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PROJECT REPORT
ON
Comparative Analysis On The Basis Of Corporate Finance Concepts
SUBMITTEDTO: - SUBMITTEDBY: -
Ms. Sandhya Prakash Vineet Singh
PGP 2010-2422
Email [email protected]
Contact No- 9873601112
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HINDUSTAN UNILIVER LTD.
Introduction- In 1931, Unilever set up its first Indian subsidiary, Hindustan VanaspatiManufacturing Company, followed by Lever Brothers India Limited (1933) and United Traders
Limited (1935). These three companies merged to form HUL in November 1956; HUL offered
10% of its equity to the Indian public, being the first among the foreign subsidiaries to do so.
Unilever now holds 52.10% equity in the company. The rest of the shareholding is distributed
among about 360,675 individual shareholders and financial institutions. With over 35 brands
spanning 20 distinct categories such as soaps, detergents, shampoos, skin care, toothpastes,
deodorants, cosmetics, tea, coffee, packaged foods, ice cream, and water purifiers, the Company
is a part of the everyday life of millions of consumers across India. Its portfolio includes leading
household brands such as Lux, Lifebuoy, Surf Excel, Rin, Wheel, Fair & Lovely, Ponds,
Vaseline, Lakm, Dove, Clinic Plus, Sunsilk, Pepsodent, Closeup, Axe, Brooke Bond, Bru,
Knorr, Kissan, Kwality Walls and Pureit. The Company has over 16,000 employees and has an
annual turnover of around Rs.19, 401 crores (financial year 2010 - 2011). HUL is a subsidiary of
Unilever, one of the worlds leading suppliers of fast moving consumer goods with strong local
roots in more than 100 countries across the globe with annual sales of about 44 billion in 2011.
Corporate governance analysis:
The purpose of corporate governance analysis is to understand the relationship between
managers and stockholder. Transparency and accountability are the two basic tenets of Corporate
Governance. at Hindustan Unilever, feel proud to belong to a Company whose visionary founders hadlaid the foundation stone for good governance long back and made it an integral principle of the
business, demonstrated in the words above. To succeed, we believe, requires the highest standards of
corporate behaviour towards everyone we work with, the communities we touch and the environment on
which we have an impact. This is our road to sustainable, profitable growth and creating long-term value
for our shareholders, our people and our business partners.
Board of Directors:
The Board ofDirectors (the Board) is entrustedwith the ultimate responsibility of the management, general
affairs, direction and performance of the Company and has been vested with the requisite powers,
authorities and duties. The Board consists of 9 Directors comprising four Executive Directors, one Non-
Executive Director and four Independent Directors. The Chairman of the Board is a Non-Executive
Director.
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Balance of power
The Company has robust systems for internal audit and corporate risk assessment and mitigation.
The Companyhas independent Control Assurance Department (CAD) assisted by dedicated audit teams.
The internal audit covers all the factories, sales offices, warehouses and businesses and functions
controlled centrally. The audit cover plan of CAD is approved by the Audit Committee at the beginning
of every year. Every quarter, theAudit Committee of the Board is presented with key control issues andactions taken on past issues.
Management Compensation:
The Remuneration and Compensation Committee comprises of Independent Directors - Mr. A. Narayan,
Mr. S. Ramadorai and Dr. R. A. Mashelkar. Mr. A. Narayan is the Chairman of the Remuneration and
Compensation Committee of the Company. The reward philosophy of the Company is to pay market
competitive reward with a strong linkage to performance. The reward philosophy is set forth into practice
by various policies governing different elements of reward.
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Performance in terms of Earnings-
Company registered an overall growth of 6.4% in 2009-10 while the domestic consumer business grew by
nearly 9%. The growth momentum improved through the year with double-digit volume growth in the
last quarter. During the year, operating margin was improved by 15 basis points compared to the previous
year, despite a significant increase in investment behind brand support. Over the last five years, your
Company has performed well with a CAGR of 10% for total sales and 11.5% for FMCG sales.
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Stockholder analysis-
The purpose of Stockholder analysis is to understand who our companies marginal investors
are.
As we can see that unilever and its associates have the largest share in the HUL. And then the resident
and individual have the largest shareholding in the HUL. And the shareholding of other companies is very
less as compare to individual resident and there is a large invest of FII also in the HUL.
