INTRODUCTION

Fundamental analysis is the cornerstone of investing. In fact, some would say that you aren't
really investing if you aren't performing fundamental analysis. Because the subject is so broad,
however, it's tough to know where to start. There are an endless number of investment strategies
that are very different from each other, yet almost all use the fundamentals. The biggest part of
fundamental analysis involves delving into the financial statements.

MEANING

Fundamental analysis (FA) is a method of measuring a security's intrinsic value by examining

related economic and financial factors. Fundamental analysts study anything that can affect the
security's value, from macroeconomic factors such as the state of the economy and industry
conditions to microeconomic factors like the effectiveness of the company's management.

The end goal is to arrive at a number that an investor can compare with a security's current price
to see whether the security is undervalued or overvalued.

THE CONCEPT OF INTRINSIC VALUE

Intrinsic value is a measure of what an asset is worth. This measure is arrived at by means of an
objective calculation or complex financial model, rather than using the currently trading market
price of that asset. There is no universal standard for calculating the intrinsic value of a company
but financial analysts build valuation models based on aspects of a business that include
qualitative, quantitative and perceptual factors. The intrinsic value of a company is a range of
values rather than a single value because making future estimates about the price of security
from historical data is a difficult task. Therefore it is better to consider intrinsic value as a range
rather than a single absolute value. So the purpose is to compare the intrinsic value with the
market value of the security and to determine whether the security is underpriced, overpriced or
fairly priced.

Overpriced = Market Value > Intrinsic Value

Underpriced = Market Value < Intrinsic Value

Fair Priced= Market Value = Intrinsic Value

 BENEFITS OF FUNDAMENTAL ANALYSIS

1. Long Term Trends

Fundamental analysis is good for long term investments based on long term trends, very long
term. The ability to identify long term economic, demographic, technological or consumer trends
can benefit patient investors who pick the right industry groups or companies.

2. Value Spotting

Sound fundamental analysis will help identify companies which represent good value. Some of
the big investors think long term and value. Graham and Dodd, Warren Buffett and John Neff are
seen as the champions of value investing. Fundamental analysis can uncover companies with
valuable assets, a strong balance sheet, stable earnings and staying power.

3. Business Insights

One of the most obvious, but less tangible, rewards of the fundamental analysis is development
of a thorough understanding of the business. After taking so much pain in researching the
company, an investor will be familiar with the key revenue and profit drivers behind the
company. Earnings and earnings expectation can be potent drivers of equity prices.

A good understanding can help investors avoid companies that are prone to shortfalls and
identify those that continue to deliver. In addition to understanding the business, fundamental
analysis allows investors to develop the understanding of key value drivers and companies
within an industry. A stock’s price is heavily influenced by its industry groups. By studying
these groups, investors can better position themselves to identify opportunities that are high-risk
(tech), low risk(utilities), growth-oriented (computers), value driven (oil), non cyclical
(consumer staples), cyclical (transportation) or income oriented (high yield).
4. Helps in knowing who’s who

Stocks move as a group. By understanding a company’s business, investors can better position
themselves to categorize stocks within their relevant industry group. Business can change rapidly
and with it the revenue mix of the company.

PROCESS OF FUNDAMENTAL ANALYSIS

The process of fundamental analysis can be divided into 4 stages:

1. Company Analysis

Company analysis is a process carried out by investors to evaluate securities, collecting info
related to the company’s profile, products and services as well as profitability. A company
analysis incorporates basic info about the company, like the mission statement and apparition
and the goals and values. During the process of company analysis, an investor also considers
the company’s history, focusing on events which have contributed in shaping the company.
Also, a company analysis looks into the goods and services offered by the company. If the
company is involved in manufacturing activities, the analysis studies the products produced
by the company and also analyzes the demand and quality of these products. Conversely, if it
is a service business, the investor studies the services put forward.

The process of conducting a company analysis involves the following steps:

 The primary step is to determine the type of analysis which would work best for the
company.
 Research well about the methods for analysis. In order to perform a company
analysis, it is important to understand the expected outcome for doing so. The analysis
should provide answer about what is done right and wrong on the basis of a thorough
evaluation. It is, therefore, important6 to make the right choice for the analysis methods.
 The next step involves implementing the selected method for conducting the
financial analysis. It is important for the analysis to include internal and external factors
affecting the business.
  As a next step, all the major findings should be supported by use of statistics.
 The final step involves reviewing the results. The weaknesses are then attempted to
be corrected. The company analysis is used in concluding issues and determining the
possible solutions. The company analysis is conducted to provide a picture of the company
at a specific time, thus providing the best way of enhancing a company, internally as well as
externally.
The common techniques used in company analysis are financial statement analysis and ratio
analysis which will be discussed in research methodology segment of this project.

2. Industry Analysis
Industry analysis is an assessment of the economic and financial condition and prospects of a
given industry of the economy. Industry analysis serves to provide an investor with a
judgment about how well companies in the Industry are expected to perform. Industry
analysis is typically employed by investors who specialize in a particular Industry, or who
use a top-down or Industry rotation approach to investing.
How Sector Analysis Works:
Sector analysis is based on the premise that certain sectors perform better during different
stages of the business cycle. The business cycle refers to the up and down changes in
economic activity that occur in an economy over time. The business cycle consists
of expansions, which are periods of economic growth, and contractions, which are periods of
economic decline.

Early in the business cycle during the expansion phase, for example, interest rates are low
and growth is beginning to pick up. During this stage, investors or analysts who do a sector
analysis would focus their research on companies that benefit from low interest rates and
increased borrowing. These companies often perform well during periods of economic
growth. These include companies in the financial and consumer discretionary sectors.

Late in an economic cycle, the economy contracts and growth slows. Investors and analysts
will turn their attention to researching defensive sectors, such as utilities and
telecommunication services. These sectors often outperform during economic downturns.
3. Economic Analysis
Economic analysis involves assessing or examining topics or issues from an economist’s
perspective. Economic analysis is the study of economic systems. It may also be a study of a
production process or an industry. The analysis aims to determine how effectively the
economy or something within it is operating. For example, an economic analysis of a
company focuses mainly on how much profit it is making.

Economic analysis can be divided into 2 parts:

 Microeconomic Analysis

Microeconomics examines the most basic of economic transactions by focusing on

behavior by individuals. It is assumed that individuals always act with economic
rationality; it is further surmised that companies make decisions that will maximize
profits. It relates to the economic factors of a company.

 Macroeconomic Analysis

The macroeconomic analysis tries to study the broader economic factors such as GDP
growth rate, inflation rate, fiscal account deficit or the industrial output of the economy to
understand the general conditions of the market.

The above mentioned process can be done through two approach:

1. Top-Down Approach

Top-down analysis generally refers to using comprehensive factors as a basis for decision

making. The top-down approach will seek to identify the big picture and all of its components.
These components will usually be the driving force for the end goal. This approach starts with
analysis at economy level followed by industry level and company level.
2. Bottom-Up Approach

The bottom-up analysis takes a completely different approach. Generally, the bottom-up

approach will focus its analysis on specific characteristics and micro attributes of an individual
stock. In bottom-up investing concentration is on business-by-business or Industry-by-
Industry fundamentals. Financial analysts start the analysis first at company level then moving
forward to industry level and economy level.

Fundamentals: Quantitative and Qualitative

The fundamental analysis can be defined as "researching the fundamentals", but that doesn't tell
you a whole lot unless you know what fundamentals are. As we mentioned in the introduction,
the big problem with defining fundamentals is that it can include anything related to the
economic well-being of a company. Obvious items include things like revenue and profit, but
fundamentals also include everything from a company's market share to the quality of its
management.

The various fundamental factors can be grouped into two categories: quantitative and qualitative.
The financial meaning of these terms isn't all that different from their regular definitions. Here is
how the MSN Encarta dictionary defines the terms:

• Quantitative – capable of being measured or expressed in numerical terms.

• Qualitative – related to or based on the quality or character of something, often as

opposed to its size or quantity.

In the context of the company, quantitative fundamentals are numeric, measurable

characteristics of a business. It's easy to see how the biggest source of quantitative data is
financial statements. You can measure revenue, profit, assets, and more with great precision.

Turning to qualitative fundamentals, these are the less tangible factors surrounding a business -
things such as the quality of a company's board members and key executives, its brand name
recognition, patents or proprietary technology.

Quantitative Meets Qualitative

Neither qualitative nor quantitative analysis is inherently better than the other. Instead, many
analysts consider qualitative factors in conjunction with the hard, quantitative factors. Take the
Coca-Cola Company, for example. When examining its stock, an analyst might look at the
stock's annual dividend payout, earnings per share, P/E ratio and many other quantitative factors.
However, no analysis of Coca-Cola would be complete without taking into account its brand
recognition. Anybody can start a company that sells sugar and water, but few companies on earth
are recognized by billions of people.

FUNDAMENTAL Vs TECHNICAL Analysis

Analyzing fundamentals such as earnings, cash flow, and assets, is useful in determining buyout
and liquidation value of a company. Growth models can be made to gauge potential
accumulation in the worth of the company. The difficulty is in trying to bridge this information
to the market price of the shares, whereas the technical analyst often interprets the data by
studying a chart. He may look for price patterns, trends, conflicting signals, or slight changes in
buying momentum. Determining the success of technical analysis is very difficult due to the
subjective nature of this practice. Ten technical analysts can examine the same chart and have
differing opinions of how and when the price will move. Many famous technical analysts, such
as George C. Lane, have little written about their personal successes using such techniques.
Technical analysis says nothing of a company’s finances; it attempts to get inside the head of the
investor. Fundamental analysts will try to figure out what a stock is really worth, versus what it
is being traded at. Technical analysts will attempt to gauge the current emotional state of the
buyers to forecast if further buying or selling is likely.
 CRITICISMS OF FUNDAMENTAL ANALYSIS

The biggest criticisms of fundamental analysis come primarily from two groups: proponents of
technical analysis and believers of the "efficient market hypothesis". Put simply, technical
analysts base their investments (or, more precisely, their trades) solely on the price and volume
movements of securities. Using charts and a number of other tools, they trade on momentum, not
caring about the fundamentals. While it is possible to use both techniques in combination, one of
the basic tenets of technical analysis is that the market discounts everything. Accordingly, all
news about a company already is priced into a stock, and therefore a stock's price movements
give more insight than the underlying fundamental factors of the business itself. Followers of the
efficient market hypothesis, however, are usually in disagreement with both fundamental and
technical analysts. The efficient market hypothesis contends that it is essentially impossible to
produce market-beating returns in the long run, through either fundamental or technical analysis.
The rationale for this argument is that, since the market efficiently prices all stocks on an
ongoing basis, any opportunities for excess returns derived from fundamental (or technical)
analysis would be almost immediately whittled away by the market's many participants, making
it impossible for anyone to meaningfully outperform the market over the long term.
 VALUATION

Merely knowing the financial health of a company is not enough an analyst also has to know the
right price at which the share should be bought which is calculated in valuation part.

