A STUDY ON EVALUATION OF FINANCIAL PERFORMANCE OF FMCG SECTOR

PREPARED BY KRUTIKA R. TANK UNDER THE GUIDANCE OF

DR. HITESH SHUKLA
ABSTRACT

Financial performance refers to the act of performing financial activity. Financial

performance is a subjective measure of how well a firm can use assets from its primary mode of
business and generate revenues. Financial performance analysis includes analysis and interpretation of
financial statements. Fast Moving Consumer Goods (FMCG) is also known as Consumer Packaged
Goods (CPG). FMCG goods are sold quickly and at relatively cheaper cost. FMCG goods are
consumable goods. Consumers have to buy at regular intervals. In this paper, an attempt has been
made to evaluate financial performance analysis of FMCG sector by studying of Hindustan Unilever
Limited, ITC Limited and Procter & Gamble Hygiene & Health Care Ltd.”. Its main objective was to
compare and examine empirically the performance of leading FMCG companies i.e. HUL, ITC and
PGHH with respect to liquidity, profitability, solvency and efficiency for the period of 2017-18. To
fulfill the requirements of data analysis and interpretation for the succession of financial performance
analysis, I have used different techniques. Which includes accounting technique i.e. Ratio Analysis
and Statistical techniques i.e. T-Test, Analysis of Variance (ANOVA). By using these techniques, data
analysis have done for the period of 2011 to 2016. And from this data analysis, findings and
conclusion have drawn.

INTRODUCTION:

Financial analysis is structural and logical way to present overall financial performance of a
financial institution. It’s also help to evaluate and decision making for business operation. In financial
analysis process ratio analysis is the most dominant and logical structure to help business related
stakeholder.

Financial performance analysis means establishing relationship between the items in the
balance sheet and profit and loss account for determining the financial strength and weakness of the
firm. It is the process of scanning of the financial statements to judge profitability, solvency, stability,
growth and prosperity of a firm. It means firm's overall financial health over a given period of time.

1
 Financial performance analysis is the process of determining the operating and financial
characteristics of a firm from accounting and financial statements. The goal of such analysis is to
determine the efficiency and performance of firm’s management, as reflected in the financial records
and reports. The analyst attempts to measure the firm’s liquidity, profitability and other indicators that
the business is conducted in a rational and normal way; ensuring enough returns to the shareholders.

According to Metcalf and Titard, “Analyzing financial statements is the process of

evaluating the relationship between the component parts of the financial statements to obtain a better
understanding of a firm’s position and performance.”

FMCG sector in India has been experiencing a phenomenal pace of growth since last
decade, thanks to increasing consumer incomes and rapidly changing consumer tastes and preferences.
Large scale and low cost production, modern retailing strategies, branding and maintenance of intense
distribution network have given FMCGs an edge over others in raising hovering revenues.

FMCG is probably the most standard case or sector of low margin and high volume
business. The FMCG sector is the 4th largest sector in the Indian economy. At present, the worth of the
industry is 13.1 billion US$. The products as well as industries have the fastest growing rate. In the
present scenario, “Time is Money”, so that the FMCG companies have to be very fast in
manufacturing and supplying goods. The FMCG sector generated revenues worth 47.3 billion USD in
2015 in India. Over the years 2007 – 2016F, this sector is expected to post CAGR of 11.9% in
revenues and revenues for this sector in the year 2016 is expected to reach 49 USD billion.

OBJECTIVES OF THE STUDY

 The broader objective of the study is to evaluate financial performance of FMCG sector.
 To examine and compare the financial performance of HUL, ITC and P & G company.
 To study and analyze the trends of various elements of financial statements of FMCG sectors.
 To analyze and compare the risk and solvency position of various FMCG sectors.
 To examine and compare the overall profitability of FMCG sector.
 To analyze and compare the liquidity position of FMCG sector.
 To evaluate working capital management of various FMCG sectors.

