A STUDY ON CAPITAL STRUCTURE

With reference to FMCG companies

Dabur, Godrej, Britannia

Submitted To-Prof. Asheesh Pandey

Submitted by-Group 8
Sec-A
Group Member- Samiksha(4)
Pranjal (25)
Saloni(20)
Shweta(19)
Avinash(48)
Payal(46)

Index

TOPICS

PAGE NO:

1) Industry Overview

3-5

2) Company overview

6-11

3) Capital Structure

12-13

4) Data analysis

14-15

5) Financial leverage

16-18

6) Ratio Analysis

19-20

7) Financing Decision

21-23

8) Capital Structure Approaches

24-25

9) Findings

26

10) Recommendation

27

11) Suggestions

28

12) Annexure

29-34

Industry Overview

Introduction
FMCG goods are popularly known as consumer packaged goods. Items in this category
include all consumables (other than groceries/pulses) people buy at regular intervals. The
most common in the list are toilet soaps, detergents, shampoos, toothpaste, shaving products,
shoe polish, packaged foodstuff, and household accessories and extends to certain electronic
goods. These items are meant for daily of frequent consumption and have a high return.
Though the profit margin made on FMCG products is relatively small (more so for retailers
than the producers/suppliers), they are generally sold in large quantities; thus, the cumulative
profit on such products can be substantial. FMCG is probably the most classic case of low
margin and high volume business.

Characteristics
The following are the main characteristics of FMCGs:
From the consumers' perspective:
Frequent purchase
Low involvement (little or no effort to choose the item)
Low price
From the marketers' angle:
High volumes
Low contribution margins
Extensive distribution networks
High stock turnover

Rural set to rise

Rural areas expected to be the major driver for FMCG, as growth continues to be high in
these regions. Rural areas saw a 16 per cent, as against 12 per cent rise in urban areas. Most
companies rushed to capitalise on this, as they quickly went about increasing direct
distribution and providing better infrastructure. Companies are also working towards creating
specific products specially targeted for the rural market.
The Government of India has also been supporting the rural population with higher minimum
support prices (MSPs), loan waivers, and disbursements through the National Rural
Employment Guarantee Act (NREGA) programme. These measures have helped in reducing
poverty in rural India and given a boost to rural purchasing power.
Hence rural demand is set to rise with rising incomes and greater awareness of brands.

Urban trends
With rise in disposable incomes, mid- and high-income consumers in urban areas have
shifted their purchasing trend from essential to premium products. In response, firms have
3

started enhancing their premium products portfolio. Indian and multinational FMCG players
are leveraging India as a strategic sourcing hub for cost-competitive product development and
manufacturing to cater to international markets.

Growth
The overall fast moving consumer goods (FMCG) market is expected to increase at a
compound annual growth rate (CAGR) of 14.7 per cent to touch US$ 110.4 billion in the
period 2012-2020, with the rural FMCG market anticipated to increase at a CAGR of 17.7
per cent to US$ 100 billion during 2012-2025.
The market size of the Indian FMCG sector is expected to reach US$ 135 billion by 2020
from US$ 44.9 billion in 2013. It is also the fourth largest sector in the Indian economy and
has grown at an annual average of about 11 per cent over the last decade. Food products, the
leading market segment with 43 per cent of the overall market revenue together with personal
care at 22 per cent make up two-thirds of the sector's revenue.
The Government of India's policies and regulatory frameworks such as relaxation of license
rules and approval of 51 per cent foreign direct investment (FDI) in multi-brand and 100 per
cent in single-brand retail are some of the major growth drivers in this sector. The
government has also amended the Sugarcane Control Order, 1966, and replaced the Statutory
Minimum Price (SMP) of sugarcane with Fair and Remunerative Price (FRP) and the State
Advised Price (SAP).
There is a lot of scope for growth in the FMCG sector from rural markets with consumption
expected to grow in these areas as penetration of brands increases. Also, with rising per capita
income, which is projected to expand at a CAGR of 7.4 per cent over the period 2013-19, the
FMCG sector is anticipated to witness some major growth.

FMCG Companies in India

1. Hindustan Unilever
2. ITC Ltd.
3. Pidilite Industries
4. Amul[8]
5. Godrej Consumer Products Limited
6. Dabur India Ltd.
7. Emami
8. Colgate Palmolive India Ltd.
9. Zydus Wellness
10. Britannia
11. GlaxoSmithKline Consumer Healthcare Ltd. (India)
12. Wipro Consumer Care & Lighting Ltd.
13. Marico

Road Ahead
4

FMCG brands would need to focus on R&D and innovation as a means of growth.
Companies that continue to do well would be the ones that have a culture that promotes using
customer insights to create either the next generation of products or in some cases, new
product categories.
One area that we see global and local FMCG brands investing more in is health and wellness.
Health and wellness is a mega trend shaping consumer preferences and shopping habits and
FMCG brands are listening. Leading global and Indian food and beverage brands have
embraced this trend and are focused on creating new emerging brands in health and wellness.

Size of the consumer durables market in India

Consumer durables market is expected to double at 14.8 per cent CAGR to US$ 12.5 billion in FY15
from US$ 6.3 billion in FY10.