What is Valuation?

Valuation is the analytical process of determining the current (or projected) worth of an asset or a
company. There are many techniques used for doing a valuation. An analyst placing a value on a
company looks at the business's management, the composition of its capital structure, the
prospect of future earnings, and the market value of its assets, among other metrics.

What does Valuation tell?

A valuation can be useful when trying to determine the fair value of a security, which is
determined by what a buyer is willing to pay a seller, assuming both parties enter the transaction
willingly. When a security trades on an exchange, buyers and sellers determine the market
value of a stock or bond.The concept of intrinsic value, however, refers to the perceived value of
a security based on future earnings or some other company attribute unrelated to the market price
of a security. -That's where valuation comes into play. Analysts do a valuation to determine
whether a company or asset is overvalued or undervalued by the market.

A brief summary of Valuation Models:

There are mainly 3 types of valuation models:

1. Multiples Valuation Model

In multiples valuation model also called trading multiples the intrinsic value is calculated by
estimating the trading multiples of the company for future period. Some of the multiples that can
be projected are P/E, EV/EBITDA. Multiples of EBITDA are the most common valuation
method.

2. Precedent Transactions

Precedent transactions analysis is another form of relative valuation where you compare the
company in question to other businesses that have recently been sold or acquired in the same
industry. These transaction values include the take-over premium included in the price for which
they were acquired.

These values represent the en bloc value of a business. They are useful for M&A transactions,
but can easily become stale-dated and no longer reflective of the current market as time passes.
They are less commonly used than Comps or market trading multiples.

3. Absolute Valuation Models

Discounted Cash Flow Analysis

When we talk about absolute valuation models we are generally talking about Discounted Cash
Flow Model (DCF). The DCF analysis is an intrinsic value approach where an analyst forecast’s
the business’ unlevered free cash flow into the future and discounts it back to today at the firm’s
Weighted Average Cost of Captial (WACC).

A DCF analysis is performed by building a financial model in Excel and requires an extensive
amount of detail and analysis.  It is the most detailed of the three approaches, requires the most
assumptions, and often produces the highest value. A common variant of Discounted Cash Flow
Model (DCF) is Discounted Dividend Model (DDM)

REVIEW OF LITERATURE

Benjamin Graham (1934) in his groundbreaking book “Security Analysis” has defined
fundamental analysis and provided quantitative and qualitative methods of finding out the
intrinsic value of the company.

Grewal S.S and Navjot Grewall (1984) revealed some basic investment rules and rules for
selling shares. They warned the investors not to buy unlisted shares, as Stock Exchanges do not
permit trading in unlisted shares. Another rule that they specify is not to buy inactive shares, ie,
shares in which transactions take place rarely. The main reason why shares are inactive is that
there are no buyers for them. They are mostly shares of companies, which are not doing well.

Preethi Singh3 (1986) disclosed the basic rules for selecting the company to invest in. She
opined that understanding and measuring return md risk is fundamental to the investment
process. According to her, most investors are 'risk averse'. To have a higher return the investor
has to face greater risks.

Yasaswy J.N. (1993) evaluated the quantum of risks involved in different types of stocks.
Defensive stocks are low risk stocks and hence the returns are relatively low but steady. Cyclical
stocks involve higher risks and hence the rewards are higher when compared to the growth
stocks. Growth stocks belong to the medium risk category and they offer medium returns which
are much better. than defensive stocks, but less than the cyclical stocks. The market price of
growth stocks does fluctuate, sometimes even violently during short periods of boom and bust.
He emphasised the financial and organisational strength of growth stocks, which recover soon,
though they may hit bad patches once in a way.

Lucio Cassia, Silvio Vismara, Andrea Plati (2007) undertook the study “Equity valuation
using DCF: A theoretical analysis of Long Term Hypothesis” and has concluded that the
enterprise value of the company is sensitive to variations of the perpetual growth rate. It also
concluded that the DCF does not reflect directly the hypothesis over the operating performance
of the firm in every single year of the forecast.

Ahmed. S. Wafi, Hassan Hassan, Adel Mabrouk (2015) in their research titled “Fundamental
Analysis Models in Financial Markets” attempted to analyse different valuation models such as
precedent transaction models, relative valuation models, and income-based models and find out
their applicability

Kanchan Naidu, Rijuta Joshi(2018) in their study titled “ Impact of Qualitative Fundamental
Analysis on Intrinsic Value of a Share ” has defined 5 key metrics for evaluating the qualitative
performance of the company.
 Research Methodology

Research is an intellectual activity. It brings out new knowledge. It is also responsible for
correcting present mistakes, removing existing misconceptions and adding new learning to the
existing fund of knowledge. Research is directed towards the solution of a problem.

J. FRANCIS RUMMEL defined Research "Research is an endeavor (attempt) to discover,

develop and verify knowledge. It is an intellectual process that has developed over hundreds of
years, ever changing in purpose and for always researching of truth".

Research Design

RESEARCH TYPE

Analytical Research

Analytical research is a specific type of research that involves critical thinking skills and
the evaluation of facts and information relative to the research being conducted.

Need of the Study

The study is undertaken for understanding how fundamental analysis is used to calculate the
intrinsic value of the company by applying various tools and techniques.

Objectives of the study

To identify key fundamental factors according to their relative importance towards equity share prices

To understand the degree of competition in FMCG industry.

To find out the intrinsic value of the common stock of Hindustan Unilever and compare it to the
market price of the same.

To understand how the economy has performed in the past decade and its impact on Indian stock
market.

METHODS OF DATA COLLECTION

Data has been collected through secondary sources and has been further modified according to
the needs of the study.

Secondary Data

Secondary data refers to data that have already been collected for some other purpose. Yet, such
data may be very useful for one’s research purpose. Common sources of secondary data
include censuses, information collected by government departments, organizational records, and
data that was originally collected for other research purposes. Secondary data analysis can save
time that would otherwise be spent collecting data and, particularly in the case of quantitative
data, can provide larger and higher-quality databases that would be unfeasible for any individual
researcher to collect on their own.

SCOPE OF THE STUDY

The scope of the study is only limited to one country, one Industry, and a single company. For
Economic analysis, only India has been taken into consideration. The Industry analysis is only
limited to the extent of the FMCG Industry which is again selected based on the non-cyclical
nature of this Industry. The company analysis is only limited to a single company.which is
compared to 3 other companies to find fair value of the firm.

COLLECTION AND CONVERSION OF DATA

Data has been collected through secondary sources. Most of the data is historical. Previous five
years data has been collected for this project. The data has been collected from company annual
reports, historical data from NSE India, companies website, broking firms such as Moneycontrol,
Morningstar India, Economic Times, Financial Express and Bloomberg.

TREATMENT OF DATA

The study has been divided into 4 parts i.e Economic Analysis, Industry Analysis, Company
Analysis and Valuation.
  Economic Analysis:

Indicators used in economic analysis

I. Real GDP growth rate

Real gross domestic product (GDP) is an inflation-adjusted measure that reflects the value of all
goods and services produced by an economy in a given year (expressed in base-year prices) and
is often referred to as "constant-price," "inflation-corrected", or "constant dollar" GDP.

Real GDP = Nominal GDP ÷ R

where:

R = GDP Deflator

II. Inflation (CPI) growth change

Consumer Price Index or CPI as it is commonly called is an index measuring retail

inflation in the economy by collecting the change in prices of most common goods and
services. The Reserve Bank of India and other statistical agencies study CPI so as to understand
the price change of various commodities and keep a tab on inflation. CPI is also a helpful pointer
in understanding the real value of wages, salaries and pensions, the purchasing power of a
country’s currency; and regulating prices.

Cost of Market Basket ∈a given year

Inflation (CPI) = *100
Cost of Market basket ∈base year

Where:
Base Year ( India) = 2011-12
III. Current Account Balance (% of GDP)

 The current account represents a country's foreign transactions and, like the capital account, is a

component of a country's balance of payments (BOP).

CAB = (X-M) + (NY+ NCT)

CAB
CAB (% of GDP) = ∗100
GDP

Where:

X = Exports of goods and services

M = Imports of goods and services

NY= Net Income abroad

IV. Fiscal Balance (% of GDP)

Fiscal balance, sometimes also referred to as government budget balance, is calculated as the
difference between a government’s revenues (taxes and proceeds from asset sales) and its
expenditures. It is often expressed as a ratio of Gross Domestic Product (GDP). If the balance
is positive, the government has a surplus (it spends less than it receives). If the balance is
negative, the government has a deficit (it spends more than it receives). Fiscal balance as a
percentage of GDP is used as an instrument to measure a government’s ability to meet its
financing needs and to ensure good management of public finances. 

Fiscal Balance = Government Revenue- Government

Expenditure

Fiscal Balance
Fiscal Balance (% of GDP) = *100
GDP
V. Investment (% change)

The investment of the country is total amount of investment in the country.

 Industry Analysis

I. Economic Cycle Analysis

The economic cycle is the fluctuation of the economy between periods of expansion (growth)
and contraction (recession). Factors such as gross domestic product (GDP), interest rates, total
employment, and consumer spending, can help to determine the current stage of the economic
cycle.

How the Economic Cycle Works

The four stages of the economic cycle are also referred to as the business cycle. These four
stages are expansion, peak, contraction, and trough.

 During the expansion phase, the economy experiences relatively rapid growth, interest rates
tend to be low, production increases, and inflationary pressures build.

 The peak of a cycle is reached when growth hits its maximum rate. Peak growth typically
creates some imbalances in the economy that need to be corrected.

 This correction occurs through a period of contraction when growth slows, employment
falls, and prices stagnate.

 The trough of the cycle is reached when the economy hits a low point and growth begins to
recover.

