Corporate Finance focus on FMCG industry

Name Danish Ata (2006 ndash 2008)

Title Corporate Finance focus on FMCG industry

Summary

The average 20 rise in profitability of FMCG companies in FY 2007 was influenced by

FMCG product sales in rural and semi-urban segments HULrsquos lsquoProject Shaktirsquo ITC lsquoe-

Choupalrsquo and Colgate-Palmolive Indiarsquos oral health awareness campaign have established

good distribution networks in these regions Other companies are to start catering to

these regions in near future

FMCG companies are aware that brand focus and increasing market share can help them

lift margin pressure in the long term They are making accessible their brands to first-time

consumers through sachets thus increasing their presence in the rural and semi-urban

areas Maricorsquos standalone net sales jumped 17 with sales of Parachute the flagship

brand advancing 11 resulting in a 43 increase in net profit in the December 2007

quarter over the December 2006 quarter Sales of the hair-oil category expanded 27 by

volume Sales volume of Parachute Jasmine and Nihar perfumed oils was up 28 and that

of Hair amp Care brand 14 The company continues to dominate the coconut-oil category

with a 56 market share

Net sales of GCPL grew 16 and net profit 13 in the quarter ended December 2007 The

growth in soaps was due to the price hike of about 6 and introduction of 100-gm

variants in certain soap brands Sales of toilet soaps spurted 13 as against the 7 growth

of the FMCG industry in the December 2007 quarter due to GCPLrsquos ability to pass on the

price hike to its consumers The company continues to be the second largest toilet-soap

player with a market share of 97

Agro Tech Foodsrsquos strategy of de-risking its business by focusing on branded products has

started showing results The company saw a decline in net sales but the strategy worked

well in improving the margin and bottom line Despite the decrease in net sales by 3 net

profit improved 28 due to improvement in margin by 50 basis points to 24 on

increased sales of branded foods segment by 20

Tata Tea recorded a double-digit growth of 22 with sales volume of branded tea

spurting 15 in the December 2007 quarter The company gets 75-80 of the revenue

from branded tea Volume share was 194 while that of second largest player HUL in

India was 191 in calendar year 2007 However the company had a market share of

212 by volume while that of the second largest player was 189 in December 2007 Its

market share by value of 215 was marginally behind market leader HUL with a share by

value of 227

To safeguard their market shares FMCG manufacturers are launching new products or

extending the existing products with new avatars GCPL forayed into the growing face-

wash and shampoo categories while Dabur and Marico entered the fitness and well-being

businesses

We expect the sector to continue its 3Q performance for the next couple of quarters

Advertisement and sales promotion will continue to drive volume growth We expect

FMCG players to spend increasingly in order to reach consumers directly and effectively

We believe the food segment will maintain its better performance compared to other

segments Lower penetration levels and higher presence of the unorganized sector offer

the organized players an opportunity to demonstrate their brand power ndash this means

huge potential for the segment to perform However players striving to upgrade

consumer habits rather than change them are better placed since changing consumer

habits is a risky proposal and takes a longer time

We like those companies which are placed well to tap the growth potential have greater

competitive advantages are likely to gain market share and have strong financial and

marketing muscle Going by these parameters Britannia and ITC are clear winners

Britanniarsquos business strategy and its marketing innovativeness will enable it to gain both

volumes and market share Improving cigarette volumes focus on filter cigarettes and its

strong pricing power will enable ITC to demonstrate superior earnings in the next two

years

Conclusion

Above information and research can be used by any company who wants to invest in he

FMCG sector The report is basically made to assist the investors to give overview about the

investment options in the FMCG industry I am going to highlights some key concepts related

with the corporate finance Any company must consider these key concepts

Invest in projects that yield a return greater than the minimum acceptable hurdle rate

bull The hurdle rate should be higher for riskier projects and reflect the financing mix used -

ownersrsquo funds (equity) or borrowed money(debt)

bull Returns on projects should be measured based on cash flows generated and the timing of

these cash flows they should also consider both positive and negative side effects of

these projects

1048657 Choose a financing mix that minimizes the hurdle rate and matches the assets being financed

1048657 If there are not enough investments that earn the hurdle rate return the cash to

stockholders

bull The form of returns - dividends and stock buybacks - will depend upon the stockholdersrsquo

characteristics

Since financial resources are finite there is a hurdle that projects have to cross before being

deemed acceptable

1048657 This hurdle will be higher for riskier projects than for safer projects

1048657 A simple representation of the hurdle rate is as follows

Hurdle rate = Riskless Rate + Risk Premium

The above article was extracted from dissertations by the students of Skyline College Skyline