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Dividend policy-
The Board of Directors at their meeting held on 25th May, 2010 recommended a final dividend of
Rs.3.50 per share on equity share of face value of Re.1/- each, for the financial year ended 31st March,
2010, subject to the approval of the shareholders at the Annual General Meeting. Together with theinterim dividend of Rs. 3.00 per share on equity share of face value of Re. 1/- each, paid on 23rd
November, 2009, the total dividend for the year works out to Rs.6.50 per share on equity share of face
value of Re.1/- each. Final dividend, if approved by shareholders, will be paid on or after 30th July, 2010.
Cost of capital
The cost of capital is the weighted average cost of equity (Ke) and cost of debt (Kd). We
therefore address the calculation of Ke and Kd first and then conclude section III with our
analysis of the weighted average costs of capital.
Cost of Equity: The Cost of Equity is the minimum rate of return a firm must offer shareholders
to compensate for waiting for their returns, and for bearing some risk. This is the return expected
by equity investors in the observed companies and an important input for the calculation of theoverall cost of capital. For a particular company, it is the rate of return on investment that is
required by the company's ordinary shareholders. Cost of equity of the HUL for the FY10 is
calculated as following:
Dividend = Rs. 6.5 ; Price per share (Po) = Rs.248; Growth rate= 6%
Cost of equity = (D1/Po) +g
= (6.5/248) +6%
= 0.0262+0.06
Ke = 8.62%
Cost of Debt:Cost of debt is the effective rate that a company pays on its debt. From the balance
sheet, it is noticed that HUL has no debenture, secured and unsecured loan. So they dont have
cost of debt it means total cost of capital belongs to equity.
WEIGHTED AVERAGE COST OF CAPITAL
Before introducing the cost of capital analyses for our companies, we will explain the calculationof the market value of both equity and debt. These figures are required for the final calculations
of the weighted average cost of capital.
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a)Market value of equity:By multiplying the number of shares outstanding in the market at the end of the period and the
market price of each stock for the same period, we calculated the market value of equity shares
of the company.
Number of shares outstanding= 964,567,363
Market value per share= Rs. 248
Market value of total shares= Rs. 239212706000
b) Value of debt: From the balance sheet, it is noticed that HUL has no debentures, secured andunsecured loan.
We now have all the inputs to solve the following equation that gives us the cost of capital:WACC = Ke (E/(D+E)) + Kd (D/(D+E))
Particulars market value Weightscost ofcomponents
weightedaverage cost
Equity sharecapital 239212706000 1 0. 0.0862
Debt
Total 239212706000 1 0. 0.0862
So weighted average cost of capital is 10.29%
CAPITAL WEIGHTS
Market Value of Equity (a) Rs.239212706000Market Value of Debt (b)
Firm Value (a) + (b) Rs. 239212706000
D/(D+E)
E/(D+E) 100%
NESTLE
Introduction- Nestls relationship with India dates back to 1912, when it began trading as
The Nestl Anglo-Swiss Condensed Milk Company (Export) Limited, importing and sellingfinished products in the Indian market.
After Indias independence in 1947, the economic policies of the Indian Government emphasized
the need for local production. Nestl responded to Indias aspirations by forming a company in
India and set up its first factory in 1961 at Moga, Punjab, where the Government wanted Nestl
to develop the milk economy.
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Nestl Indias first production facility, set up in 1961 at Moga (Punjab), was followedsoon after by its second plant, set up at Choladi (Tamil Nadu), in 1967.
Consequently, Nestl India set up factories in Nanjangud (Karnataka), in 1989, and
Samalkha (Haryana), in 1993. This was succeeded by the commissioning of two
more factories - at Ponda and Bicholim, Goa, in 1995 and 1997 respectively. Theseventh factory was set up at Pantnagar, Uttarakhand, in 2006.
The 4 branch offices in the country help facilitate the sales and marketing of its
products. They are in Delhi, Mumbai, Chennai and Kolkata. The Nestl India headoffice is located in Gurgaon, Haryana.
Corporate governance analysis:
Nestl Indias business objective and that of its management and employees is to manufacture and market
the Companys products in such a way as to create value that can be sustained over the long term for
consumers, shareholders, employees, business partners and the national economy. Nestl India is
conscious of the fact that the success of a corporation is a reflection of the professionalism, conduct and
ethical values of its management and employees. In addition to compliance with regulatory requirements,
Nestl India endeavours to ensure that highest standards of ethical and responsible conduct are met
throughout the organisation.
BOARD OF DIRECTORS
Composition, Attendance of the Directors at the Board Meetings and the last Annual General Meeting,
Outside Directorships and other Board Committees Above information as on 31st December, 2010 or for
the year 2010, as applicable, is tabulated hereunder:
Management Compensation:
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Remuneration of Executive Directors is considered by the Board of Directors of the Company, with the
interested Executive Director(s), not participating or voting. The terms of remuneration of Executive
Directors are approved by the shareholders at the Annual General Meeting. Therefore, no separate
Remuneration Committee has been constituted.