II. Porter’s Five Forces

 Porter's Five Forces is a model that identifies and analyzes five competitive forces that shape
every industry and helps determine an industry's weaknesses and strengths. Five Forces
analysis is frequently used to identify an industry's structure to determine corporate strategy.
Porter's model can be applied to any segment of the economy to understand the level of
competition within the industry and enhance a company's long-term profitability. The Five
Forces model is named after Harvard Business School professor, Michael E. Porter.

Porter’s Five Forces Are:

i. Competition in the industry

The first of the five forces refers to the number of competitors and their ability to undercut a
company. The larger the number of competitors, along with the number of equivalent
products and services they offer, the lesser the power of a company. Suppliers and buyers
seek out a company's competition if they are able to offer a better deal or lower prices.
Conversely, when competitive rivalry is low, a company has greater power to charge higher
prices and set the terms of deals to achieve higher sales and profits.

ii. Power of customers

The ability that customers have to drive prices lower or their level of power is one of the
five forces. It is affected by how many buyers or customers a company has, how
significant each customer is, and how much it would cost a company to find new
customers or markets for its output. A smaller and more powerful client base means that
each customer has more power to negotiate for lower prices and better deals. A company
that has many, smaller, independent customers will have an easier time charging higher
prices to increase profitability.

iii. Power of suppliers

 The next factor in the five forces model addresses how easily suppliers can drive up the
cost of inputs. It is affected by the number of suppliers of key inputs of a good or service,
how unique these inputs are, and how much it would cost a company to switch to another
supplier. The fewer suppliers to an industry, the more a company would depend on a
supplier. As a result, the supplier has more power and can drive up input costs and push
for other advantages in trade. On the other hand, when there are many suppliers or low
switching costs between rival suppliers, a company can keep its input costs lower and
enhance its profits.

iv. Threat of substitute products

The last of the five forces focuses on substitutes. Substitute goods or services that can be
used in place of a company's products or services pose a threat. Companies that produce
goods or services for which there are no close substitutes will have more power to
increase prices and lock in favorable terms. When close substitutes are available,
customers will have the option to forgo buying a company's product, and a company's
power can be weakened.

v. Potential of new entrants into the industry

A company's power is also affected by the force of new entrants into its market. The less
time and money it costs for a competitor to enter a company's market and be an effective
competitor, the more an established company's position could be significantly weakened.
An industry with strong barriers to entry is ideal for existing companies within that
industry since the company would be able to charge higher prices and negotiate better
terms.

 Company Analysis

Qualitative Fundamental Analysis

Fundamental analysis seeks to determine the intrinsic value of a company's stock. But since
qualitative factors, by definition, represent aspects of a company's business that are difficult or
 impossible to quantify, incorporating that kind of information into a pricing evaluation can be
quite difficult. Therefore, some of the qualitative factors that have been looked at are mentioned
below:

Business Model

Supply Chain

Economic Moat

Management Analysis

Shareholding Pattern

Corporate Governance

Quantitative Fundamental Analysis

I. Key Financial Highlights

Under this section some of the key points from the financial statements i.e. income statement,
position statement and the cash flow statement of the company have been analysed on the year
on year growth basis to track their growth pattern and further, this analysis has been used to
evaluate the overall financial health f the company.

Critical Components:

 Ratio Analysis

I. Liquidity Ratios
 The liquidity ratios are a result of dividing cash and other liquid assets by the short term
borrowings and current liabilities. They show the number of times the short term debt
obligations are covered by the cash and liquid assets.

i. Current Ratio

It is a firm’s liquidity ratio that measures the ability of the firm to meet its short term
obligation. It shows the relationship of the current asset with current liabilities in the firm.

Current Assets
Current Ratio =
Current Liabilities

Generally, the current ratio of 2:1 is considered ideal but it also depends on the industry in
which the companies operate.

ii. Quick Ratio

It measures the firm’s ability to convert its current assets quickly into cash in order to meet
its short term obligation. It is the proportion of quick asset and current liabilities.

Quick Assets
Quick Ratio =
Current Liabilities

Where:

Quick assets = Current Assets – (Inventory – Prepaid Expenses)

II. Solvency
Ratios
The solvency ratio is a key metric used to measure an enterprise's ability to meet its debt
obligations and is used often by prospective business lenders. The solvency ratio indicates
whether a company's cash flow is sufficient to meet its short-and long-term liabilities
Debt to Equity Ratio
Debt to Equity Ratio is a long term solvency ratio that indicates the proportion of borrowed
funds and owner’s capital in financing the assets of a firm. Debt to equity ratio is also known
as “external-internal equity ratio”.
Both a very high and very low debt to equity ratios is not desirable.

Total Debt
Debt to Equity Ratio =
Shareholde r ' s Equity

The interest coverage ratio is a debt ratio used to determine how easily a company can pay
interest on its outstanding debt. The interest coverage ratio measures how many times a
company can cover its current interest payment with its available earnings.

EBIT
Interest Coverage Ratio =
Interest Expense

Profitability Ratios
Profitability ratios are a class of financial metrics that are used to assess a
business's ability to generate earnings relative to its revenue, operating costs,
balance sheet assets, and shareholders' equity over time, using data from a
specific point in time.

Operating Profit Margin

The operating margin measures how much profit a company makes on a
dollar of sales, after paying for variable costs of production, such as wages
and raw materials, but before paying interest or tax. It is calculated by dividing
a company’s operating profit by its net sales.

Operating Income
Operating Profit Margin =
Net Sales
 A company’s operating margin, also known as return on sales, is a good
indicator of how well it is being managed and how risky it is. It shows the
proportion of revenues that are available to cover non-operating costs

Net Profit Margin

It is a firm’s profitability ratio expressed in a percentage form that measures how much of each
rupee of revenue earned by company is actually converted in to earnings. It is the proportion of net
profit and net sales of the firm.

Net Income
Net Profit Margin=¿
Net Sales

It is a fundamental indicator that affects the share prices. Every firm has its own pricing policies and
strategies that make them different from other firms.

Return on Equity

Return on equity (ROE) is a measure of financial performance calculated by dividing net

income by shareholders' equity. Because shareholders' equity is equal to a company’s assets
minus its debt, ROE is considered the return on net assets.

Higher the ROE the better it is

Net Income
ROE=
Shareholde r ' s Equity
Return on Asset

Return on asset measures the relationship between net income and assets. This ratio shows how
efficiently the management of a firm used its assets to generate income.

Net Income
ROA =
Total Assets

Return on Capital Employed

Return on average capital employed is an important profitability ratio of the firm that measures
the firm’s ability to generate profit from its capital employed in the business.

EBIT
ROCE =
Average Capital Employed

Where:

Average Capital Employed =

OpeningCapital Employed +Closing Capital Employed
2

Total Asset
Turnover Ratio

Total asset turnover ratio measures the firm’s efficiency to generate its sales by use of its entire
asset. It shows how much a firm is able to generate its sales from each rupee of the firm asset.

Total Asset Turnover =

Total Assets
From the investors’ point of view, it is one of the most important fundamental variables that
affect the equity share prices of the company.

Receivables Turnover Ratio

The accounts receivable turnover ratio is an accounting measure used to quantify a company's

effectiveness in collecting its receivables or money owed by clients. The ratio shows how well
a company uses and manages the credit it extends to customers and how quickly that short-term
debt is collected or is paid.

Net Credit Sales

Receivables Turnover Ratio=
Average Accounts Receivable

Inventory Turnover Ratio

Inventory turnover is the number of times a company sells and replaces its stock of goods during
a period. Inventory turnover provides insight as to how the company manages costs and how
effective their sales efforts have been.

Cost of Goods Sold

Inventory Turnover Ratio =
Average Inventory

Where:

COGS = Sales – Gross Profit

Opening Inventory +Closing Inventory

Average Inventory =
2

Valuation Ratios
Enterprise Value

Enterprise value (EV) is a measure of a company's total value, often used as a more
comprehensive alternative to equity market capitalization. EV includes in its calculation the
market capitalization of a company but also short-term and long-term debt as well as any cash on
the company's balance sheet. Enterprise value is a popular metric used to value a company for a
potential takeover.

Enterprise Value = Market Capitalization + Debt - Cash

The general principle behind the concept of enterprise value is that when a company is bought
the investor also has to takeover its liabilities. The enterprise value of a company should be less
than its market capitalization.

Market Capitalization

Market capitalization refers to the total dollar market value of a company's outstanding shares of

stock. Commonly referred to as "market cap," it is calculated by multiplying the total number of
a company's outstanding shares by the current market price of one share.

Market Capitalization = Total No. of Outstanding Shares* Current Market Price

Market capitalization is a quick and easy method for estimating a company's value by
extrapolating what the market thinks it is worth for publicly traded companies.
Price to Book Value

Companies use the price-to-book ratio (P/B ratio) to compare a firm's market capitalization to its
book value. It's calculated by dividing the company's stock price per share by its book value per
share (BVPS).

Price
Price to Book Value =
Book Value

Where :

Price = Current Market Price

Book Value = Net Assets Value – Intangible Assets

 Large discrepancies between the P/B ratio and ROE often send up a red flag on companies.

Price to Earnings Ratio

The price-to-earnings ratio (P/E ratio) is the ratio for valuing a company that measures its current
share price relative to its per-share earnings (EPS). The price-to-earnings ratio is also sometimes
known as the price multiple or the earnings multiple. 

P/E ratios are used by investors and analysts to determine the relative value of a company's
shares in an apples-to-apples comparison.
 CMP
Price to Earnings Ratio =
EPS

Where:

CMP = Current Market Price

EPS = Earnings Per Share

A general misconception about P/E ratio is that low P/E ratio indicates undervalued stocks but
this is not true as there are many factors that may affect P/E ratio of the company such as its
future growth prospects. The P/E should be compared of the companies operating in similar
industries only.

Dividend Yield

The dividend yield, expressed as a percentage, is a financial ratio (dividend/price) that shows
how much a company pays out in dividends each year relative to its stock price.