2
LITERATURE REVIEW

Dr. Bhaskar Bagchi and Dr. Basanta khamrui (2012) examined that FMCG sector in
India has been experiencing a phenomenal step of evolution since last decade, thanks to increasing
consumer incomes and quickly changing consumer tastes and preferences. Large scale and low cost of
production, modern retailing strategies, branding and maintenance of intense distribution network have
given FMCGs an edge over others in raising floating revenues.
According to Drake (2010), financial statement analysis is the selection, analysis and
interpretation of financial data, along with other appropriate information, to help in investment and
financial decision making. Moreover, it is also the process of specifying financial strengths and
weaknesses of the firm by appropriately creating relationship between the items of the balance sheet
and the profit and loss account.
The evaluation of financial statement is a procedure of assessing the relationship between
the component parts of financial statement to get a better understanding of the firm’s position and
performance. Thus, financial performance analysis assists to highlight the facts and relationships
regarding managerial performance, corporate efficiency, financial strength and weakness and credit
worthiness of the firm. (Kieso, et al 2012:1549)
R. Idhayajothi, Dr. O. T. V. Latasri, N. Manjula, A. Meharaj Banu, R. Malini, (Jun.
2014) evaluated that financial statements are prepared for various decision making purpose. It plays
governing role to set the framework and managerial decisions, and it is possible through analysis and
the interpretation of financial statements. So that it is essential for each and every unit to evaluate and
analyze the financial performance.
Abdi Dufera (June, 2010) examined that a financial statement refers to such statements,
which includes financial information about an enterprise. It is the final product of accounting work
done during the accounting period – quarterly / half-yearly / annually. (Bernstein & Wild, 2000)

STATEMENT OF PROBLEM

The study attempts to evaluate the financial performance of FMCG sector by analyzing
financial performance of three leading FMCG companies, these are Hindustan Unilever limited,
Imperial Tobacco Company of India limited and Procter & Gamble Hygiene and Health care Ltd.

3
RESEARCH METHODOLOGY

The study covers analysis of three leading companies in the FMCG segment - Hindustan
Unilever limited, Imperial Tobacco Company of India limited and Procter & Gamble Hygiene and
Health care Ltd. The descriptive form of research method is adopted for study. The major purpose of
descriptive research is description of state of affairs of the institution as it exists at present. The data
required for the study has been collected from secondary source. The relevant information was taken
from annual reports, literature from various books and various websites. In order to analyze financial
performance of the selected FMCG companies, various accounting ratios and statistical tools like,
ANOVA analysis has been used. The study has been undertaken for a period of 7 years from 2010-11
to 2016-17.

SCOPE OF STUDY

The study was carried out for the evaluation of financial performance of FMCG sector by
studying and analyzing data of Hindustan Unilever limited, Imperial Tobacco Company of India
limited and Procter & Gamble Hygiene and Health care Ltd. The period for analysis is 7 financial year
from 2010 to 2016. The study aims to analyze liquidity ratios, leverage ratios, asset management
ratios, profitability ratios, operating ratios and market based ratios.

RESEARCH DESIGN

This study uses descriptive financial ratio analysis to measure, describe and analyze the
financial performance of FMCG sector. For the purpose of analysis the data was obtained from the
audited annual report Hindustan Unilever limited, Imperial Tobacco Company of India limited and
Procter & Gamble Hygiene and Health care Ltd, literature from various research papers, different
websites and various reference books.

SAMPLE OF STUDY

In India, the leading FMCG companies in the year 2016 are as following:

1. Hindustan Unilever Ltd. 11. Colgate-Palmolive (India) Ltd.

2. ITC (Indian Tobacco Company) 12. Gillette India Ltd.

4
 3. Nestlé India 13. Godfrey Phillips
4. GCMMF (AMUL) 14. Henkel Spic
5. Dabur India Ltd 15. Johnson & Johnson
6. Asian Paints (India) 16. Modi Revlon
7. Cadbury India 17. Wipro
8. Britannia Industries Ltd. 18. Nirma Ltd
9. Procter & Gamble Hygiene and Health Care 19. Amul India
10. Marico Industries Ltd. 20. Godrej Consumer Products Ltd

The sample of the study is leading units that are working in FMCG industry. They are as following:

1. Hindustan Unilever limited.

2. Imperial Tobacco Company of India limited.
3. Procter & Gamble Hygiene and Health care Ltd.

METHODS OF DATA COLLECTION

For this study, secondary data collection method is used to conduct research. The data are
collected from Annual Reports of HUL, ITC and P & G Company, various reference books, various
websites previous year reports and various research papers.