Market break-up of Indian FMCG industry

Food products are the leading segment, accounting for 43 per cent of the overall market in terms of

revenue.

Company Overview

Godrej
Established in 1897, the Godrej Group has its roots in India's Swadesh movement. Its
founder, Ardeshir Godrej, lawyer-turned-serial entrepreneur failed with a few businesses,
before he struck gold with the locks business that you know today. One of India's most
trusted brands, with revenues of USD 4.1 billion, Godrej enjoys the patronage of over 600
million Indians across our consumer goods, real estate, appliances, agri and many other
businesses.
Godrej Consumer Products Limited is the largest home-grown home and personal care
company in India. It is constantly innovating to delight its consumers with more exciting,
superior quality products at affordable prices.
Godrej have bold ambitions and are becoming more agile and future ready. It rank number 1
in hair colour, household insecticides and liquid detergents and number 2 in soaps. In India,
we grow up with Godrej brands - Good knight, Cinthol, Godrej Expert, Godrej No. 1 - and it
is now on its way to becoming an emerging markets FMCG leader.
In line with its 3X3 approach to international expansion, it is building a presence in 3
emerging markets (Asia, Africa, Latin America) across 3 categories (home care, personal
wash, hair care). In 2010, Godrej acquired the Indonesia based Megasari group, a leader in
household insecticides, air fresheners and baby care. With the acquisition of Rapidol, Kinky
and Frika in South Africa, and the Darling Group, a leading pan-Africa hair care company, it
has a strong presence in the fast growing African hair care market. Godrej acquired the Issue
and Argencos groups in Argentina, leaders in hair colour, in 2010, and expanded its footprint
to Chile through the acquisition of a 60 per cent stake in Cosmetica Nacional. The UK based
Keyline Brands, which it acquired in 2005, plays in hair and personal care. Godrej also have
a business in the Middle East and a strong presence across SAARC countries.

Godrej product Portfolio

Godrej portfolio of brands includes many household favourites and are constantly innovating
and looking for new and exciting ways to delight consumers.
Today, Godrej rank among the largest household insecticide and hair care players in emerging
markets. In household insecticides, they are the leader in India, the second largest player in
Indonesia and are now expanding our footprint in Africa. Godrej are the leader in hair
extensions in Africa, the number one player in hair colour in India and Sub-Saharan Africa
and among the leading players in Latin America. They rank number two in soaps in India and
are the number one player in air fresheners and wet tissues in Indonesia. We are also a leading player
in hand sanitisers and female deodorants in the United Kingdom.

Here is a selection of some of our biggest India brands across our three categories - home care, hair
care and personal care.
Hair care
Godrej expert
Godrej renew
Godrej nupur henna
Home Care

Goodnight
Hit
Ezee
Godrej aer
Personal care
No.1
Cinthol
Protekt

Britannia
The company was started in the year 1892 in Calcutta (now Kolkata) as a biscuit factory with
an initial investment of just Rs 295 (US$ 4.76). From a humble beginning, Britannia
Industries Ltd is presently one of Indias most popular food industries. The company's
offerings are spread across the spectrum with products ranging from the healthy and
economical Tiger biscuits to the more lifestyle-oriented Milkman Cheese. Having succeeded
in garnering the trust of almost one-third of India's one billion population and a strong
management at the helm, Britannia continues to dream big on its path of innovation and
quality.
Britannia strode into the 21st Century as one of India's biggest brands and the pre-eminent
food brand of the country. It was equally recognised for its innovative approach to products
and marketing: the Lagaan Match was voted India's most successful promotional activity of
the year 2001 while the delicious Britannia 50-50 Maska-Chaska became India's most
successful product launch. In 2002, Britannia's New Business Division formed a joint venture
with Fonterra, the world's second largest Dairy Company, and Britannia New Zealand Foods
Pvt. Ltd. was born. In recognition of its vision and accelerating graph, Forbes Global rated
Britannia 'One amongst the Top 200 Small Companies of the World', and The Economic
Times pegged Britannia India's 2nd Most Trusted Brand.
7

Product Portfolio
a)
b)
c)
d)
e)
f)
g)
h)
i)
j)
k)

Britannia Super Sipper offer

New Britannia Tiger
Britannia NutriChoice Oat Cookies
Britannia NutriChoice Ragi Cookies
Veg Cakes
Nutrichoice Health Starter Kit
NutriChoice 5 Grain
NutriChoice SugarOut
NutriChoice Digestive Biscuit
Treat Fruit Rollz
New Britannia Milk Bikis

Dabur
Dabur India Limited has marked its presence with significant achievements and today
commands a market leadership status. Its story of success is based on dedication to
nature, corporate and process hygiene, dynamic leadership and commitment to our
partners and stakeholders. The results of the policies and initiatives speak for
themselves.

