS df MS F P- F crit
Variation value
Between 2534.774 2 1267.387007 216.228 3.87E- 3.885293835
Groups 2 10
Within Groups 70.33608 12 5.86134

Total 2605.11 14

Above analysis shows that the F value (216.2282) is more than the table value (3.885293835)
therefore null hypothesis is rejected. Therefore it is concluded that there is significant
relationship between Operating Profit Margin of the above FMCG Companies.

Net Margin Ratio: It shows the relationship between Net profit and sales i.e. Profit left for
equity shareholders as a percentage of Net sales.
Table.7. Net Profit Margin (%)
Year Britannia ITC Ltd HUL
Industries
2014 2.92 22.52 11.52
2015 3.66 23.90 11.95
2016 4.23 24.29 14.22
2017 5.79 25.42 13.53
2018 7.39 25.14 13.69
2019 10.10 25.37 12.33

Electronic copy available at: https://ssrn.com/abstract=3989613


Mean 5.68 24.44 12.87
SD 2.69 1.12 1.08
COV 0.47 0.05 0.08

The Table.7 depicts that ITC Ltd has the highest Mean Value while Britannia Industries has
lowest Mean Value in comparison to other FMCG Companies. Standard deviation of
Britannia Industries is 2.69, the highest while Coefficient of Variation of Britannia Industries
is maximum and ITC Ltd the minimum.

Hypothesis:
H0: μ1 = μ2 = μ3 (There is no significant relationship between Net Profit Margin of the
above Companies)
H1: μ1 ≠ μ2 ≠ μ3 (There is significant relationship between Net Profit Margin of the above
Companies)

Table.8. Net Profit Margin - ANOVA Single Factor


SUMMARY
Groups Count Sum Average Variance
Britannia 5 31.17 6.234 6.78023
Industries
22.52 5 124.12 24.824 0.47303
11.52 5 65.72 13.144 0.92328

Table.9. ANOVA Variation


Source of SS Df MS F P-value F crit
Variation
Between 882.931 2 441.4655 161.9752 2.08E-09 3.885293835
Groups
Within 32.70616 12 2.725513333
Groups
Total 915.6372 14

Electronic copy available at: https://ssrn.com/abstract=3989613


Above analysis shows that the F value (161.9752) is more than the table value (3.885293835)
therefore null hypothesis is rejected. Therefore it is concluded that there is significant
relationship between Net Profit Margin of the above FMCG Companies.

Rate of Return Ratios:


It reflects the relationship between profit earned and the total investments of a firm
Return on Capital Employed (ROCE): It shows the relationship between Operating Profits
and Capital Employed.

Table.10. Return on Capital Employed - ROCE (%)


Year Britannia ITC Ltd HUL
Industries
2014 13.9 45.1 93.4
2015 19.1 47.2 99.6
2016 25.8 48.1 121.8
2017 40.0 47.7 141.6
2018 43.9 45.3 140.6
2019 46.0 45.5 108.1
Mean 31.5 46.5 117.5
CAGR (%) 27% 0.16% 3%

The Table depicts that HUL has the highest mean in terms of Return on Capital Employed
followed by ITC Ltd and Britannia Industries. The Compounded Annual Growth Rate (CAGR
%) of Britannia Industries is maximum.
Hypothesis:
H0: μ1 = μ2 = μ3 (There is no significant relationship between Return on Capital Employed
of the above Companies)
H1: μ1 ≠ μ2 ≠ μ3 (There is significant relationship between Return on Capital Employed of
the above Companies)

Electronic copy available at: https://ssrn.com/abstract=3989613


Table.11. Return on Capital Employed - ANOVA Single Factor
SUMMARY
Groups Count Sum Average Variance
13.9 5 174.8 34.96 140.663
45.1 5 233.8 46.76 1.648
93.4 5 611.7 122.34 356.138

Table.12. ANOVA Variation


ANOVA
Source of SS Df MS F P- F crit
Variation value
Between Groups 22478.07 2 11239.034 67.64404 2.92E- 3.885293835
07
Within Groups 1993.796 12 166.1496667
Total 24471.86 14

Above analysis shows that the F value (67.64404) is more than the table value (3.885293835)
therefore null hypothesis is rejected. Therefore it is concluded that there is significant
relationship between Return on Investment of the above FMCG Companies.

Earnings per Share (EPS): It shows the relationship between profit after tax and number of
equity shares outstanding

Table.13. Earnings per Share (EPS)


Year Britannia ITC Ltd HUL
Industries
2014 11.2 6.5 10.5
2015 16.7 8.0 11.9
2016 21.7 9.6 14.7
2017 33.0 11.1 16.4
2018 47.9 12.0 16.9
2019 70.1 12.3 19.0

Electronic copy available at: https://ssrn.com/abstract=3989613


Mean 33.4 9.9 14.9
CAGR (%) 44% 14% 13%

The Table depicts that Britannia Industries has the highest Mean Value while, ITC Ltd has
lowest Mean Value in comparison to other Companies. The Compounded Annual Growth
Rate (CAGR %) of Britannia Industries is maximum followed by ITC Ltd and HUL.