College is amongst the top MBA and BBA institutes in Delhi Gurgaon (NCR)

profit improved 28 due to improvement in margin by 50 basis points to 24 on

increased sales of branded foods segment by 20

Tata Tea recorded a double-digit growth of 22 with sales volume of branded tea

spurting 15 in the December 2007 quarter The company gets 75-80 of the revenue

from branded tea Volume share was 194 while that of second largest player HUL in

India was 191 in calendar year 2007 However the company had a market share of

212 by volume while that of the second largest player was 189 in December 2007 Its

market share by value of 215 was marginally behind market leader HUL with a share by

value of 227

To safeguard their market shares FMCG manufacturers are launching new products or

extending the existing products with new avatars GCPL forayed into the growing face-

wash and shampoo categories while Dabur and Marico entered the fitness and well-being

businesses

We expect the sector to continue its 3Q performance for the next couple of quarters

Advertisement and sales promotion will continue to drive volume growth We expect

FMCG players to spend increasingly in order to reach consumers directly and effectively

We believe the food segment will maintain its better performance compared to other

segments Lower penetration levels and higher presence of the unorganized sector offer

the organized players an opportunity to demonstrate their brand power ndash this means

huge potential for the segment to perform However players striving to upgrade

consumer habits rather than change them are better placed since changing consumer

habits is a risky proposal and takes a longer time

We like those companies which are placed well to tap the growth potential have greater

competitive advantages are likely to gain market share and have strong financial and

marketing muscle Going by these parameters Britannia and ITC are clear winners

Britanniarsquos business strategy and its marketing innovativeness will enable it to gain both

volumes and market share Improving cigarette volumes focus on filter cigarettes and its

strong pricing power will enable ITC to demonstrate superior earnings in the next two

years

Conclusion

Above information and research can be used by any company who wants to invest in he

FMCG sector The report is basically made to assist the investors to give overview about the

investment options in the FMCG industry I am going to highlights some key concepts related

with the corporate finance Any company must consider these key concepts

Invest in projects that yield a return greater than the minimum acceptable hurdle rate

bull The hurdle rate should be higher for riskier projects and reflect the financing mix used -

ownersrsquo funds (equity) or borrowed money(debt)

bull Returns on projects should be measured based on cash flows generated and the timing of

these cash flows they should also consider both positive and negative side effects of

these projects

1048657 Choose a financing mix that minimizes the hurdle rate and matches the assets being financed

1048657 If there are not enough investments that earn the hurdle rate return the cash to

stockholders

bull The form of returns - dividends and stock buybacks - will depend upon the stockholdersrsquo

characteristics

Since financial resources are finite there is a hurdle that projects have to cross before being

deemed acceptable

1048657 This hurdle will be higher for riskier projects than for safer projects

1048657 A simple representation of the hurdle rate is as follows

Hurdle rate = Riskless Rate + Risk Premium

The above article was extracted from dissertations by the students of Skyline College Skyline

College is amongst the top MBA and BBA institutes in Delhi Gurgaon (NCR)

Conclusion

Above information and research can be used by any company who wants to invest in he

FMCG sector The report is basically made to assist the investors to give overview about the

investment options in the FMCG industry I am going to highlights some key concepts related

with the corporate finance Any company must consider these key concepts

Invest in projects that yield a return greater than the minimum acceptable hurdle rate

bull The hurdle rate should be higher for riskier projects and reflect the financing mix used -

ownersrsquo funds (equity) or borrowed money(debt)

bull Returns on projects should be measured based on cash flows generated and the timing of

these cash flows they should also consider both positive and negative side effects of

these projects

1048657 Choose a financing mix that minimizes the hurdle rate and matches the assets being financed

1048657 If there are not enough investments that earn the hurdle rate return the cash to

stockholders

bull The form of returns - dividends and stock buybacks - will depend upon the stockholdersrsquo

characteristics

Since financial resources are finite there is a hurdle that projects have to cross before being

deemed acceptable

1048657 This hurdle will be higher for riskier projects than for safer projects

1048657 A simple representation of the hurdle rate is as follows

Hurdle rate = Riskless Rate + Risk Premium

The above article was extracted from dissertations by the students of Skyline College Skyline

College is amongst the top MBA and BBA institutes in Delhi Gurgaon (NCR)