METHODS OF DATA PRESENTATIONS AND ANALYSIS

After relevant data regarding the sample units are collected, the researchers compute various
financial ratios which the researchers believe measure the financial performance of the FMCG sector.
And ANOVA analysis is conducted for analysis of FMCG sector. The financial ratios as a measure of
financial performance were grouped and presented into six performance conditions as follows;

1. Liquidity Ratios
2. Leverage Ratios
3. Asset Management Ratios
4. Profitability Ratios

5
 5. Operating Ratios
6. Market Based Ratios

Next to that, the researchers report the outcome of their finding based on the analysis of
seven years financial reports. In the process the collected secondary data values are edited,
summarized, categorized and possible generalization and inferences was made by the researchers. The
researchers use the descriptive data analysis technique to analyze the outcome of the study and are
presented as a ratio in the form of tables (as per annexed) and graphs. Here, the researchers try to
minimize premature conclusions and interpretations as well as great care was taken in the data
processing.

IMPORTANCE OF STUDY

 It provides some insight about the evaluation process of FMCG industry.

 To initiate the concerned organizations to reassess existing practices and put a renewed emphasis on
those undermined ones.
 To serve as a reference material for both academicians and practitioners.
 To initiate other interested researchers to carry out more extensive studies in the area.

LIMITATIONS OF THE STUDY

1. The study is completely based on the secondary data which has its own limitations and it may affect
the results.
2. The present study uses ratios as an important tool of analysis which itself has a number of
limitations on its applicability.
3. Most of the information is collected from the financial statements. So the limitations of financial
statements may affect the study.
4. Non-monetary factors are not considered in this study, which may be a part of financial
performance analysis up to some point.

HYPOTHESIS OF THE STUDY

1. H0: There is no significant difference between liquidity ratios and financial performance.

6
 H1: There is significant difference between liquidity ratios and financial performance.
2. H0: There is no significant difference between leverage ratios and financial performance.
H1: There is significant difference between leverage ratios and financial performance.
3. H0: There is no significant difference between asset management ratios and financial performance.
H1: There is significant difference between asset management ratios and financial performance.
4. H0: There is no significant difference between profitability ratios and financial performance.
H1: There is significant difference between profitability ratios and financial performance.
5. H0: There is no significant difference between operating ratios and financial performance.
H1: There is significant difference between operating ratios and financial performance.
6. H0: There is no significant difference between market based ratios and financial performance.
H1: There is significant difference between market based ratios and financial performance.

DATA ANALYSIS & INTERPRETATION

A. LIQUIDITY RATIOS: 1. CURRENT RATIOS:

Year HUL ITC PGHH

2010 0.97 1.55 1.60
2011 1.05 1.54 2.19
2012 1.21 1.58 1.93
2013 0.99 1.70 1.91
2014 1.04 1.82 2.02
2015 1.05 2.05 1.90
2016 1.03 1.65 2.51

ANOVA TABLE

Source of Variation SS df MS F P-value F crit

Between Groups 0.231324 6 0.038554 0.140335 0.988161 2.847726
Within Groups 3.8462 14 0.274729
Total 4.077524 20

7
 The ANOVA table describes the calculation of F at 5% level of significance. Here, the
calculated value of F (0.1403) is less than the table value of F (2.8477). So that hypothesis is accepted.