Hypothesis:
H0: μ1 = μ2 = μ3 (There is no significant relationship between Earnings per share of the
above Companies)
H1: μ1 ≠ μ2 ≠ μ3 (There is significant relationship between Earnings per share of the above
Companies)
Table.14. Earnings per Share (EPS) - ANOVA Single Factor
SUMMARY
Groups Count Sum Average Variance
Britannia 5 189.4 37.88 468.182
Industries
ITC LTD 5 53 10.6 3.215
HUL 5 78.9 15.78 7.057

Table.15. ANOVA Variation


Source of SS Df MS F P-value F crit
Variation
Between Groups 2099.06 2 1049.534 6.58078 0.01176 3.88529383
8 3 7 5
Within Groups 1913.81 12 159.484666
6 7
Total 4012.88 14
4

Electronic copy available at: https://ssrn.com/abstract=3989613


Above analysis shows that the F value (6.580783) is more than the table value (3.885293835)
therefore null hypothesis is rejected. Therefore it is concluded that there is significant
relationship between Earnings per share of the above FMCG Companies.

Debt–Asset Ratio: It measures the total Debt of a company as a percentage of its total Capital
Employed.

Table.16. Debt –Asset Ratio


Year Britannia ITC Ltd HUL
Industries
2014 0.66 0.07 0.25
2015 0.60 0.06 0.22
2016 0.41 0.07 0.30
2017 0.16 0.06 0.27
2018 0.11 0.06 0.23
2019 0.07 0.06 0.29
Mean 0.34 0.06 0.26
CARG (%) -35% -0.96% 3.4%

The Table.17 depicts that Britannia Industries has the highest Mean Value while, ITC Ltd has
lowest Mean Value in comparison to other Companies. The Compounded Annual Growth
Rate (CAGR %) of all FMCG Companies are Negative except HUL.

Hypothesis:
H0: μ1 = μ2 = μ3 (There is no significant relationship between Debt–Asset Ratio of the
above Companies)
H1: μ1 ≠ μ2 ≠ μ3 (There is significant relationship between Debt–Asset Ratio of the above
Companies)

Electronic copy available at: https://ssrn.com/abstract=3989613


Table.17. Debt Asset Ratio -ANOVA Single Factor
SUMMARY
Groups Count Sum Average Variance
0.66 5 1.35 0.27 0.05155
0.07 5 0.31 0.062 0.00002
0.25 5 1.31 0.262 0.00127

Table.18. ANOVA: Variation


Source of SS df MS F P-value F crit
Variation
Between 0.13888 2 0.06944 3.942468 0.048299 3.885293835
Groups
Within 0.21136 12 0.017613333
Groups
Total 0.35024 14

Above analysis shows that the F value (3.942468) is more than the table value (3.885293835)
therefore null hypothesis is rejected. Therefore it is concluded that there is significant
relationship between Debt–Asset Ratio of the above FMCG Companies.

CONCLUSION-
The current study on five leading FMCG companies has been conducted to examine the
profitability, liquidity and sustainability of the Leading FMCG Companies by using Ratio
Analysis during the period 2014 to 2019 (six years). The study reveals that:
 In terms of Margin Ratios: Gross Profit, Operating Profit and Net Profit ITC are in the
top position.
 In terms of Rate of Return Ratios: Return on Capital Employed HUL is on the top
position.
 Structural Ratios include both Leverage and Coverage Ratios, In terms of Leverage
Britannia is in the top position for both Debt Equity and Debt–Asset Ratios.

Electronic copy available at: https://ssrn.com/abstract=3989613


 In terms of Interest Coverage ITC is in the top position. Under Valuation Ratios:
Britannia is in the top position in terms of Earnings per Share while HUL in Dividend
per Share and min Price Earnings Ratio.
 Composite Performance shows that ITC is in better position in comparison to other
FMCG Firms.
 The study depicted that though ranking of ratios are different, but there is no
statistically significant difference between the financial ratios.

Limitations of the study-


The main limitations of the study are as follows:
I. The study is related to FMCG Sector of India only.
II. The study is based on secondary data derived from annual reports as well as web-sites of
selected FMCG units.
III. This study is restricted to 6 years and only three units as compared to population the
sample size is too small. Hence results of the study cannot be generalized.
IV. The ratio analysis has its own limitations. The same also applies to the present study.

REFERENCES
Alayande, S. A., & Adekunle, B. K. (2015). An overview and application of discriminant
analysis in data analysis. Journal of Mathematics, 11(1), 12–15.
Almomani, M. A. (2016). The Ability of Traditional and Modern Performance Indicators in
Interpreting the Phenomenon of Earnings Management: Evidence Manufacturing Firms in
Amman Stock Exchange. Asian Journal of Finance & Accounting, 8(1), 77–99.
Kothari C. R., “Research Methodology Methods & Techniques”, Second Edition, New Delhi,
New Age International publisher, 2004.
K. Battacharyya Asish, “Introduction to Financial Statement Analysis”, Elsevier, 2009.
D. H. Kantilal, “Financial Analysis of Selected Pharmaceutical companies in India with
Special Reference to Gross Profit to Sales Ratio”, Indian Journal of AppliedResearch, Vol. 2,
No. 2, pp. 5-6, 2014.
William H. Beaver, “Financial Ratios as Predictors of Failure”, Journal of Accounting
Research, Vol. 4, pp. 71-111, 1966.
Prasanna Chandra, “Financial Management Theory and Practice”, 9th Edition, McGraw-
Hill, 2015

Electronic copy available at: https://ssrn.com/abstract=3989613


Annual Reports of Britannia Industries Limited
Annual Reports of Hindustan Unilever Limited
Annual Reports of Indian Tobacco Company

Electronic copy available at: https://ssrn.com/abstract=3989613

You might also like