Leading consumer goods company in India with a turnover of Rs. 5,283 Crore
(FY12)
2 major strategic business units (SBU) - Consumer Care Business and
International Business Division (IBD)
2 Subsidiary Group companies - Dabur International and NewU and several
step down subsidiaries: Dabur Nepal Pvt Ltd (Nepal), Dabur Egypt Ltd
(Egypt), Asian Consumer Care (Bangladesh), Asian Consumer Care
(Pakistan), African Consumer Care (Nigeria), Naturelle LLC (Ras Al
Khaimah-UAE), Weikfield International (UAE) and Jaquline Inc. (USA)
17 ultra-modern manufacturing units spread around the globe
Products marketed in over 60 countries
Wide and deep market penetration with 50 C&F agents, more than 5000
distributors and over 3.4 million retail outlets all over India

Consumer Care Business adresses consumer needs across the entire FMCG
spectrum through four distinct business portfolios of Personal Care, Health
Care, Home Care & Foods
12 Billion-Rupee brands: Dabur Amla, Dabur Chyawanprash, Vatika, Ral,
Dabur Red Toothpaste, Dabur Lal Dant Manjan, Babool, Hajmola, Dabur
Honey, Glucose, Fem and Odonil
Strategic positioning of Honey as food product, leading to market leadership
(over 75%) in branded honey market
Dabur Chyawanprash the largest selling Ayurvedic medicine with over 65%
market share.
Vatika has been the fastest growing hair care brand in the Middle East
Hajmola tablets in command with 60% market share of digestive tablets
category. About 2.5 crore Hajmola tablets are consumed in India every day
Leader in herbal digestives with 90% market share
Consumer Health Division (CHD) offers a range of classical Ayurvedic
medicines and Ayurvedic OTC products that deliver the age-old benefits of
Ayurveda in modern ready-to-use formats
Has more than 300 products sold through prescriptions as well as over the
counter
Major categories in traditional formulations include:
- Asav Arishtas
- Ras Rasayanas
- Churnas
- Medicated Oils
Proprietary Ayurvedic medicines developed by Dabur include:
- Nature Care Isabgol
- Madhuvaani
- Trifgol
Division also works for promotion of Ayurveda through organised community
of traditional practitioners and developing fresh batches of students
International Business Division (IBD) caters to the health and personal care
needs of customers across different international markets, spanning Nepal,
Bangladesh, the Middle East, North & West Africa, EU and the US with its
brands Dabur & Vatika .
Leveraging the 'Natural' preference among local consumers to increase share
in personal care categories
Focus markets:
- GCC
- Egypt
- Nigeria
- Bangladesh
- Nepal

Product Portfolio
1. Dabur Amla Hair Oil
2. Dabur Jasmine Hair Oil
9

3. Dabur Chyawanprakash Sugarfree

4. Dabur Chyawanprakash Special
5. Dabur Glucose D
6. Dabur Honey
7. Dabur Vatika Hair Oil
8. Dabur Pudin Hara
9. Dabur Hajmola
10. Dabur Sat Isabagol
11. Dabur Shwaasamrit

SCOPE OF THE STUDY

A study of the capital structure involves an examination of long term as well as short term
sources that a company taps in order to meet its requirements of finance. The scope of the
study is confined to the sources that FMCG companies tapped over the years under study i.e.
2010-2014.
OBJECTIVES OF THE STUDY
The project is an attempt to seek an insight into the aspects that are involved in the capital
structuring and financial decisions of the company. This project endeavours to achieve the
following objectives.
1. To Study the capital structure of FMCG companies through EBIT-EPS analysis
2. Study effectiveness of financing decision on EPS and EBIT of the firm.
3. Examining the financing trends in the FMCG for the period of 2010-2014.
4. Study debt/equity ratio of FMCG for 2010-2014.

RESEARCH METHODOLOGY AND DATA ANALYSIS

Data relating to Ultra tech cements. Has been collected through
SECONDARY SOURCES:
Published annual reports of the company for the year 2007-11.

10

DATA ANALYSIS
The collected data has been processed using the tools of
Ratio analysis
Graphical analysis
Year-year analysis
These tools access in the interpretation and understanding of the Existing scenario of the
Capital Structure.

CAPITAL STRUCTURE
The assets of a company can be financed either by increasing the owners claim or the
creditors claim. The owners claims increase when the form raises funds by issuing ordinary
shares or by retaining the earnings, the creditors claims increase by borrowing .The various
means of financing represents the financial structure of an enterprise .The financial
structure of an enterprise is shown by the left hand side (liabilities plus equity) of the balance
sheet. Traditionally, short-term borrowings are excluded from the list of methods of financing
the firms capital expenditure, and therefore, the long term claims are said to form the capital
structure of the enterprise .The capital structure is used to represent the proportionate
relationship between debt and equity .Equity includes paid-up share capital, share premium
and reserves and surplus. The financing or capital structure decision is a significant
11

managerial decision .It influences the shareholders returns and risk consequently; the market
value of share may be affected by the capital structure decision. The company will have to
plan its capital structure initially at the time of its promotion.