2. QUICK / LIQUID / ACID TEST RATIO:

Year HUL ITC PGHH

2010 0.65 0.99 1.51
2011 0.63 0.92 1.96
2012 0.82 0.97 1.72
2013 0.66 1.06 1.64
2014 0.72 1.18 1.78
2015 0.76 1.38 1.73
2016 0.75 1.07 2.32

ANOVA TABLE

Source of Variation SS df MS F P-value F crit

Between Groups 0.215714 6 0.035952 0.106452 0.994279 2.847726
Within Groups 4.728267 14 0.337733
Total 4.943981 20

The ANOVA table describes the calculation of F at 5% level of significance. Here, the
calculated value of F (0.1065) is less than the table value of F (2.8477). So that hypothesis is accepted.

B. LEVERAGE RATIOS: 1. DEBT-EQUITY RATIO

Year HUL ITC PGHH

2010 0.00 0.008 0.00
2011 0.33 0.013 0.518
2012 0.28 0.011 0.531
2013 0.44 0.009 0.003
2014 0.37 0.006 0.003

8
 2015 0.30 0.004 0.003
2016 0.36 0.004 0.002

ANOVA TABLE

Source of Variation SS df MS F P-value F crit

Between Groups 0.17831 6 0.029718 0.666957 0.677893 2.847726
Within Groups 0.623813 14 0.044558
Total 0.802123 20

The ANOVA table describes the calculation of F at 5% level of significance. Here, the
calculated value of F (0.6670) is less than the table value of F (2.8477). So that hypothesis is accepted.

2. SHAREHOLDERS EQUITY RATIO

Year HUL ITC PGHH

2010 0.34 0.86 0.52
2011 0.27 0.73 0.66
2012 0.38 0.78 0.63
2013 0.27 0.76 0.66
2014 0.30 0.79 0.70
2015 0.33 0.77 0.65
2016 0.30 0.82 0.68

ANOVA TABLE

Source of Variation SS df MS F P-value F crit

Between Groups 0.005981 6 0.000997 0.016182 0.999973 2.847726
Within Groups 0.8624 14 0.0616
Total 0.868381 20

The ANOVA table describes the calculation of F at 5% level of significance. Here, the
calculated value of F (0.0162) is less than the table value of F (2.8477). So that hypothesis is accepted.

3. FIXED ASSETS TO LONG TERM FUNDS RATIO

9
 Year HUL ITC PGHH
2010 0.84 0.57 0.24
2011 0.61 0.52 0.21
2012 0.48 0.48 0.19
2013 0.59 0.50 0.27
2014 0.54 0.45 0.24
2015 0.51 0.46 0.25
2016 0.58 0.43 0.21

ANOVA TABLE

Source of Variation SS df MS F P-value F crit

Between Groups 0.055733 6 0.009289 0.243559 0.954102 2.847726
Within Groups 0.533933 14 0.038138
Total 0.589667 20

The ANOVA table describes the calculation of F at 5% level of significance. Here, the
calculated value of F (0.2436) is less than the table value of F (2.8477). So that hypothesis is accepted.

4. INTEREST COVER RATIO

Year HUL ITC PGHH

2010 388.83 67.63 9316.90
2011 0.00 83.61 6799.86
2012 2798.60 91.83 743.50
2013 198.13 101.88 0.00
2014 140.56 536.72 86.4
2015 368.86 179.43 88.55
2016 0.00 208.96 159.34

ANOVA TABLE

Source of Variation SS df MS F P-value F crit

Between Groups 28632995.37 6 4772166 0.744249 0.623571 2.847726

10
 Within Groups 89768736.25 14 6412053
Total 118401731.6 20

The ANOVA table describes the calculation of F at 5% level of significance. Here, the
calculated value of F (0.7442) is less than the table value of F (2.8477). So that hypothesis is accepted.

C. ASSET MANAGEMENT RATIOS: 1. INVENTORY TURNOVER RATIO

Year HUL ITC PGHH

2010 7.74 5.74 16.89
2011 8.27 6.28 17.36
2012 8.70 6.46 16.55
2013 10.82 6.88 16.09
2014 11.21 6.74 17.41
2015 12.23 6.63 19.87
2016 13.42 6.35 20.73

ANOVA TABLE

Source of Variation SS df MS F P-value F crit

Between Groups 28.8592 6 4.809865 0.137849 0.988695 2.847726
Within Groups 488.4903 14 34.89216
Total 517.3495 20

The ANOVA table describes the calculation of F at 5% level of significance. Here, the
calculated value of F (0.1378) is less than the table value of F (2.8477). So that hypothesis is accepted.