DPS
Dividend Yield =
CMP

Where:

DPS = Dividend Per Share

CMP = Current Market Price

The dividend yield is an estimate of the dividend-only return of a stock investment. Assuming

the dividend is not raised or lowered, the yield will rise when the price of the stock falls. And
conversely, it will fall when the price of the stock rises.
Enterprise Value to EBITDA

Enterprise multiple, also known as the EV multiple, is a ratio used to determine the value of a
company. The enterprise multiple looks at a firm in the way that a potential acquirer would by
considering the company's debt. Stocks with an enterprise multiple of less than 7.5x based on
the last 12 months (LTM) is generally considered a good value. However, using a strict cutoff is
generally not appropriate because this is not an exact science. 

EV
Enterprise Value to EBITDA =
EBITDA

Where:

EV = Market Capitalization + Debt – Cash

EBITDA = Earnings Before Interest Tax and DIvidend

Investors mainly use a company's enterprise multiple to determine whether a company is

undervalued or overvalued. A low ratio indicates that a company might be undervalued and a
high ratio indicates that the company might be overvalued.

Price Earnings Growth Ratio

The price/earnings to growth ratio (PEG ratio) is a stock's price-to-earnings (P/E)

ratio divided by the growth rate of its earnings for a specified time period. The
PEG ratio is used to determine a stock's value while also factoring in the
company's expected earnings growth, and is thought to provide a more complete
picture than the more standard P/E ratio.

P /E Ratio(TTM )
PEG Ratio =
EPS Growth Rate

Where:

P/E Ratio = Trailing Twelve Months Price to Earnings Ratio

EPS Growth Rate = 5 years EPS growth Rate Average

Criteria: If PEG ratio is < 1 the stock is undervalued

= 1 stock is fairly valued

> 1 stock is overvalued

Performance Comparison

CAGR

Compound annual growth rate (CAGR) is the rate of return that would be

required for an investment to grow from its beginning balance to its ending
balance, assuming the profits were reinvested at the end of each year of the
investment’s lifespan.

1
CAGR = ( EV /BV ¿ n −1 ¿

Where,
EV = Ending Value
BV = Beginning Value
n = number of years

Benchmark Return

Benchmarks are a handy tool for useful comparison as the benchmark returns are indicative

of how much the share has earned against how much it should have earned.
Beta

Beta is a measure used in fundamental analysis to determine the volatility of an

asset or portfolio in relation to the overall market. A stock that swings more than
the market over time has a beta greater than 1.0. If a stock moves less than the
market, the stock's beta is less than 1.0. High-beta stocks tend to be riskier but
provide the potential for higher returns; low-beta stocks pose less risk but
typically yield lower returns.

Covariance
β=
Variance

Where,

β = Beta

Covariance = Measure of a stock’s return relative

to that of the market

Variance = Measure of how the market moves

relative to its mean

Alpha

Alpha is used in finance as a measure of performance, indicating when a

strategy, trader, or portfolio manager has managed to beat the market return
over some period. Alpha, often considered the active return on an investment,
gauges the performance of an investment against a market index or benchmark
that is considered to represent the market’s movement as a whole. The excess
return of an investment relative to the return of a benchmark index is the
investment’s alpha.

α =¿Ri – (Rf + β*(Rm – Rf))

Where:

Ri = Realised return of the investment

Rf = Risk-free rate of return

β = Beta
Valuation Models

Price to Sales Model

Price to Sales Model valuation model is based on price to estimated sales of the company.

The Price to Sales Model is important because of two reasons. First strong and consistent sales
growth in the requirement of a growth company. Second, given all the data in financial
statements, sales information is subject to less manipulation than any other data item. The Price
to Sales Model calculates a company’s future market capitalization with the help of estimated
sales and current price to sales ratio. The results of this valuation model can vary greatly as it is
very difficult to estimate a company’s future sales and different analysts can have different
estimates of future sales. Therefore, the results of this model should not be seen in isolation.

Estimated Market Capitalization

Intrinsic Value =
No. of shares outstanding

Where:

Estimated Market Capitalization = Estimated Sales * P/S Ratio

Estimated Sales = Latest Year Sales* (1+ Estimated Growth in Sales)

EV/ EBITDA Model

The EV/EBITDA valuation model tries to calculate the intrinsic value of the company by
estimating its future enterprise value. After the future Enterprise Value of a company is
calculated it is used to arrive at the future market capitalization (EV-Debt). At last, the estimated
market capitalization is divided by no. of shares outstanding which gives us a value that an
analyst thinks is the true value of the share price of the company. This value is then compared to
the current market price of the share of the company and if the intrinsic value of the company is
less than its CMP then the stock is undervalued and can be bought.

The EV of a company is a much better estimate of a company’s value because it takes into
consideration that when a company is acquired not only its future stream of income is bought but
its liabilities are also acquired.

Forecasted EV (less debt)

Intrinsic Value =
No . of Shares Outstnding

Where:

EV
Forecasted EV = *Expected EBITDA
EBITDA

Expected EBITDA = Current EBITDA*(1+ CAGR of EBITDA)

Discounted

Discounted cash flow (DCF) is a valuation method used to estimate the value of

an investment based on its future cash flows. DCF analysis attempts to figure out
the value of an investment today, based on projections of how much money it will
generate in the future. This applies to both financial investments for investors and
for business owners looking to make changes to their businesses, such as
purchasing new equipment.

FCF 1 FCF 2 FCF n

Intrinsic Value = 1 + 2 + …. + n +
(1+r ) (1+r ) (1+r )
FCF n (1+ g)
r−g

Where,

FCF = Free Cash Flow

g = terminal growth rate

ECONOMIC ANALYSIS
 Economic factors to be considered while performing fundamental analysis:

1. Real GDP Growth Rate

Real GDP Growth ( % change)

9%
8%
7%
6%
5%
4%
3%
2%
1%
0%
2015 2016 2017 2018 2019 2020

Interpretation:

The GDP growth rate has been constantly in a downward trend which is evident from the fact
that the GDP growth rate in 2017 was 7% and has gone down since to 6.1% in 2018 and 4.2% in
2019. The slowdown has been triggered by both internal and external factors such as
synchronized global slowdown, demonetization, poor implementation of GST, plummeting
domestic automobile sales, flattening of core sector growth, and declining investment in
construction and infrastructure but the outbreak of novel coronavirus has brought the Indian as
well as economies around the world to its knees which is evident by the fact that the revised
GDP growth rate for India is 1.9% for this year resulting in negative returns in the stock market.

2. Inflation (CPI)
 Inflation(CPI) (% change)
6.00%

5.00%

4.00%

3.00%

2.00%

1.00%

0.00%
2015 2016 2017 2018 2019 2020

Interpretation:

Before 2014 inflation was based on the Wholesale Price Index (WPI) but since 2014 it has been
changed to Consumer Price Index (CPI). The inflation of India is hovering around 3.5% for quite
some time now but in 2019 it was 4.5% which is not far from the long term inflation target of
India i.e. 4%. Considering this it can be said that the concern for the Indian economy is not
Inflation but the quantum of consumer demand which has been going down for quite some time
because of structural and global economic issues.

3. Current Account Balance

Current Account (% of GDP)

0.00%
2015 2016 2017 2018 2019 2020

-0.50%

-1.00%

-1.50%

-2.00%

-2.50%
Interpretation:

The Current Account balance of India has improved in 2019 and 2020 in comparison to 2018 in
which it was -2.10%.

4. Fiscal Balance

Fiscal Balance (% of GDP)

0.00%
2015 2016 2017 2018 2019 2020
-0.50%
-1.00%
-1.50%
-2.00%
-2.50%
-3.00%
-3.50%
-4.00%
-4.50%

Interpretation:

India’s Fiscal balance or fiscal deficit has been hovering around 3.5% of GDP for some years
now and though the deficit that has been disclosed by the government is 3.3%, many experts
believe that the actual fiscal deficit of India is around 6% to 6.5%.

Even among the top 7 fastest emerging economies having an average fiscal deficit of 3% India’s
fiscal deficit is only less than Brazil.

5. Investment
 Investment ( % change)
12.00%

10.00%

8.00%

6.00%

4.00%

2.00%

0.00%
2015 2016 2017 2018 2019 2020

Interpretation:

The annual growth rate of investment in India was above 9% during 2017 and 2018 as the
overall stock market was giving phenomenal returns. But in 2019 the growth rate fell to 4.90%
owing largely to the slowdown in the Indian as well as the global economy which led to poor
investor sentiment. But in 2020 the projected investment growth rate is 6.55% as the stocks are
undervalued and available at attractive valuations.

IMPACT ASSESSMENT OF COVID-19 PANDEMIC ON INDIAN

ECONOMY
CURRENT STATUS - The economic impact of the 2019–20 coronavirus pandemic in
India has been hugely disruptive. World Bank and Credit Rating Agencies have downgraded
India's growth for Fiscal Year 2021 with the lowest figures India has seen in three decades since
India's Economic Liberalization in 1990s However, the International Monetary Fund projection
for India for the FY 2021-22 of 1.9% GDP growth is the highest among G-20 nations. Within a
month Unemployment rose from 6.7% on 15 March to 26% on 19 April. During the lockdown,
an estimated 14 crore (140 million) people lost employment. More than 45% of households
across the nation have reported an income drop as compared to the previous year.

ANTICIPATED RAMIFICATIONS - The above-mentioned status of Indian economy

signifies the paradigm shift that the India is all set to see in the dimension of Economic Activities
and in the overall trend of Indian Economy. Quick Bouncing Back of Economy or Revival from
the current grave situation inevitably seems a little bit of an overstatement right now but gradual
healing of Economic Sector is not unthinkable as the lessons from the past have made us learnt
that chaos is the ladder; be it Financial Crisis of 2008-09 when the immediate following year of
crisis saw the surge of 80% rise in the Market or the global recession of the year 2001 and
successive overcoming from it. In all the desperate circumstances India particularly has always
thrived like an unbeatable Hero irrespective of how strongly the script may support the
antagonist (i.e. Economic Upheavals in this scenario). Also, the opportunities that lie ahead are
also not scarce and the investment avenues are still open as the market in the aftermath of this
pandemic will favor investors more as the stocks will be less pricey to gain their possession.

Therefore, considering the aforementioned factual account of Covid-19 Pandemic might not
currently sail the boat of economic optimism for us but the knee-jerk response of Indian
government to keep the pandemic at bay is laudable and is definitely an indicator of revival that
somehow makes the situation ahead of us to be seen as glass half full rather than to be seen as
half empty.

