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Fundamental Financial Analysis of HUL Ltd

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Pramana Research Journal ISSN NO: 2249-2976

Fundamental Financial Analysis of HUL Ltd

Sarveshwar S1, Dr Prasanna Kumar2

1
Student, Department of Commerce, Loyola College, Chennai
2
Assistant Professor, Department of Commerce, Loyola College, Chennai
1
sarveshwar.sridhar@gmail.com
2
drprasannakumar@loyolacollege.edu

Abstract
This study aims at analyzing the financial performance and growth of the company. For this
research data is taken for a period of five years from 2016 to 2021. The data for the purpose
of the research is obtained from published annual reports of the company from the NSE
website. The stocks are analyzed by using financial tools. The tools used for measuring the
financial performance are ratios such as liquidity ratio, Profitability ratio and Turnover ratio.
The analyses conclude that the company can generate consistent growth in the wealth of the
shareholders and it has a low debt to equity ratio, which indicates lower risk to the
shareholders. There has been an inefficient utilization of assets by the company and the
company can improve its profitability by efficient usage of assets.

Keywords: Ratio analysis, financial performance, FMCG, Liquidity ratio, Financial Analysis

Introduction
Indian economy is one of the top five economies in the world in terms of its market potential.
It is also ranked as the third-largest economy in Asia in terms of its GDP. This makes India a
profitable investment avenue for investors across the world. Capital markets play a vital part
in the development of a country. They help in providing the financial resources required for
the long-term sustainable development of the economy. Investors need to be more prudent to
the market fluctuations in the stock market. To minimize the risk in the stock market, the
investors before investing should analysis about the company’s past performance, market
fluctuations in the industry, the reason for such fluctuation, inflation etc. (R. Amsaveni & S.
Gomathi, 2013)There are two ways of analyzing a stock. Firstly, Technical analysis is
analyzing the security by the study the price movement by scrutinizing a security's past pricing
predominately through charts and indicators. Secondly, Fundamental analysis is analyzing the
security by analyzing the firm's financial statements and examining ratios and other metrics.
This is used to estimate a company's intrinsic value based on its revenues, profit, costs, capital
structure, cash flows, and so on. These results are compared with industry peers and
competitors. Finally, these results can be used to compare to the broader market or larger
economic environment.

Hindustan Unilever is one of the largest FMCG company in India. with a market share of 14%.
The parent company of HUL ltd is British Company Uniliver. Hindustan Uniliver produces
Several products like cleaning agents, personal and care products, water purifiers Other FMCG

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goods. The company was started the year 1931 as Hindustan Vanasapathi Manufacturing ltd
and later renamed as Hindustan Lever Uniliver ltd in 1936. In 2007 it is later named Hindustan
Uniliver Ltd. The Company’s portfolio includes several brands such as Dove, lifebuoy, lux,
Clinic Plus, Sunsilk, close up, Vaseline etc. (Hindustan Unilever Limited, 2020)The company
has over 50 brands spread over 15 categories of products such as skin care, hair care, oral care,
coffee, tea, home & hygiene etc. A study shows that an average Indian household uses 9 out
10 household products of HUL. The main motto of HUL is to create a better future every day
and helps people feel good, look good and get more out of life with brands and services that
are good for them and the planet.

Need for Study:

This study on the financial performance of Hindustan Uniliver Ltd provides information about
the financial position and stability of the company. It helps the investors understand the
company and helps them to decide to make an investment in the company. This study provides
vital information about the company’s future performance. This study helps to understand the
solvency and profitability of the company.

Objectives of the study:

1. To analyze the financial position of the company.
2. To ascertain the growth of HUL ltd.
3. To perform a fundamental analysis of HUL ltd.

Review of Literature:
‘To Study the Financial Position of Maruti Suzuki India Ltd Using Ratio Analysis’ this study
reveals that various financial ratios such as liquidity ratios, and profitability ratios were used
to understand the financial performance of the company. This research was conducted for a
definite period time from 2014-15 to 2018-19. The study revealed that the company has a
balanced liquidity proportion and it also has a consistent increase in the gross profit YoY.(Dr
Kaakandikar Rishikaysh & Miss Seema Ramhari Ponde, 2019)

“Fundamental Factors Influencing Investments in Mutual Funds the EIC Approach” This study
concentrates on the financial analysis of mutual funds in India. For the purpose of this study
various variables such as RBI bank rate, money supply, Gross National Product, Wholesale
Price Index, Domestic savings and forex reserves. The analyses of economic variables
indicated that all the economic variables were positively correlated except the wholesale price
index and bank rate. The study revealed that market capitalization, net asset value, Price
earning Ratio, Price to book ratio and fund size affect the rate of return of the specified mutual
funds. (K.Viyyanna Rao & Nirmala Daita, 2011)