2. DEBTORS TURNOVER RATIO

Year HUL ITC PGHH

2010 30.15 33.80 35.75
2011 25.56 35.05 34.83

11
 2012 28.58 37.72 32.94
2013 36.08 39.25 26.33
2014 35.83 28.28 24.77
2015 40.92 25.92 23.60
2016 37.26 30.48 19.39

ANOVA TABLE

Source of Variation SS df MS F P-value F crit

Between Groups 67.967229 6 11.32787 0.259662 0.94684 2.847726
Within Groups 610.7554 14 43.62539
Total 678.72263 20

The ANOVA table describes the calculation of F at 5% level of significance. Here, the
calculated value of F (0.2597) is less than the table value of F (2.8477). So that hypothesis is accepted.

3. TOTAL ASSETS TURNOVER RATIO

Year HUL ITC PGHH

2010 2.13 1.24 1.03
2011 2.17 1.27 0.91
2012 2.24 1.29 0.98
2013 2.47 1.34 1.25
2014 2.45 1.29 1.51
2015 2.49 1.21 1.37
2016 2.51 1.11 1.25

ANOVA TABLE

Source of Variation SS df MS F P-value F crit

Between Groups 0.2644476 6 0.044075 0.099011 0.995291 2.847726
Within Groups 6.2320667 14 0.445148
Total 6.4965143 20

12
 The ANOVA table describes the calculation of F at 5% level of significance. Here, the
calculated value of F (0.0990) is less than the table value of F (2.8477). So that hypothesis is accepted.

4. FIXED ASSETS TURNOVER RATIO

Year HUL ITC PGHH

2010 5.64 2.33 3.94
2011 5.62 2.49 3.74
2012 6.12 2.62 3.96
2013 6.87 2.71 4.70
2014 6.89 2.65 5.13
2015 7.14 2.50 4.96
2016 6.82 2.34 4.65

ANOVA TABLE

Source of Variation SS df MS F P-value F crit

Between Groups 3.035981 6 0.505997 0.128261 0.990629 2.847726
Within Groups 55.2308 14 3.945057
Total 58.266781 20

The ANOVA table describes the calculation of F at 5% level of significance. Here, the
calculated value of F (0.1283) is less than the table value of F (2.8477). So that hypothesis is accepted.

5. WORKING CAPITAL TURNOVER RATIO

Year HUL ITC PGHH

2010 230.27 3.92 1.28
2011 72.95 4.68 2.43
2012 59.47 4.77 2.82
2013 73.32 4.08 3.05
2014 83.55 3.69 2.85

13
 2015 69.57 2.94 2.59
2016 43.47 3.23 2.05

ANOVA TABLE

Source of Variation SS df MS F P-value F crit

Between Groups 7828.6828 6 1304.78 0.354909 0.895306 2.847726
Within Groups 51469.315 14 3676.38
Total 59297.998 20

The ANOVA table describes the calculation of F at 5% level of significance. Here, the
calculated value of F (0.3549) is less than the table value of F (2.8477). So that hypothesis is accepted.

FINDINGS

 From the current ratio and quick ratio, we can find out that the PGHH unit shows highly solvent
position.
 From the debt-Equity ratio, the HUL unit is more volatile for paying return to the shareholders.
 From the shareholders equity ratio, the ITC Company’s financial position is strong because the
proportion of shareholders’ equity is larger.
 From the fixed assets to long term funds ratio, the HUL Company has enough funds available in
case of liquidation.
 From the interest cover ratio, the HUL Company is conservative in using debt and PGHH Company
having excessive use of debt.
 From the inventory turnover ratio, the inventory management of PGHH is good and lower ratio in
ITC Company implies excessive inventory levels or a slow moving inventory.
 From the debtor’s turnover ratio, the HUL Company is more efficient for management of credit.
 From the total assets turnover ratio, the ITC Company’s lower ratio is lower indicates idle capacity.
 From the fixed assets turnover ratio, the HUL Company is doing an effective job of generating sales
with a relatively small amount of fixed assets.
 From the working capital turnover ratio, the HUL Company is being extremely efficient in using a
firm’s short-term assets and liabilities to support sales as the ratio is higher. It also indicates PGHH