FACTORS AFFECTING THE CAPITAL STRUCTURE:

LEVERAGE: The use of fixed charges of funds such as preference shares, debentures and
term-loans along with equity capital structure is described as financial leverage or trading on.
Equity. The term trading on equity is used because for raising debt.
DEBT /EQUITY RATIO-Financial institutions while sanctioning long-term loans insists
that companies should generally have a debt equity ratio of 2:1 for medium and large scale
industries and 3:1 indicates that for every unit of equity the company has, it can raise 2 units
of debt. The debt-equity ratio indicates the relative proportions of capital contribution by
creditors and shareholders.
EBIT-EPS ANALYSIS-In our research for an appropriate capital structure we need to
understand how sensitive is EPS (earnings per share) to change in EBIT (earnings before
interest and taxes) under different financing alternatives.
The other factors that should be considered whenever a capital structure decision is taken are
Cost of capital
Cash flow projections of the company
Size of the company
Dilution of control
Floatation costs
CAPITAL STRUCTURE AND FIRM VALUE
Since the objective of financial management is to maximize shareholders wealth, the key
issue is: what is the relationship between capital structure and firm value? Alternatively, what
is the relationship between capital structure and cost of capital? Remember that valuation and
cost of capital are inversely related. Given a certain level of earnings, the value of the firm is
maximized when the cost of capital is minimized and vice versa. There are different views on
how capital structure influences value. Some argue that there is no relationship what so ever
between capital structure and firm value; other believe that financial leverage (i.e., the use of
debt capital) has a positive effect on firm value up to a point and negative effect
thereafter; still others contend that, other things being equal, greater the
leverage, greater the value of the firm.

12

COMPOSITION AND OBSERVATION

The sources tapped by DABUR, GODREJ, and BRITANNIA are classified into:
Shareholders funds resources
long term borrowings resources
SHAREHOLDER FUND RESOURCES: Shareholders fund consists of equity capital and
reserves and surplus.
EQUITY CAPITAL BUILD-UP
1. DABUR: From 2010 to 2014, there is an increase of 100.66% in the equity because in
the year 11-12 1501598 equity shares allotted against the options exercised by
employees pursuant to Employees Stock Option Scheme of the Company.
2. GODREJ: From 2010 to 2014, there is an increase of 4.28% in the equity.
3. BRITANNIA: From 2010 to 2014, there is an increase of 0.41% in the equity.
RESERVES AND SURPLUS
1. DABUR: From 2010 to 2014, there is an increase of 160.83% in the reserves.
2. GODREJ: From 2010 to 2014, there is an increase of 41.46% in the reserves.
3. BRITANNIA: From 2010 to 2014, there is an increase of 122.76% in the reserves.
As shown on its balance sheet, a company's capitalization is constructed from basic block of:
1. Long-term debt: By standard accounting definition, long-term debt includes
obligations that are not due to be repaid within the next 12 months. Such debt consists
mostly of bonds or similar obligations, including a great variety of notes, capital lease
obligations, and mortgage issues.

DATA ANALYSIS
YEAR 2009-2010
Performance of company (Amount in Rs.
CRS)
Dabur
Gross Revenue
Profit (Loss)
before tax
Equity dividend

Godrej

2905.05

987.21

528.62
173.6

79.98
47.64

Britannia
Total
3378.57 Expenditure
114.13 Profit after tax
59.73 Earnings per
13

Britann
Dabur Godrej ia
2325.
818.4
28
2 3218.7
433.3
3
80.93 116.51
4.99
2.55
4.99

Rs.

share Rs.
YEAR 2010-2011
Performance of company (Amount in Rs.
CRS)
Dabur

Gross Revenue
Profit (Loss)
before tax
Equity dividend
Rs.

Godrej

3391.9

1263.74

596.28

136.01

200.19

55.58

Britannia
Total
4283.52 Expenditure
193.46 Profit after tax
Earnings per
77.64 share Rs.

Dabur
2728.
36
471.3
3

Britann
Godrej ia
1035. 4005.3
76
9
133.4
3 145.29

2.71

4.2

12.16

YEAR 2011-2012
Performance of company (Amount in Rs.
CRS)
Dabur
Gross Revenue
Profit (Loss)
before tax
Equity dividend
Rs.

Godrej

3825.55

1555.31

587.53

201.05

226.47

55.64

Britannia
Total
5037.51 Expenditure
252.37 Profit after tax
Earnings per
101.53 share Rs.

Britann
Dabur Godrej ia
3158.
1256. 4699.7
74
54
5
463.2
201.5
4
6 186.74
2.66

6.35

15.63

YEAR 2012-2013
Performance of company (Amount in Rs.
CRS)
Dabur
Gross Revenue
Profit (Loss)
before tax
Equity dividend
Rs.

Godrej

4410.45

1532.53

749.67

97.16

261.44

58.69

Britannia
Total
5681.12 Expenditure
332.18 Profit after tax
Earnings per
101.66 share Rs.

Britann
Dabur Godrej ia
3569.
1347. 5254.1
14
43
2
590.9
8
96.74 233.87
3.39

2.89

19.57

YEAR 2013-2014
Performance of company (Amount in Rs.
CRS)

Gross Revenue

Dabur
Godrej
Britannia
4991.25
1652.15
6334.79 Total
14

Britann
Dabur Godrej ia
4056.
1407. 5723.3

Expenditure
Profit (Loss)
before tax
Equity dividend
Rs.

861.33

124.88

305.17

58.71

542.62 Profit after tax

Earnings per
143.91 share Rs.