Industry Analysis

1. Economic Cycle Analysis

 12.0

10.0
9.7
9.1
8.7 8.7 8.6
8.0 8.0 8.0 8.2
7.5 7.6 7.6
7.3 7.1 7.2 7.1
6.4 6.5 6.3 6.5 6.25.7
6.0 5.9 5.8
5.4 5.3 5.6 5.6
4.9 5.1
4.7
4.3
4.0

2.0

0.0

Interpretation:

If the COVID-19 pandemic had not hit the world then there could have been a revival in the
Indian economy in the first half of 2020-21.

The explanation for this assumption is that up- cycles in India’s GDP growth take 13 quarters,
while down- cycles take nine quarters. The data points that since 2011-12, India’s GDP growth
hit its lowest quarterly GDP growth in the fourth quarter of 2012-13, 4.3%. Then there was a
gradual growth thereafter and, after 13 quarters, the economic growth increased to 9.7% by the
second quarter of 2016-17.

After another 13 quarters, the economic growth once again skid to 4.5% in third quarter of 2019-
20. This shows that the length of a typical business cycle in India is 13 quarters and growth can
bottom at these levels.

Therefore, a resurgence in growth was expected in early 2020. But the COVID-19 pandemic has
impacted the recovery estimate. While no one is expecting a V-Shape recovery in the Indian or
global economy the growth rates will rise sooner rather than later. But for now investors can
consider defensive stocks as a good buy.

Defensive stocks are the ones that perform better during the recession as their demand is pretty
consistent. These are the stocks related to the FMCG, Pharmaceuticals, Consumer Staples
industry.

Therefore, in this study a FMCG company has been taken for analysis.

Introduction and Growth Forecast of Indian FMCG Industry

 FMCG is the 4th largest sector of the Indian economy. It constitutes 3 major segments of
food and beverages which account for 19%, healthcare for 31%, and household & personal
care for the remaining 50% by revenue.
 The overall market for FMCG has grown at 12.88% (2011-2019) with $83.3 billion in
revenue in 2019 which is expected to reach $103.7 billion by 2020 and is further expected to
grow at 14% CAGR (2020-2025). The market size across rural India has grown at 11.32%
(9yr-CAGR, 2009-2018) and is expected to grow at 37.5% CAGR (2018-2025). 
 Demand for goods has been increasing with the increasing disposable income in rural India
which contributes around 45% whereas urban segment accounts for 55% of the total revenue
of the FMCG sector. India’s demographic profile plays a major role in the growth of this
sector.
 Consumption in the new emerging cities is growing at a faster pace than India’s metro cities.
With the higher technological awareness among millennials, changing lifestyles, increasing
awareness for health & nutrition, and the penetration of smartphone and internet connectivity
have boosted the e-commerce activities.
 In India, one in every two items purchased online is from FMCG products comprising
around 56% of total e-commerce sales by volume. According to Nielson, a market research
firm, e-commerce contribution to total FMCG sales is expected to be 11% by 2030.
 Government initiatives such as the implementation of GST (reducing the cascading effect of
indirect taxes) helped in reducing costs that can be passed on to the final consumer. 100%.
Given the variety of items and an increasing number of local players, it is one of the most
competitive industries. To maintain brand equity, firms have to spend a lot on marketing and
branding activities which is a good expense for existing players because it acts as a barrier
for a new player to enter this industry. This rising competition gives bargaining power in the
hands of consumers. With the abundant supply across the country via existing distribution
channels and entry of unorganized domestic players, demand is still rising with the rise in the
population of India.

Porter’s Five Forces Analysis of HUL

1. Competitive Rivalry (Strong Force)

No matter what the industry is, the competition is the major thing to consider. When we talk
about HUL, competition becomes one of the most important external factors to consider. The
HUL faces a strong level of competition from its competitors in the industry.

HUL isn’t the only firm but there are a large number of firms operating in this consumer
goods industry. There are a large number of firms that are giving tough competition to HUL
as the switching cost in this industry is really low. For instance, Patanjali in a short amount of
time has become one of the fastest-growing FMCG company even though being relatively

new in the market .

2. Bargaining Power of Customers/Buyers (Strong Force)

 HUL’s business and industry environment depend on the response of consumers to its
products. HUL must address the following external factors that lead to the strong force of the
bargaining power of customers:

 Low switching costs (strong force)

 High quality of information (strong force)
 Small size of individual buyers (weak force)

The low switching costs make it easy for consumers to transfer from HUL’s products to other
companies’ products. This external factor contributes to the strong intensity of the bargaining
power of buyers. In addition, consumers have access to the high quality information about
consumer goods, making it even easier for them to decide when transferring from HUL to other
providers. For example, buyers can compare products based on online information. The small
size of an individual consumer’s purchases has minimal impact on HUL’s profits. However, the
low switching costs and high quality of information outweigh this third external factor in the
industry environment. Based on this section of the Five Forces analysis, the bargaining power of
customers is one of the strongest forces affecting HUL’s consumer goods business.

3. Bargaining Power of HUL’s Suppliers (Moderate Force)

Suppliers impact HUL’s industry environment by affecting the level of supply available to firms.
This section of the Five Forces analysis presents the influence of suppliers on companies. The
following are the external factors that contribute to the moderate force of the bargaining power
of suppliers on HUL:

 Moderate size of individual suppliers (moderate force)

 Moderate population of suppliers (moderate force)
 Moderate overall supply (moderate force)

While HUL has large suppliers, the average supplier is moderate in size. This external factor
imposes a moderate intensity force on the consumer goods industry environment. In addition, the
moderate population of suppliers enables them to impose significant but limited influence on
firms like HUL. Similarly, the moderate level of the overall supply adds to such significant but
limited influence of suppliers. For example, any supplier’s change in production level leads to
significant but limited change in the availability of raw materials used in HUL’s business. Other
firms in the industry are similarly affected. As shown in this section of the Five Forces analysis
of HUL, the bargaining power of suppliers is a significant but moderate consideration in the
consumer goods industry environment.

4. Threat of Substitutes or Substitution (Weak Force)

Substitutes can reduce HUL’s revenues and the strength of firms in the consumer goods industry
environment. The impact of substitution is determined in this section of the Five Forces analysis.
In HUL’s case, the following external factors are responsible for the weak force of the threat of
substitution:

 Low switching costs (strong force)

 Low substitute availability (weak force)
 Low performance to price ratio of substitutes (weak force)

The low switching costs enable consumers to easily use substitutes to HUL’s products. This
external factor imposes a strong force on the company and the consumer goods industry
environment. However, the overall impact of substitution is weakened because of the low
availability of substitutes. For example, it is easier to access HUL’s Close-Up toothpaste from
grocery stores than to obtain substitutes like homemade organic dentifrice. In relation, most
substitutes have low performance with minimal or insignificant cost difference when compared
to consumer goods readily available in the market. This condition makes HUL’s products more
attractive than substitutes, thereby further weakening the intensity of the threat of substitution.
This section of HUL’s Five Forces analysis shows that the threat of substitutes is a minor issue in
the business.

5. Threat of New Entrants or New Entry (Weak Force)

HUL competes with established firms as well as new firms in the consumer goods market. This
section of the Five Forces analysis considers the influence of new firms on the industry
environment. The following external factors create the weak force of the threat of new entrants
against HUL:

 Low switching costs (strong force)

 High cost of brand development (weak force)
 High economies of scale (weak force)

The low switching costs enable new entrants to impose a strong force against HUL. For example,
consumers can easily decide to try new products from new firms. However, it is costly to build
strong brands like HUL’s. This external factor weakens the intensity of the threat of new entrants
against the company. Also, HUL takes advantage of high economies of scale, which support
competitive pricing and high organizational efficiencies that new firms typically lack. As a
result, the company remains strong despite new entrants. Based on this section of the Five Forces
analysis, the threat of new entry is a minor concern in HUL’s industry environment.
 Company Analysis

Qualitative Analysis

HUL Business Model in a nutshell

HUL is a powerhouse of FMCG sector with 44 consumer brands spanning across 4 distinct
categories i.e.- home care, beauty & personal care, food & refreshment, and others. The company
operates in FMCG sector which is a high volume high margin sector. The business model of
HUL is a fairly simple one i.e. it is in the manufacturing business and sells its products through a
wide range of distribution networks. Additionally, in recent years, it has tried to increase its
direct to consumer business through its e-commerce arm.

The recent addition to the business model of the company is the ‘ Winning in Many India’s’
strategy introduced by Mr. Sanjeev Mehta (Chairman and Managing Director) in which 14
nationwide clusters have been formed for different regions which aims to eliminate homogeneity
of products across the nation and provide region specific products. Along with this HUL also
provides its warehouse facilities available to e-commerce companies and charges commission
from them.

Segmental Revenue (%) Segmental Profit (%)

3%
2%
19% 14%
29%
34%

55%
44%

Home Care Beauty & Personal Care Food & Refreshments Other

Home Care Beauty & Personal Care Food & Refreshments Other
 The beauty and personal care segment of HUL is the largest contributor of revenue (44%)
and EBITDA (55%) owing to robust performance in skin care and hair care brands.
 Along with beauty and personal care, homecare provided double digit revenues (34%) and
EBITDA (29%). The combined revenue and profit of these 2 segments provide about 78% of
total revenue and 84% of total EBITDA.
 The food and refreshments segment and other miscellaneous segment did not contribute
much to the revenue and EBITDA figures.

Supply Chain Analysis

1. Around 1,150 supplier partners source materials and provide critical services for HUL. These
suppliers provide thousands of tonnes of agricultural raw material, packaging materials and
chemicals for their products.
2. The raw material of HUL is send to there 31 in-house manufacturing plants and some other
third party manufacturers.
3. The products are stocked in warehouses dotted across the country and delivered to over 4,500
distributors as well as a large number of institutional consumers such as Army Canteens and
government co-operatives.
4. Further the products are relayed to various online and offline retailers by the distributors
which in total comprise of more than 80 lacs retail outlets which further makes the products
available to ultimate consumer.
5. HUL also sells its product directly to consumers through e-commerce platforms which
6. helps them to reduce the costs associated with distribution.
7. HUL also improved the on shelf quality of their products by 30% over previous year due to
the Consumer Case Fill on Time (CCFOT) of over 95%.
8. The efficiency of supply chain of the company can be seen from the fact that it has
successfully reduced its DIO by 1 whole day.
9. The business of HUL depends on purchasing materials, efficient manufacturing and the
timely distribution of products to our customers. This supply chain network is exposed to
potentially adverse environmental factors as is evident from the fact that a pandemic like
COVID-19 had brought down this chain of supply to a standstill for a limited time period.
10. HUL imports about Rs 400 crores worth of raw materials from China which is around 50%
of their total raw material supply. Keeping in mind the COVID – 19 pandemic this could
impact HUL’s raw material supply.