14
 Company is investing in too many accounts receivable and inventory assets to support its sales as
the ratio is low.
 From the gross profit margin and net profit margin, the ITC having an advantageous position to
survive in the face of falling selling prices, rising costs of production or declining demand for the
product.
 From the return on total assets, the HUL Company is using their assets more effectively and this
leads to generate more returns.
 From the return on shareholders’ funds, the HUL Company’s higher ratio motivates shareholders to
invest in a company for getting adequate rate of return on their funds.
 From the return on equity, the HUL Company’s higher ratio indicates that the firm has used
resources of owners efficiently and effectively.
 From the Return on capital employed, the HUL Company’s higher ratio indicates how effectively
the operating assets are used in earning return.
 From the Material cost ratio, the ITC, HUL and PGHH companies having lower material cost ratio,
administrative expense ratio and operating expense ratio,. So that the lower material cost ratio of
company shows favorable condition.
 From the earnings per share ratio, the PGHH Company’s higher ratio indicates better capital
productivity.
 From the dividend per share ratio, the PGHH Company’s higher ratio indicates higher amount of
dividend available per share.
 From the dividend payout ratio, the HUL Company’s higher ratio signifies a liberal distribution
policy. PGHH Company’s lower ratio reflects conservative distribution policy.

CONCLUSION

The study was conducted to analyze the financial performance of the FMCG sector.
Financial performance is redefining the way of how to manage the funds supply and financial position
as well as liquidity position. To conduct this analysis, I have taken a sample of 3 leading FMCG
companies namely Hindustan Unilever limited, Imperial Tobacco Company of India limited and
Procter & Gamble Hygiene and Health care Ltd. The financial statements of these 3 companies was
analyzed and interpreted and ratio analysis is conducted to identify the financial strength and weakness
of the company as well as industry. For this purpose, the relevant secondary data of sample units for a

15
period of 7 years (2010 to 2016) and data were analyzed using the appropriate statistical tools and
techniques. The analysis of the data has provided major conclusions are as following: from the ratio
analysis of these 3 companies I found that the performance of Hindustan Unilever limited is very good
and very well managed as compared to Imperial Tobacco Company Of India Limited and Procter &
Gamble Hygiene And Health Care Ltd. ANOVA analysis proved that the financial performance of
FMCG sector is very well managed as compared to any other sector. The FMCG sector is 4 th largest
sector in Indian economy. It is the fastest growing sector in India. At present the worth of FMCG
industry is 13.1 billion US$. FMCG industry has a strong MNC presence and it is characterized by a
well established distribution network and intense competition. Availability of key raw materials, lower
labour costs, well established distribution network and presence across the entire value chain gives a
competitive advantage to Indian FMCG industries.

REFERENCES

1. Abdi Dufera, ‘Financial Performance Evaluation (A Case Study of Awash International Bank
(AIB))” June, 2010. A Research project.
2. Dr. Bhaskar Bagchi and dr. Basanta khamrui (2012), “financial performance of fmcg companies in
india: a comparative study between britannia industries and dabur india”, zenith international
journal of business economics & management research vol.2 issue 3, march 2012, issn 2249 8826.
3. Drake, L. (2010). Efficiency and Productivity Change in UK Banking. Applied Financial
Economics Journal, 11, 557-571.
4. Kieso, E., Weygandt, J. and Warfield, D. (2012). Intermediate Accounting (14th edition). New
York, USA: John Wiley Inc.
5. R. Idhayajothi, Dr. O. T. V. Latasri, N. Manjula, A. Meharaj Banu, R. Malini, “A Study on
Financial Performance of Ashok Leyland Limited at Chennai.” (Jun. 2014) , IOSR Journal of
Business and Management (IOSR-JBM)

16