68
672.1

82
119.6
9

369.83

3.85

3.57

30.84

Observation
The year 2009-10 witnessed unprecedented commodity inflation, particularly in sugar, wheat
and milk products, coupled with a fiercely competitive environment. This adverse economic
scenario and harder competition in the sector had a high adverse impact on margins and
profitability of Britannia Industries. A steep fall in ROI indicates tough times for the company
in the coming days. Moreover, the company also needs to improve its short term liquidity
situation. But in future company again started growing with the increase in sale.
On the contrary, Dabur India continued to ride on its growth path by maintaining good ROI
and even during the period of global economic recession. In 2009-10, Dabur India was
capable to boost its ROI by more than 6.00%. The company also showed good performance
in terms of maintaining both short term and long term liquidity. But, it is suggested that
Dabur India should marginally enhance its long term borrowings so as to take the benefit of
Trading on Equity.

Financial leverage
Financial leverage is the ability of the firm to use fixed financial charges to magnify the
effects of changes in EBIT on EPS i.e., financial leverage involves the use of funds obtained
at fixed cost in the hope of increasing the return to shareholder. The favourable leverage
15

occurs when the Firm earns more on the assets purchase with the funds than the fixed costs of
their use. The adverse business conditions, this fixed charge could be a burden and pulled
down the companies wealth
The variability of EBIT and EPs distinguish between two types of risk:
1. Operating risk
2. Financial risk.

OPERATING RISK: Operating risk can be defined as the variability of EBIT (or return on total assets). The
environment internal and external in which a firm operates determines the variability of
EBIT. So long as the environment is given to the firm, operating risk is an unavoidable risk.
A firm is better placed to face such risk if it can predict it with a fair degree of accuracy.

FINANCIAL RISK: For a given degree of variability of EBIT the variability of EPS and ROE increases with more
financial leverage. The variability of EPS caused by the use of financial leverage is called
financial risk. Firms exposed to same degree of operating risk can differ with respect to
financial risk when they finance their assets differently. A totally equity financed firm will
have no financial risk. But when debt is used the firm adds financial risk. Financial risk is this
avoidable risk if the firm decides not to use any debt in its capital structure.

EBIT LEVELS of DABUR

Particulars
EBIT
Change

2009

2010

2011

2012

2013

460.67

566.19
105.52

650.61
84.42

653.41
2.8

822.91
169.5

22.91%

14.91%

0.43%

25.94%

%change

2014
915.2
2
92.31
11.22
%

EPS LEVELS of DABUR

Particulars
EPS
Change
%change

2009
4.16

2010
4.99
0.83

2011
2.71
-2.28

2012
2.66
-0.05

2013
3.39
0.73

19.95%

-45.69%

-1.85%

27.44%

16

2014
3.85
0.46
13.57
%

EBIT LEVELS of GODREJ

Particulars
EBIT
Change

2009
98.76

%change

2010
108.37
9.61

2011
164.86
56.49

2012
228.24
63.38

9.73%

52.13%

38.44%

2013
2014
120.28 149.49
-107.96
29.21
24.29
-47.30%
%

EPS LEVEL of GODREJ

Particulars
EPS
Change

2009
2.25

%change

2010
2.55
0.3

2011
4.2
1.65

2012
6.35
2.15

2013
2.89
-3.46

13.33%

64.71%

51.19%

-54.49%

2014
3.57
0.68
23.53
%

EBIT LEVEL of BRITANNIA

Particulars
EBIT

2009
123.78

Change
%change

2010
151.66

2011
238.05

2012
299.69

2013
389.26

27.88

86.39

61.64

89.57

22.52%

56.96%

25.89%

29.89%

2014
606
216.7
4
55.68
%

EPS LEVEL of BRITANNIA

Particulars
EPS
Change

2009
29.44

%change

2010
48.77
19.33

2011
12.16
-36.61

2012
15.63
3.47

2013
19.57
3.94

65.66%

-75.07%

28.54%

25.21%

INTERPRETATION
Financial leverage results from the presence of fixed financial costs in a firm's income
stream. The extent of the presence of fixed financial costs in a firm's income stream is
measured by the degree of financial leverage (DFL). Financial leverage increases expected
return on equity, but it also increases the risk faced by the shareholders. The business
risk part of total risk is affected by operating leverage, whereas financial leverage affects
financial risk thus affecting the total risk of the firm. Though capital structure theories
17

2014
30.84
11.27
57.59
%

consider long term debt as a proxy for financial leverage but we measure degree of financial
leverage (DFL) as the ratio of earnings before taxes (EBT) to earnings before interest and
taxes (EBIT).

DEGREE OF FINANCIAL LEVERAGE:

The higher the quotient, greater the leverage. In Dabur case DFL is showing mixed scenario
because of completion in FMCG sector. In 2013, DFL increased i.e. 1.30 then again it
declined in 2014 to 1.23.
The EBIT level is increasing every year till 2014 in all the three companies because of boast
in the sales as FMCG industry is growing at a fast phase. The PAT is in an increasing because
of increase in sale prices and also decreases in the cost of manufacturing.