Corporate Governance

HUL has set a pretty high bar in terms of following the corporate governance rules and
regulations. In fact the Corporate Governance Scorecard, which has been jointly developed by
the BSE Limited, the International Finance Corporation (IFC) and Institutional Investor
Advisory Services India Limited (IiAS) has placed HUL in the top 10 list of best governed
Indian companies. Some of the factors that have been looked at to assess good corporate
governance are as follows:

 Board Effectiveness
 It is mandatory according to SEBI for companies to have at least one independent women
director on their board and this has been followed by HUL from even before it was made
mandatory.
Also, listed companies must conduct a board evaluation exercise but the results of this
exercise was not disclosed by HUL.
In addition to this board also appointed Mr. Nitin Paranjpe as the non-executive chairperson
according to the SEBI guidelines w.e.f 1st April 2020.

 Conflict of Interest

Companies must publish a policy regarding related party transactions. The board of HUL has
adopted the Code of Conduct for the Members of the Board and Senior Management team.
The Code provides that the Directors are required to avoid any interest in contracts entered
into by the Company. If such an interest exists, they are required to make adequate disclosure
to the Board and to abstain from discussion, voting or otherwise influencing the decision on
any matter in which the concerned Director has or may have such interest. The Members of
the Board and the Management Committee annually confirm the compliance of the Code of
Conduct to the Board. This Code of Conduct also extends to employees of the company.

 Quality of Auditors

Generally reappointing of auditors is considered a good practice and for the past five years,
the auditors of HUL have been M/S BSR & Co. LLP which is the subsidiary of KPMG, one
of the big 4 accounting firms.

 Management Salary

The total management salary is 39.06 crores is just 0.56% of the total net profits of the
company. Considering the fact that the overall ceiling as per companies act, 2013 for
management salary is 11% of the total net profits the salary taken by management is
commendable and shows that the management’s interests are aligned with the interests of
shareholders.

Economic Moat Of HUL

 Hindustan Unilever has a narrow economic moat. Though HUL is the biggest FMCG
company in India with a market capitalization of about Rs511,132.86 crores. It has 75% of
the total market share in FMCG space. The HUL Distribution network is also very strong
with about reach in 80 lacs or 8 million retail outlets. HUL also have many patents. However
HUL does not enjoy a very wide economic moat. The main reason for this is that the
switching costs in FMCG space is very low. Therefore consumers have a many options. HUL
also faces intense pressure from global and domestic players.

Management Analysis

The management of HUL is a pretty stable one. Mr. Sanjiv Mehta is the chairman and MD of
HUL. He was appointed the CEO and MD of HUL in 2013 and the company has seen its best
years under him. He has won The Outstanding CEO of the Year' at the 3rd edition of the CEO
AWARDS 2016 organised by CEO INDIA magazine. He also won ‘ Management Man of the Year’ in
2017. So the company is in the right hands.

Shareholding Pattern of HUL

Sharehloding Pattern

7%

12%

14%

67%

Promoters Public FII DII

 The promoters of the company hold about 67.18% of the company which is a very good sign
indicating that the promoters of the company have confidence about its future growth.
 Also the FII and DII combined have about 19% of the total shares outstanding. This is
considered good because institutions generally have much better tools to estimate the value
of the company.
 The rest 14.05% is held by retail investors.
 Also the promoter pledging in the company is 0% which shows that company is getting funds
from other sources.
 Quantitative Analysis

I. Key Balance Sheet Highlights

i. Share Capital

Share Capital (in Crs.)

250

200

150

100

50

0
Mar-11 Mar-12 Mar-13 Mar-14 Mar-15 Mar-16 Mar-17 Mar-18 Mar-19 Mar-20

Mar- Mar- Mar- Mar- Mar- Mar- Mar- Mar- Mar- Mar-
Particulars 11 12 13 14 15 16 17 18 19 20
Actual
Figures(Crs. 216 216 216 216 216 216 216 216 216 216
)
% Change   0% 0% 0% 0% 0% 0% 0% 0% 0%

Interpretation:

The balance sheet of HUL is a pretty strong one. HUL has not diluted its share capital over the
years which shows that the company is able to finance its operations without raising additional
capital through the issuance of equity shares.
 ii. Reserves and Surplus

Reserves and Surplus (in Crs.) % Change

9,000 80%

8,000
60%
7,000

6,000
40%
5,000

4,000 20%

3,000
0%
2,000 Mar-12 Mar-13 Mar-14 Mar-15 Mar-16 Mar-17 Mar-18 Mar-19 Mar-20

1,000 -20%

0
Mar-11 Mar-12 Mar-13 Mar-14 Mar-15 Mar-16 Mar-17 Mar-18 Mar-19 Mar-20 -40%

Mar- Mar- Mar- Mar- Mar- Mar- Mar- Mar- Mar- Mar-
Particulars 11 12 13 14 15 16 17 18 19 20
Actual
Figures 2,519 3,465 2,649 3,321 3,811 6,357 6,528 7,065 7,651 8,013
(Crs.)
% Change N.A 38% -24% 25% 15% 67% 3% 8% 8% 5%

Interpretation:

The reserves and surplus of HUL have been increasing but in the past few years the growth rate
has slowed down which is evident from the fact that is the last 3 years reserves and surplus have
grown by an average of 7% only. The amount of reserves and surplus the company has, shows
that it has enough cushion to fund future capital expenditures if and when the need arises.

iii. Debt

Debt (in Crs.) % Change

300 350%

300%
250
250%

200 200%

150%
150
100%

50%
100
0%
Mar-12 Mar-13 Mar-14 Mar-15 Mar-16 Mar-17 Mar-18 Mar-19 Mar-20
50 -50%

-100%
0
Mar-11 Mar-12 Mar-13 Mar-14 Mar-15 Mar-16 Mar-17 Mar-18 Mar-19 Mar-20 -150%
 Mar- Mar- Mar- Mar- Mar- Mar- Mar- Mar- Mar- Mar-
Particulars 11 12 13 14 15 16 17 18 19 20
Actual
0 0 25 46 43 177 277 0 99 0
Figures
% Change   0% 0% 84% -7% 312% 56% -100% 100% -100%

Interpretation:

The debt of HUL is almost zero which is a positive sign for investors and this indicates that the
financial risk of the company is low.

iv. Gross Block

Gross Block (Crs.) % Change

7,000 60%

50%
6,000
40%
5,000 30%

4,000 20%

10%
3,000
0%
2,000 Mar-12 Mar-13 Mar-14 Mar-15 Mar-16 Mar-17 Mar-18 Mar-19 Mar-20
-10%

1,000 -20%

-30%
0
Mar-11 Mar-12 Mar-13 Mar-14 Mar-15 Mar-16 Mar-17 Mar-18 Mar-19 Mar-20 -40%

Mar- Mar- Mar- Mar- Mar- Mar- Mar- Mar- Mar- Mar-
Particulars 11 12 13 14 15 16 17 18 19 20
Actual
Figures 3,531 3,564 3,868 4,162 4,430 3,207 4,698 5,234 5,912 5,569
% Change N.A. 1% 9% 8% 6% -28% 46% 11% 13% -6%

Interpretation:

The gross block of the company is the sum of the cost of accumulating assets and depreciation. If
we consider the yoy percentage change in gross block has reduced in the year 2019-20 (-6%) in
comparison to 2018-19 (13%). The reason for this decline can be that the company has enough
assets to carry out its operations.
 II. Key Income Statement Highlights

i. Revenue from Operations

Actual Figures(Crs.) % Change

45,000 16.00%

40,000 14.00%
35,000
12.00%
30,000
10.00%
25,000
8.00%
20,000
6.00%
15,000
4.00%
10,000

5,000 2.00%

0 0.00%
Mar-11 Mar-12 Mar-13 Mar-14 Mar-15 Mar-16 Mar-17 Mar-18 Mar-19 Mar-20 Mar-12 Mar-13 Mar-14 Mar-15 Mar-16 Mar-17 Mar-18 Mar-19 Mar-20

Financial Mar- Mar- Mar- Mar- Mar- Mar- Mar- Mar- Mar- Mar-
s 11 12 13 14 15 16 17 18 19 20
Actual
20,04 22,98 26,31 29,23 31,97 32,18 33,16 35,54 39,31 39,73
Figures
8 7 7 3 2 6 2 5 0 8
(Crs.)
% 14.66 14.49 11.08 10.59
Change N.A. % % % 9.37% 0.67% 3.03% 7.19% % 1.09%

Interpretation:

The revenue from operations of the company has not increased consistently over the years. From
2016 onwards there have been wide fluctuations in the growth rate of revenues. One of the main
reasons for this has been the rise of Patanjali Ayurveda Ltd. in the past five years. The growth
rate in the year gone by has just been 1.09% which to some extent can be attributed to the
COVID-19 pandemic but not fully.

ii. Operating Income

 Actual Figures(Crs.) % Change
10,000 25%

9,000

8,000 20%

7,000

6,000 15%

5,000

4,000 10%

3,000

2,000 5%

1,000

0 0%
Mar-11 Mar-12 Mar-13 Mar-14 Mar-15 Mar-16 Mar-17 Mar-18 Mar-19 Mar-20 Mar-12 Mar-13 Mar-14 Mar-15 Mar-16 Mar-17 Mar-18 Mar-19 Mar-20

Mar- Mar- Mar- Mar- Mar- Mar- Mar- Mar- Mar- Mar-
Financials
11 12 13 14 15 16 17 18 19 20
Actual
Figures(Crs. 2,786 3,248 3,897 4,542 5,144 5,484 5,959 7,041 8,373 8,923
)
% Change N.A. 17% 20% 17% 13% 7% 9% 18% 19% 7%

Interpretation:

The operating profit of HUL has been increasing but the year on year growth is not consistent
which may indicate that the operating costs of the company has been increasing. The annual
growth rate came down to 6.5% from previous year’s 19.1%.