Performance in terms of Earnings and stock price-
During the 2010 company delivered a strong performance. Net sales for the year 2010 increased
by 21.9% over the previous year. Domestic sales increased by 22.9% on increased volume and
realization. Export sales increased by 7.6%. overall, the business continued to grow the market
while retaining leadership in most businesses.
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STOCKHOLDER ANALYSIS
The purpose of Stockholder analysis is to understand who our companies marginal investorsare.
From the table we can see that majority part of the shares are held by the promoters of the company, then
the second largest investors are individuals with 16% holding in shares. Then comes the FIIS with 10%
holding.
DIVIDEND POLICY
Final dividend of Rs.12.50 per share has been recommended by the Board of Directors and subject to the
approval of the shareholders at the ensuing Annual General Meeting, is proposed to be paid on andaround 6th May, 2011.Two interim dividends for the year 2010, first at the rate of Rs. 9.00 per share and
the second at the rate of Rs. 27.00 per share, were paid on 7th May, 2010 and 16thNovember, 2010,
respectively.
The dividend payout ratio of the company for the FY10 year is 13.5%. It is calculated by
dividing the dividend per equity share with earning per share (EPS).
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COST OF CAPITAL
The cost of capital is the weighted average cost of equity (Ke) and cost of debt (Kd). We
therefore address the calculation of Ke and Kd first and then conclude section III with ouranalysis of the weighted average costs of capital.
Cost of Equity: The Cost of Equity is the minimum rate of return a firm must offer shareholders
to compensate for waiting for their returns, and for bearing some risk. This is the return expected
by equity investors in the observed companies and an important input for the calculation of the
overall cost of capital. For a particular company, it is the rate of return on investment that isrequired by the company's ordinary shareholders. Cost of equity of the Nestle for the FY10 iscalculated as following:
Dividend = Rs. 12.5; Price per share (Po) = Rs.2650; Growth rate= 12%
Cost of equity = (D1/Po) +g
= (12.5/2018) +12%
= 0.0042+0.1
Ke =12.0042%
Cost of Debt:Cost of debt is the effective rate that a company pays on its debt. From the balance
sheet, it is noticed that NESTLE has no debentures but has taken secured and unsecured loan of
Rs.1,514,412 (in Thousands). So cost of debt is cost of secured and unsecured loan. Interest rate
on loans is 7%.
So Before Tax Cost of Debt is 6%
After tax Cost of Debt= I(1-Tax Rate)
=7 (1-.28)
=5.04%
Cost of Debt (after tax) is 5.04%
Before introducing the cost of capital analyses for our companies, we will explain the calculationof the market value of both equity and debt. These figures are required for the final calculations
of the weighted average cost of capital.
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WEIGHTED AVERAGE COST OF CAPITAL
a)Market value of equity:By multiplying the number of shares outstanding in the market at the end of the period and themarket price of each stock for the same period, we calculated the market value of equity sharesof the company.
Number of shares outstanding= 35,900,637Market value per share= Rs. 2650
Market value of total shares= Rs. 95136688050
b) Value of debt: From the balance sheet, it is noticed that NESTLE has no debentures but has
taken secured and unsecured loan of Rs.1,514,412 thousands. So value of debt is value of
secured and unsecured loan.
We now have all the inputs to solve the following equation that gives us the cost of capital:WACC = Ke (E/(D+E)) + Kd (D/(D+E))
Particularsmarket value (inRs. millions) weights
cost ofcomponents
weightedaverage cost
Equity sharecapital 95136688050 0.98433 0.1204 0.1185
Debt 1514412000 0.01566 0.0504 0.0007
Total 96651100050 1 0.1192
So weighted average cost of capital is 11.92%
CAPITAL WEIGHTS
Market Value of Equity (a) Rs. 95136688050
Market Value of Debt (b) Rs. 1514412000
Firm Value (a) + (b) Rs. 96651100050
D/(D+E) 1.56%
E/(D+E) 98.43%
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Conclusion
In conclusion I would like to say that both the company have a large part of equity then debt in their
capital structure, which can be because of the recession, so that the companies didnt want to take so
much of debt it wanted to have more of equity. Both the companies almost have similar corporate
governance, their ultimate aim is to being transparent and provide as much profit as they can for their
shareholders.