LIMITATION OF EPS AS A FINANCING-DECISION CRITERION

EPS is one of the mostly widely used measures of the companys performance in practice. As
a result of this, in choosing between debt and equity in practice, sometimes too much
attention is paid on EPS, which however, has serious limitations as a financing-decision
criterion. The major short coming of the EPS as a financing-decision criterion is that it does
not consider risk; it ignores variability about the expected value of EPS. The belief that
investors would be just concerned with the expected EPS is not well founded. Investors in
valuing the shares of the company consider both expected value and variability.

RATIO ANALYSIS
18

The financial analyst always needs certain yardsticks to evaluate the efficiency and
performance of business unit. The one of the most frequently used yardsticks is ratio analysis.
Ratio analysis involves the use of various methods for calculating and interpreting financial
ratios to assess the performance and status of the business unit. It is a tool of financial
analysis, which studies the numerical or quantitative relationship between with other variable
and such ratio value is compared with standard or norms in order to highlight the deviations
made from those standards/norms.
The primary user of financial statements are evaluating part performance and predicting
future performance and both of these are facilitated by comparison. Therefore the focus of
financial analysis is always on the crucial information contained in the financial statements.
This depends on the objectives and purpose of such analysis. The purpose of evaluating such
financial statement is different form person to person depending on its relationship.

Debt-equity
ratio
Dabur
Godrej
Britannia
Industry

2010
1.31299
2
0.80898
4
2.35036
1.49077
9

2011
0.84397
4

2012
0.82919
1

1.00776
2.27850
7
1.37674
7

1.08983
1.93717
8
1.2854

2013
0.74052
9
0.90053
7

2014
0.59751
7
1.49555
7

1.58181
1.07429
2

1.58181
1.22496
1

A high DER reveals more investment of loan capital than equity capital. The high the DER,
the more is the risk and so also the profitability. A low DER indicates more use of equity
capital than debt capital. A high DER is observed in Britannia(2.35) which means, financing
more with debt. The other companies are more efficient in management of debt- equity.

Debt euity ratio

2.5
Dabur

Godrej

1.5

Britannia
Industry

1
0.5
0
2010

2011

2012

2013

19

2014

Britannia is always above the industry as there is more investment of loan than equity. Godrej
is following the trend of industry but in the year 2014 DER of Godrej surpass the industry as
in 2014 debt increases from Rs.422 to Rs.663. Dabur is constantly decreasing which shows
co. is financially strong.

Interest Coverage Ratio

Dabur
Godrej
Britann
ia
Industr
y

Interest Coverage ratio

2010
2011
2012
2013
43.634 51.317 49.761 45.723
79
87
94
37
2.7936 3.6118 4.2360
11
5
7 2.8556
19.472 6.9393 8.8720 11.314
59
71
78
26
20.623 20.956 19.964
21.967
03
7
41

2014
48.298
19
2.5762
34
112.39
71
54.423
83

Interest coverage ratio

120
100

Dabur

80

Godrej
Britannia

60

Industry

40
20
0
2010

2011

2012

2013

2014

Interest coverage ratio, indicates the capacity of the company to meet fixed financial charges.
The reciprocal of interest coverage that is interest divided by EBIT is a measure of the firms
incoming gearing. Again by comparing the companys coverage ratio with an accepted
industry standard, the investors, can get an idea of financial risk.
How ever, this measure suffers from certain limitations. First, to determine the companys
ability to meet fixed financial obligations, it is the cash flow information, which is relevant,
not the reported earnings. During recessional economic conditions, there can be wide
disparity between the earnings and the net cash flows generated from operations. Second, this
20

ratio, when calculated on past earnings, does not provide any guide regarding the future risky
ness of the company. Third, it is only a measure of short term liquidity than leverage.
As can be observed Dabur has met the payment of interest above the industry average as
compared to Godrej and Britannia. The average interest paid by Dabur from 2010-2014 is
47.74 whereas by Godrej it is 3.21 and Britannia is 31.79.

Financing Decision
Financing strategy forms a key element for the smooth running of any organization where
flow, as a rare commodity, has to be obtained at the optimum cost and put into the wheels of
business at the right time and if not, it would lead intensely to the shut down of the business.
Financing strategies basically consists of the following components:
Mobilization
Costing
Timing/Availability
Business interests
Therefore, the strategy is to always keep sufficient availability of finance at the optimum cost
at the right time to protect the business interest of the company.
Strategies of finance mobilization can be through two sectors, that is, owners resources and
the debt resources. Each of the above categories can also be split into: Securitized resources;
and non-securities resources. Securitized resources are those who instrument of title can be
traded in the money market and non-securities resources and those, which cannot be traded in
the market.