iii. Net Operating Income

Actual Figures(Crs.) % Change

8,000 50.00%

7,000
40.00%

6,000
30.00%
5,000
20.00%
4,000

3,000 10.00%

2,000 0.00%
Mar-12 Mar-13 Mar-14 Mar-15 Mar-16 Mar-17 Mar-18 Mar-19 Mar-20
1,000
-10.00%
0
Mar-11 Mar-12 Mar-13 Mar-14 Mar-15 Mar-16 Mar-17 Mar-18 Mar-19 Mar-20 -20.00%

Mar- Mar- Mar- Mar- Mar- Mar- Mar- Mar- Mar- Mar-
Financials
11 12 13 14 15 16 17 18 19 20
Actual
Figures(Crs 2,338 2,738 3,755 3,976 4,399 3,985 4,513 5,261 6,105 6,791
.)
% Change N.A. 17.11 37.14 5.89% 10.64 - 13.25 16.57 16.04 11.24
% % % 9.41 % % % %
 %

Interpretation:

The net income of HUL has been rising at a decreasing rate for quite some time now and in the
last financial year, the net profits indicated a negative trend growing by just 11% as compared to
16.1% in the year before that. Though the coronavirus might have impacted the growth but still
the trend has not been positive for some years now which may indicate poor operational
efficiency.

iv. Earnings Per Share

Actual Figures % Change

35 40.00%

35.00%
30
30.00%
25
25.00%

20 20.00%

15.00%
15
10.00%
10
5.00%

5 0.00%
Mar-12 Mar-13 Mar-14 Mar-15 Mar-16 Mar-17 Mar-18 Mar-19 Mar-20
-5.00%
0
Mar-11 Mar-12 Mar-13 Mar-14 Mar-15 Mar-16 Mar-17 Mar-18 Mar-19 Mar-20 -10.00%

Financial Mar- Mar- Mar- Mar- Mar- Mar- Mar- Mar- Mar- Mar-
s 11 12 13 14 15 16 17 18 19 20
Actual
Figures 10.52 12.91 17.7 18.23 20.16 19.12 20.67 24.08 27.96 31.17
% 22.72 37.10 10.59 - 16.50 16.11 11.48
Change N.A. % % 2.99% % 5.16% 8.11% % % %

Interpretation:

The EPS of the company is nothing but net profit divided by the no. of shares outstanding and
therefore corresponds to the trend of net profits. The growth rate of EPS in the last three financial
years has been decreasing which is not a good sign. In the 2017-18, 2018-19 and 2019-20 the
EPS grew by 16.50%, 16.11% and 11.48% respectively. Though this year’s decline can be
attributed to the COVID-19 pandemic but the problem has been going on for some time now.
 v. Dividend Per Share

Actual Figures % Change

30 40.00%

35.00%
25
30.00%
20
25.00%

15 20.00%

15.00%
10
10.00%
5
5.00%

0 0.00%
Mar-11 Mar-12 Mar-13 Mar-14 Mar-15 Mar-16 Mar-17 Mar-18 Mar-19 Mar-20 Mar-12 Mar-13 Mar-14 Mar-15 Mar-16 Mar-17 Mar-18 Mar-19 Mar-20

Financial Mar- Mar- Mar- Mar- Mar- Mar- Mar- Mar- Mar- Mar-
s 11 12 13 14 15 16 17 18 19 20
Actual
Figures 6.5 7 8.5 11.5 13.5 15.5 16.5 18 21 24
% 21.43 35.29 17.39 14.81 16.67 14.29
Change N.A. 7.69% % % % % 6.45% 9.09% % %

Interpretation:

The DPS of HUL from 2011 to 2014 grew very rapidly with an average of 21.47% but thereafter
it grew till 2017 by an average of 12.9% but now the dividend growth is again improving.
 Margin % of Sales
120

100

80

60

40

20

0
Mar-11 Mar-12 Mar-13 Mar-14 Mar-15 Mar-16 Mar-17 Mar-18 Mar-19 Mar-20
-20

Revenue COGS Gross Margin SG&A Other

Operating Margin Net Int Inc & Other EBT Margin Net Margin %

Interpretation:

The COGS as a percentage of revenue has come down significantly in the last decade. The
COGS in Mar-11 was 54.34% of sales in comparison to 46.23% of sales in Mar-20 which shows
a decline of almost 15% in 10 years. One of the main reasons for this decline is the input tax
credit claim which was introduced under GST. But the COGS in the FMCG sector can increase
in the near term because of volatility in currency and crude oil prices.
The Gross Margin of HUL has increased somewhat in the last 2 to 3 years. In the year ended
Mar-20, the Gross Margins of HUL are at 10 year high.
SG&A plays a key role in the company’s profitability. It is one of the fastest ways to increase the
company’s income without disrupting sales. SG&A expenses have also come down over the
years and are pretty stable right now.
The other costs of the company had increased in 2016-17 and 2017-18 but in recent years these
costs have slightly declined. In the FMCG sector, the advertisement costs are high HUL has been
able to maintain a pretty stable margin of other costs.
The OPM margin of HUL has increased continuously over the years and I the last financial year
was at a decade high of 22.43% of sales. The trend in OPM of HUL is pretty consistent.
The net interest is the difference between interest paid by the company and interest received by it
on investments. Net interest of HUL of HUL has been positive for many years as it is a zero debt
company.
EBT is the money retained internally by a company before deducting tax expenses. The impact
of taxes is excluded from EBT and it is a pure ratio. Coinciding with the other profit margins the
EBT Margin of HUL is also increasing.
The net margins of HUL are among the best in the industry. In the year 2019-20 the net margin
of HUL was 17.09%.
 III. Cash Flow Statement Analysis

..
Ratio Analysis
i. Liquidity Ratios

a. Current Ratio

Current Ratio
2.5

1.5

0.5

0
Mar-11 Mar-12 Mar-13 Mar-14 Mar-15 Mar-16 Mar-17 Mar-18 Mar-19 Mar-20

HUL Godrej Consumers Dabur India Britannia

Interpretation:

The current ratio measures a company’s ability to meet its short-term obligations. Although the
current ratio between 1.3-3 is considered good and HUL is in a good position to pay its short
term liabilities, still HUL does not have a liquidity position as good as its competitors which are
better positioned if any sudden working capital need arises. Infact in most of the years taken
under consideration HUL has been second last in terms of current ratio.
 Quick Ratio
1.4

1.2

0.8

0.6

0.4

0.2

0
Mar-11 Mar-12 Mar-13 Mar-14 Mar-15 Mar-16 Mar-17 Mar-18 Mar-19 Mar-20

HUL Godrej Consumers Dabur India Britannia

Interpretation- The quick ratio excludes inventory and prepaid expenses from current assets and
provides a true picture of the liquidity position of the business. The quick ratio of HUL was not
very good until 2017 in comparison to its peers but after 2017 the quick ratio was second to none
in the next three years and in 2019-20 was only outperformed by Dabur. The ideal quick ratio is
considered to be 1:1 but all the companies under consideration have a quick ratio of less than 1
which may indicate an efficient working capital cycle.

Debt/Equity Ratio
3

2.5

1.5

0.5

0
Mar-11 Mar-12 Mar-13 Mar-14 Mar-15 Mar-16 Mar-17 Mar-18 Mar-19 Mar-20

HUL Godrej Consumers Dabur India Britannia

Interpretation- One of the main reasons that HUL is considered a multi bagger by investors is
that it truly is a debt free company in all aspects. From a capital structure point of view the ideal
Debt to Equity ratio is considered to be 2:1 but investors like it to be as low as possible. In terms
of debt to equity ratio there is no comparison of HUL with its competitors.

Interest Coverage Ratio

400

350

300

250

200

150

100

50

0
Mar-11 Mar-12 Mar-13 Mar-14 Mar-15 Mar-16 Mar-17 Mar-18 Mar-19 Mar-20

HUL Godrej Consumers Dabur India Britannia

Interpretation- The interest coverage ratio tells about how many times a company can cover its
interest expense with its available earnings. The higher the interest coverage ratio the better it is.
HUL has been able to maintain a good interest coverage ratio for past many years owing to its
low interest charges. Though the interest coverage ratio of HUL has reduced in 2019-20 (78.74
as compared to previous years 261.73) but still it is far better than its competitors.
 Operating Profit Margin (%)
25

20

15

10

0
Mar-11 Mar-12 Mar-13 Mar-14 Mar-15 Mar-16 Mar-17 Mar-18 Mar-19 Mar-20

HUL Godrej Consumers Dabur India Britannia

Interpretation:

The OPM of HUL has been increasing consistently over the years. In 2018-19 and 2019-20 the
OPM of HUL was 22.43% which is best among its competitors showing the operating efficiency
of the company. This shows the control that HUL has over its operating costs.

Net Profit Margin(%)

25

20

15

10

0
Mar-11 Mar-12 Mar-13 Mar-14 Mar-15 Mar-16 Mar-17 Mar-18 Mar-19 Mar-20

HUL Godrej Consumers Dabur India Britannia

Interpretation:

The Net Profit Margin of HUL is excellent. In the past 4 years HUL has improved its NPM on an
average by 17% whereas the NPM of Godrej Consumers and Dabur India has decreased in same
time period.
 Return on Equity
140

120

100

80

60

40

20

0
Mar-11 Mar-12 Mar-13 Mar-14 Mar-15 Mar-16 Mar-17 Mar-18 Mar-19 Mar-20

HUL Godrej Consumers Dabur India Britannia

Interpretation of ROE- The Return on Equity or ROE is one of the most crucial ratios in
fundamental analysis. The ROE of the company tells how efficiently the management of the
company has used shareholder’s funds. The ROE of HUL has been pretty consistent over the
years and is extraordinarily high in comparison to its peers. A general rule of thumb regarding
ROE is that it should be just above the average of the peers but as we can see this is not the case
with HUL. A very high ROE can spell problems about the company but HUL’s case is quite
different and there are three main reasons for this:

 The ROE of HUL has been pretty consistent over the years.
 Generally, companies can increase there ROE by maintaining very low Net Profit Margin but
HUL’s Net profit Margin is pretty healthy.
 The ROE can also be increased with the help of debt but as we have seen above HUL is
almost a Zero debt company.
 Return on Assets
40

35

30

25

20

15

10

0
Mar-11 Mar-12 Mar-13 Mar-14 Mar-15 Mar-16 Mar-17 Mar-18 Mar-19 Mar-20

HUL Godrej Consumers Dabur India Britannia

Interpretation of Return on Assets- The ROA indicates how profitable a company is relative to
its assets. The ROA of HUL has been stable and is better than the rest of its peers. For the last
three years (2017 to 2020) the ROA of HUL has been more than 30% whereas Britannia comes
in at second with an average ROA of around 20% showing how efficiently HUL has used its
assets.