This study, analysis about accounting-based fundamental signals and future earnings of
security prices. Multiple regression analysis was used to analyze the data. Further, the study
also revealed that variables such as Gross Domestic Product, inflation, firm-specific variables
such as prior earnings, expected earnings growth, and the relation between fundamental signal

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and future earnings play a significant role in the fundamental analysis of the company.(Jeffrey
S. Abarbanell & Brian J. Bushee, 1997)

This study is conducted on Business Failure Risk Analysis using Financial Ratios. The
objective of this research is to investigate the effectiveness of financial ratios on listed
companies on the Romanian stock exchange. This study used a t-test method is applied and the
result concludes that financial ratios can discriminate between failed and non-failed companies.
This discrimination can be in regard to profitability, financial position and leverage.(Maricica
& Georgeta, 2012)

This research focuses on analyzing the financial performance of selected FMCG companies
and the impact of their performance in the stock market. The study was conducted for a period
of twelve years from 1st April 2006 to 31st March 2017. In this research companies were
classified into three categories Market Under-Performers, Market Average-Performers and
Market Out-Performers in the stock market and multiple discriminant function analysis was
used to analyze the performance of selected companies’ performance. The study concluded
that revenue from operations is an important ratio that has a direct impact on the company’s
market performance. Debt equity ratio and inventory turnover ratio have a moderate impact on
the stock market performance of companies and the least impact ratio is the dividend payout
ratio in assessing the company’s stock market performance. (Dhingra et al., 2018)

This research shows the financial performance and stability of the steel industry. For the
purpose of this study financial ratios such as Liquidity, Solvency, Profitability and Efficiency
position. This study uses ANOVA-Test to evaluate the impact of selected ratios on the financial
performance of identified units in the steel industry The study concluded that the steel industry
needs special turnaround plans to uplift the industry and achieve the goals set by the
government. (Das, 2018)

This paper aims to quantify the financial performance of the top three companies in the
pharmaceutical industry. In order to analyze the financial performance tools such as ROE, ROI
and Du point analysis were carried out. It concluded that the ROE and ROI is a comprehensive
measure of the company’s profitability. (Sheela & Karthikeyan, 2012)

This study is based on the technical analysis of the securities. The research was conducted
using tools such as Candlestick Chart, Moving Average, Moving Average Convergence
Divergence (MACD), and Relative Strength Index (RSI). The research was conducted for a
period of three years from Feb- 2018 to 31- Jan- 2020. The study concludes that technical
analysis can be used to forecast the price movements in future by providing guidance to
investors.(Kishori & Divya, 2020)

Research Methodology:
1. Research Design and Period of the Study:
This study covers a period of 5 years from 2016 to 2021.
2. Data Collection:

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This research is based on secondary data. Secondary data for this research is collected
from published annual reports of the company obtained from the NSE website.
3. Tools used:
For this research, financial tools such as ratio analysis were used to analyze the financial
performance of Hindustan Uniliver Ltd.

Analysis and Interpretation:

A. Solvency ratio:
Current Ratio:
This ratio evaluates the concerns liquidity and meets its current obligations. The ratio. To
measure the liquidity of a concern, the current assets and current liability of the concern are
correlated with each other.

Formula:
Current Ratio = Current Assert / Current Liabilities

Current Ratio
1.50 1.46
1.45
1.40 1.37
1.35 1.32 1.31 1.32
1.30 1.28
1.25
1.20
1.15
2016 2017 2018 2019 2020 2021
Years

Figure 1: Current Ratio

Figure 1 shows that there has been a consistent decline in the current ratio of the company. The
volume of inventory in current asserts is significant in the years 2016, 2017 and 2021 while
compared to cash and bank, such situation causes difficulty for the company to meet its current
obligations. The current ratio of the company is below the ideal ratio of 2:1 for the past five
years.

Equity Ratio:
This ratio compares the shareholder’s funds or owner's funds of the company with its total
tangible assets. This ratio indicates the general soundness of the company. It is of particular
interest to the creditors of the company as it helps them to ascertain the shareholder’s funds in
the total assets of the business. A higher ratio indicates safety to the creditors and a lower ratio
shows a greater risk to the creditors.
Formula: Shareholder’s funds / Total tangible assets
The shareholder’s funds consist of equity shares, preference share retained earnings and long-
term debt.