Funding Mix of Dabur

1. Shareholders'
Funds
(a) Share Capital

2010

2011

2012

2013

2014

86.9

(b) Reserves and

Surplus
(b) Deferred Tax
Liabilities (Net)
Total

662.4
8
11.95

174.0
7
927.0
9
17.4

174.2
9
1391.
32
34.18

174.3
8
1727.
96
42.64

761.3
3

1118.
56

174.
21
1129
.06
27.1
1
1330
.38

1599.
79

1944.
98

21

2.Loan Fund
(a) Long Term
borrowings
(b) Short-term
borrowings
Total
Total (1+2)
% of S.H in C.E
% of loan fund in
Total C.E

24.27

5.51

1.14

0.84

87.5

246.5
252.0
1
1370.
57
81.61
276
18.38
724

240.7
4
241.5
8
1841.
37
86.88
042
13.11
958

44.29

111.7
7
873.1

272.
13
273.
27
1603
.65
82.9
595
17.0
405

87.19
849
12.80
151

44.29
1989.
27
97.77
356
2.226
445

Funding Mix of Godrej

1.Shareholders
Funds
(a) Share Capital
(b) Reserves And
Surplus
(c) Deferred Tax
Liabilites (Net)
Total
2. Loan Fund
(a) Long Term
Borrowings
(b) Short Term
Borrowings
Total
Total (1+2)
% of S.H in C.E
% of loan fund in
Total C.E

2010

2011

2012

2013

2014

31.76
990.9
3
31.98

31.76
1058.
38
35.92

31.76
1200.
79
35.76

33.52
1590.
6
34.38

33.12
1401.
81
39.48

1054.
67

1126.
06

1268.
31

1658.
5

1474.
41

204.1
9
343.4
2
547.6
1
1602.
28
65.82
308
34.17
692

197.7
3
115.7
3
313.4
6
1439.
52
78.22
469
21.77
531

181.1

422.3
6
445.2
6
867.6
2
2526.
12
65.65
405
34.34
595

663.2
6
675.9
4
1339.
2
2813.
61
52.40
279
47.59
721

22

94.49
275.5
9
1543.
9
82.14
975
17.85
025

Funding Mix of Britannia

(1) Shareholders
funds
(a) Share capital
(b) Reserves and
surplus
(c) Deferred tax
liabilities (net)
Total
(2).Loan Fund
(a) Long-term
borrowings
(b) Short-term
borrowings
Total
Total(1+2)
% of S.H in C.E
% of loan fund in
Total C.E

2010

2011

2012

2013

2014

23.89
372.3
6
-

23.89
427.4
1
6.23

23.89
496.1
5
8.16

23.91
612.5
13.62

23.99
829.4
7
9.16

396.2
5

457.5
3

528.2

650.0
3

862.6
2

408.1

28.15

0.41

0.34

21.51

407.7
6
23.68

429.6
1
825.8
6
47.98
029
52.01
971

431.4
4
888.9
7
51.46
743
48.53
257

28.15

189.2
4
189.6
5
839.6
8
77.41
401
22.58
599

556.3
5
94.94
024
5.059
765

0.34
862.9
6
99.96
06
0.039
399

INTERPRETATION
Dabur
The shareholder fund is at 761.33 constitutes 87.19% in total C.E in 2010-11 and loan funds
constitute 12.80% in 2010-11. The Funding Mix on an average for 5 years will be 87.97% of
shareholders Fund and 12.02% of Loan Funds. The company is trying to maintain a good
Funding Mix.

Godrej
The shareholder fund has showing an increasing trend from 2010-2014. The funding Mix on
an average for 5 years is 66.31% of shareholder fund and 33.68% of loan fund. The Loan
Fund share has seen an increasing trend as Godrej is trying to increase its product in market
and focussing on increasing its product portfolio.
Britannia
Shareholder Fund of Britannia was at 47.98% of total C.E in 2010 whereas in 2014 it was
99.96% of total C.E. Shareholder fund on an average has contributed 72.84% of total C.E. On

23

the other hand, the contribution of loan has decreased over the year. In 2010 loan fund
contributed 52.10% in total C.E whereas in 2014 it dropped down to 0.03% of total C.E.

Therefore, it can be analysed from the funding mix that the FMCG sector has a major share
of shareholder fund in their capital structure. The FMCG companies try to maintain a low
debt ratio. The companies remain on low debt because they are dealing in the product which
will be required by the customer every time irrespective of the fluctuation in the market.

THE CAPITAL STRUCTURE APPROACHES

The value of the firm depends upon its expected earnings stream and the rate used to discount
this stream. The rate used to discount earnings stream its the firms required rate of return or
the cost of capital. Thus, the capital structure decision can affect the value of the firm either
by changing the expected earnings of the firm, but it can affect the reside earnings of the
shareholders. The effect of leverage on the cost of capital is not very clear. Conflicting
opinions have been expressed on this issue. In fact, this issue is one of the most continuous
areas in the theory of finance, and perhaps more theoretical and empirical work has been
done on this subject than any other.
If leverage affects the cost of capital and the value of the firm, an optimum capital structure
would be obtained at that combination of debt and equity that maximizes the total value of
the firm or minimizes the weighted average cost of capital. The question of the existence of
24

optimum use of leverage has been put very succinctly by Ezra Solomon in the following
words.
The existence of an optimum capital structure is not accepted by all. These exist two extreme
views and middle position. David Durand identified the two extreme views the net income
and net operating approaches.

1. Net Income Approach:

Under the net income approach (NI), the cost of debt and cost of equity are assumed to be
independent to the capital structure. The weighted average cost of capital declines and the
total value of the firm rise with increased use of leverage.