Return on Capital Employed %

100
90
80
70
60
50
40
30
20
10
0
Mar-11 Mar-12 Mar-13 Mar-14 Mar-15 Mar-16 Mar-17 Mar-18 Mar-19 Mar-20

HUL Godrej Consumers Dabur India Britannia

Interpretation of Return on Capital Employed- The ROCE tells how efficiently the management
of the company uses its total capital employed. In the above chart we can see that the ROCE of
HUL has been better than its competitors in all the years taken under consideration. In the
previous year i.e. 2019-20 the ROCE of HUL was 87.58% which was more than double than that
of Britannia which stood at second place with a ROCE of 36.72%. But in a no debt company
ROE is more important than ROCE.

Turnover Ratios

Asset Turnover Ratio (Times)

6

0
Mar-11 Mar-12 Mar-13 Mar-14 Mar-15 Mar-16 Mar-17 Mar-18 Mar-19 Mar-20

HUL Godrej Consumers Dabur India Britannia

Interpretation- The asset turnover ratio represents how much sales a company generates per
rupee invested. Generally FMCG sector have a high ATR as its asset base is smaller as compared
to other sectors. As a general norm higher the asset turnover ratio better it is. The ATR of HUL
is second to only Britannia that too till 2017-18. In comparison the ATR of Britannia has been
continuously decreasing whereas that of HUL has been increasing with a stable rate over the
years. For the year 2019-20 the ATR of HUL is around 2.04 times.
 ReceivablesTurnover Ratio (times)
70

60

50

40

30

20

10

0
Mar-11 Mar-12 Mar-13 Mar-14 Mar-15 Mar-16 Mar-17 Mar-18 Mar-19 Mar-20

HUL Godrej Consumers Dabur India Britannia

Interpretation

A high receivables turnover ratio indicates that a company’s collection of accounts receivables is
efficient. A general rule of thumb is higher the receivables turnover ratio better it is. In the
company’s selected Britannia has the best receivables turnover ratio which for the year 2019-20
was around 32.38 times whereas that of HUL for the previous year was 26.64 times. HUL has
maintained a pretty consistent receivables turnover ratio for past many years.

Inventory Turnover Ratio

25

20

15

10

0
Mar-11 Mar-12 Mar-13 Mar-14 Mar-15 Mar-16 Mar-17 Mar-18 Mar-19 Mar-20

HUL Godrej Dabur Britannia

Interpretation-

The inventory turnover ratio of HUL has been improving consistently for the past many years. A
higher inventory turnover ratio is preferred as it indicates the no. of times the inventory of the
company has been sold in a particular year. In the past 5 years this ratio of HUL has been best in
comparison to its peers.

Key Financial Highights

Gross Profit Margin

Performance Comparison with Benchmark

Parameters 10yr 5yr 3yr

CAGR 25% 19.80% 34%
Return of
Benchmark 5.40% 2.20% 1.90%
(Sensex)
Alpha 20% 18% 32%
0.6140
Beta 0.51764 0.50916
6

Interpretation:
 HUL has outperformed Sensex in all the three periods taken under consideration which is
evident from the fact that in 10 year, 5 year, and 3 year period the alpha generated by HUL is
around 20%, 18% and 32% respectively.

Also Beta of HUL in all the three periods is less than 1 which shows that the company is less
volatile in comparison to the benchmark.
 PEG Ratio

Particulars Mar-15 Mar-16 Mar-17 Mar-18 Mar-19 Mar-20 TTM

PE Ratio 43.28 45.24 43.9 55.34 60.93 73.56 73.35
EPS 20.17 19.13 20.62 24.09 27.97 31.17  
EPS Growth
Rate N.A. -5.2% 7.8% 16.8% 16.1% 11.4%  

Particulars 5 Years 3 Years

Average EPS 9.40% 14.80%

 Estimated EPS = Latest Year EPS X ( 1+ 5 years average EPS)

= 3.17 X ( 1+ 9.40%)

= 34.1

 PEG Ratio = P/E Ratio TTM/ EPS Growth Rate( 5 Years Average)

= 73.35/9.40

= 7.80

The PEG ratio of HUL is 7.80 which is very high according to the criteria of PEG ratio. But it is
also important to see results of other valuation methods.

Criteria: If PEG ratio is < 1 the stock is undervalued

= 1 stock is fairly valued

> 1 stock is overvalued
 Valuation Models
 Price to Sales Model

Mar- Mar- Mar- Mar- Mar- Mar- Mar- Mar- Mar- Mar-
Particulars 11 12 13 14 15 16 17 18 19 20
2004 2343 2700 2923 3197 3218 3316 3554 3931 3978
Sales (Cr.) 8 6 4 3 2 6 2 5 0 3
Growth
Rate N.A. 16.9% 15.2% 8.3% 9.4% 0.7% 3.0% 7.2% 10.6% 1.2%

 Estimated Sales = Latest Year Sales* (1+ Estimated Growth in Sales)

Estimated Growth Rate of Sales = 3%

= 39310 Cr.* (1 + 3%)

= 40976 Cr.

 Price to Sales Ratio = Current Market Capitalization/ Sales

= 494885/ 39783

= 1243%

 Estimated Market Capitalization = Estimated Sales* Price to Sales Ratio

= 40976 Cr. X 1243%
= 50933 Cr.
 Target Price = Estimated Market Capitalization/ No. of Shares Outstanding

= 50933 Cr. / 234 Cr.

= Rs 2176.6
  EV/ EBITDA

Particulars Mar-15 Mar-16 Mar-17 Mar-18 Mar-19 Mar-20

186,230.2 194,977.0 285,089.4
EV (Cr.) 7 185,000.00 0 0 365,244.80 491,304.40
EBITDA
5980 6444 6709 7882 9431 10493
(Cr.)
EV/EBITD
A 31.14 28.71 29.06 36.17 38.73 46.82
Debt           0

*EV = Market Capitalization – Debt + Cash

*EBITDA = Earnings Before Interest Tax and Dividend

CAGR 5 Year 3 Year

EBITDA 10.24% 4.11%

 Expected EBITDA = Current EBITDA X (1 + CAGR of EBITDA (5 year))

= 10493 X (1 + 10.24%)
= 11568
 Forecasted EV = Current EV/ EBITDA*Expected EBITDA
= 46.82 X 11568
=541613
 Target Price = Forecasted EV (less debt)/ Shares Outstanding
= 541613/ 234

= Rs. 2314

 Entry Price = 2314 X 2.5/3

=Rs.1928.3
  Price to Earnings Valuation Model

Price to Earnings Valuation Model

Assumptions:

This model assumes that the PE of a stock will always return to its average levels.

We collect different periods i.e (7 years, 4 years avg) PE ratio Data’s assuming the stock’s PE
will return to average levels.

Estimating the EPS Growth Rate is very, important as this allows us to project a target price and
entry price.

Target and entry prices are calculated for different performance scenarios, which allows us to
project a better Target/ Entry.
  Discounted Cash Flow Model

Particula
rs (in
crores) Mar-11 Mar-12 Mar-13 Mar-14 Mar-15 Mar-16 Mar-17
Operating
Cash Flow
INR Mil 1910.2 2050.1 3604.7 3818.2 3123.8 4125.3 5185.0
Capital
Expenditu
e -321.3 -280.6 -441.4 -606.4 -605.6 -824.5 -1461.0
Free Cash
Flow 1588.9 1769.6 3163.3 3211.8 2518.0 3300.9 3724.0
Average
FCF (3
Years)              
Valuation Ratios
 Enterprise Value
600,000.00

500,000.00

400,000.00

300,000.00

200,000.00

100,000.00

0.00
Mar-16 Mar-17 Mar-18 Mar-19 Mar-20

HUL Godrej Consumers Dabur India Britannia

Interpretation: The enterprise value of a company is an important metric to evaluate a company.

(EV) is an indicator of how the market attributes value to a firm as a whole. The EV of HUL has
been increasing continuously and shows that why HUL is India’s biggest FMCG company. No
other company among the selected one’s comes even close to HUL in terms of EV.
 Price to Book Value
70

60

50

40

30

20

10

0
Mar-16 Mar-17 Mar-18 Mar-19 Mar-20

HUL Godrej Consumers Dabur India Britannia

Interpretation: The price to book value ratio of HUL is one of the highest in the industry which
shows that it may be overvalued if we only consider P/B ratio. But the companies in FMCG
space have less investment in fixed assets the P/B ratio of HUL can be misleading.

Price to Earnings
80

70

60

50

40

30

20

10

0
Mar-16 Mar-17 Mar-18 Mar-19 Mar-20

HUL Godrej Consumers Dabur India Britannia

Interpretation: The P/E ratio of FMCG normally tend to be high because they have shown high
level of growth and ROE. PE ratio of HUL has always been high. The industry average PE ratio
in which HUL operates is 68.35 times in comparison to that of HUL’s 73.56. This shows that the
company is overvalued in terms of PE ratio.
 Dividend Yield (%)
12

10

Interpretation: The dividend yield of HUL has come down in past five years and is lower than
that of its competitors. But as dividend yield is calculated relative to the price of the company the
low dividend yield of HUL can be the cause of rise in share price. Therefore HUL’s dividend
yield can be considered good.
 EV/EBITDA
60

50

40

30

20

10

0
Mar-16 Mar-17 Mar-18 Mar-19 Mar-20

HUL Godrej Consumers Dabur India Britannia

Interpretation: The EV/EBITDA of HUL for 2019-20 is 46.82x which is very high in
comparison to industry average of 17.9x. Even among the companies selected the EV/EBITDA

Of HUL is highest in the year 2019-20. So on the basis of EV/ EBITDA the company can be
considered overvalued.
 Market Capitalization
600000

500000

400000

300000

200000

100000

0
Mar-16 Mar-17 Mar-18 Mar-19 Mar-20

HUL Godrej Dabur India Britannia