2. Net Operating Income Approach:

Under the net operating income (NOI) approach, the cost of equity is assumed to increase
linearly with average. As a result, the weighted average cost of capital remains constant and
the total value of the firm also remains constant as leverage is changed.
3. Traditional Approach:
According to this approach, the cost of capital declines and the value of the firm increases
with leverage up to a prudent debt level and after reaching the optimum point, coverage cause
the cost of capital to increase and the value of the firm to decline.
Thus, if NI approach is valid, leverage is significant variable and financing decisions have an
important effect on the value of the firm. On the other hand, if the NOI approach is correct
then the financing decisions should not be a great concern to the financing manager, as it does
not matter in the valuation of the firm.
Modigliani and Miller (MM) support the NOI approach by providing logically consistent
behavioural justifications in its favour. They deny the existence of an optimum capital
structure between the two extreme views; we have the middle position or intermediate
version advocated by the traditional writers.
Thus these exists an optimum capital structure at which the cost of capital is minimum. The
logic of this view is not very sound. The MM position changes when corporate taxes are
assumed. The interest tax shield resulting from the use of debt adds to the value of the firm.
This advantage reduces the when personal income taxes are considered.

According to us, FMCG industry follows Net Operating income approach as the percentage
of total shareholder fund is showing an increasing trend. The market value of a firm depends
on its net operating income and business risk. The change in the financial leverage employed
by a firm cannot change these factors. It merely changes the distribution of income and risk
between debt and equity, without affecting the total income and risk which influence the
market value (or equivalently the average cost of capital) of the firm.
25

Findings
1) It has been found that in spite of global economic recession in recent past, Dabur India
sustained which is far better than Britannia industries. Even, Dabur India was capable to
boost its RoI .
2) More companies go under because of cash flow issues, rather than declining
profitability. Hence traditional prudence always suggests that a firm should have
sufficient cash to cover its immediate liabilities.
3) However there is a growing breed of FMCG companies that claim otherwise. Unlike
most other industries, the turnover of a FMCG company is not limited by its ability to
produce, but its ability to sell.
4) They can generate cash so quickly they actually have a negative working capital. This
happens because customers pay upfront and so rapidly, the business has no problem
raising cash.

26

5) In these companies products are delivered and sold to the customer before the company
even pays for them.
6) Hence they concentrate their resources on marketing and either outsource their
manufacturing or make a limited investment (as compared to their turnover) in plant and
machinery.
7) Therefore there is a limited room to raise funds by mortgaging the plant and machinery.
Typically a firm pledges its plant, machinery or inventory to raise the bank
loan/overdraft required to fund its operation.
8) Realizing these limitations, many companies ( Dabur) starting using their negotiating
powers over their customers and suppliers to fund their expansion in operations.
9) A negative working capital is a sign of managerial efficiency in a business with low
inventory and accounts receivable. In other situation, it is a sign a company may be
facing bankruptcy or serious financial trouble.

Recommendations
1) Indias FMCG industry will grow from $37 billion in 2013 to $49 billion in 2016.
2) Indian FMCG industry expected to grow 7% in 2014, 10% in 2015 and about 12% in
2016, taking the sales in 2016 to $49 billion.
3) Distribution growth, innovations around sachet offerings, employment rates and index
of industrial production (IIP) are key influencers of FMCG sales in India.
4) Governments policy. The India government has enacted policies aimed at attaining
international competitiveness by lifting quantitative restrictions, reducing excise
duties, and changing food laws, all of which have resulted in an environment that
fosters growth. Hundred per cent export-oriented units can be set up with government
approval, and the use of foreign brand names is now freely permitted.
5) Foreign direct investment (FDI). Automatic investment approval (including foreign
technology agreements within specified norms), up to 100 per cent foreign equity or
100 per cent investment for NRI and overseas corporate bodies (OCBs) is allowed for
most of the food processing sector except malted food, alcoholic beverages and those
reserved for small-scale industries (SSIs). There is continuous growth in net FDI
inflows.
27

6) The Indian FMCG industries are primarily seeking the implementation of the GST
(Goods & Services Tax) by April 1, 2016 in the upcoming Union Budget. Industry
captains expect fiscal measures that will spur growth of the FMCG sector in rural as
well as urban India.

Suggestions
1. The company has to maintain the optimal capital structure and leverage so that in coming

years it can contribute to the wealth of the shareholders.

2. The company has to exercise control over its outside purchases and overheads which have
effect on the profitability of the company.
3. Efficiency and competency in managing the affairs of the company should be maintained.
4. With the upcoming market opportunities, the companies show invest in R& D to find out
the key area of expansion.

28

Annexure
Balance Sheet of Britannia

29

Profit and loss statement of Britannia

30

Balance sheet of Godrej

31

Profit and loss of Godrej

32

Balance sheet of Dabur

33

Profit and loss statement of Dabur

34

35

Refrences
1)
2)
3)
4)
5)

Annual report of Dabur from 2010-14

Annual report of Britannia from 2010-14
Annual report of Godrej from 2010-14
Economic times
Fundamentals of Corporate Finance

THANK YOU

36