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Table 2: Equity ratio

Equity Ratio 2021 2020 2019 2018 2017 2016
Shareholder’s Equity 47674 8229 7867 7281 6744 6573
Total Assets 68,757 20,153 18,629 17,862 15,706 14,794
Equity Ratio 0.69337 0.40833 0.4223 0.40763 0.42939 0.4443
(Source: Computed)
There has been a decline in the proprietary ratio in the years 2017 and 2018. Above table 2
shows that the proprietary ratio improved in the year 2019 as there is a growth in both
shareholder’s funds and the total asset of the company. In 2020, the ratio fell by 0.02 compared
to the previous year. However, there has been a significant improvement in the ratio in the year
2021 as the ratio improved from 0.40833: 1 to 0.69337: 1. The proprietary ratio of Hindustan
Unilever has been below the ideal ratio of 0.5: 1 from 2016 to 2020. The proprietary ratio below
0.5 is alarming for creditors since, in the event of liquidation of the company the creditors are
settled in the order of preference, and creditors have to lose heavily because the company has
more creditors’ funds compared to shareholder’s funds.

Debt to Equity Ratio

This ratio compares the total debt of the company with its total equity.
Formula: Total Debt / Total Equity
A higher the debt-equity ratio indicates that higher risk to shareholders of the company and
vice versa. The ideal debt-equity ratio is difficult to determine as it varies from one industry to
another.
Table 3: Debt to Equity Ratio
Debt to Equity Ratio 2021 2020 2019 2018 2017 2016
Total Debt 21,063 11,907 10,744 10,561 8,940 8,201
Total Equity 47694 8246 7885 7301 6766 6593
Debt to Equity Ratio 0.44 1.44 1.36 1.45 1.32 1.24
(Source: Computed)
Table 3 shows that the debt-to-equity ratio of Hindustan Unilever Ltd from 2016 to 2020 there
has been a consistent ratio of 1.2 to 1.4 times. However, for the year ended 31st March 2021,
there has been a substantial increase in both debt and equity which has led to a fall in the ratio
to 0.4 times. This has resulted in a significant decline in the risk for the shareholders of the
company.

B. Turnover Ratio:
Working Capital Turnover Ratio:
This ratio measures the effective utilization of working capital by the company. It also
measures the placid running of the business. The ratio tends to establish a relation between the
cost incurred for the production goods sold and the working capital of the company. A high
Working Capital Turnover ratio shows that the company make a lower investment in working

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capital and can generate higher profit and vice versa. This shows that the company is efficient
in its utilization of assets.

Formula:
Working capital turnover ratio = Sales/Cost of sales/ Net working capital
Net working capital = Current assets - Current liabilities
Table 4: Working Capital Turnover Ratio
Working Capital 2021 2020 2019 2018 2017 2016
Turnover Ratio
Total Sales 47,028 39,783 39,310 36,238 35,759 34,616
Working Capital 3,114 3,004 3,247 2,773 2,504 3,278
Working Capital
Turnover Ratio 15.1021 13.2433 12.1066 13.0682 14.2808 10.5601
(Source: Computed)
Table 4 shows that the working capital ratio grows from 10.5 to 14.28 from 2016 to 2017 as
there has been an increase in sales and also there has been a decline in working capital. In the
subsequent year from 2018 to 2021, there has been an increasing trend in sales of the company
but there was a downward trend in the working capital turnover ratio because the working
capital requirement was also increased from the year 2018 to 2020 which led to a decline in
the ratio from 14.28 to 13.23 in the year 2020. However, the company have bounced back from
it in the year 2021 which resulted in a working capital turnover ratio of 15.10.

Fixed Assert turnover ratio:

This ratio indicates the efficiency of utilization of fixed assets and profitability of a business
concern. A Higher Fixed Assert turnover ratio indicates more efficient utilization of fixed
assets and a lower Fixed Assert turnover ratio indicates inefficient utilization of fixed assets.

Formula:
Fixed asset turnover ratio = Cost of sales/ Net Fixed Asserts
Or = Sales/ Net Fixed Asserts
Table 5: Fixed asset turnover ratio
2021 2020 2019 2018 2017 2016
Fixed asset turnover
ratio
Total Sales 47,028 39,783 39,310 36,238 35,759 34,616
Total Fixed Assert 6,861 5,557 4,598 4,541 4,197 3,573
Fixed Assets Turnover
Ratio 6.85439 7.15908 8.54937 7.98018 8.52013 9.68822
(Source: Computed)
The ideal Fixed asset turnover ratio is 2.5 or more. Table 5 shows that the Fixed asset turnover
ratio of HUL ltd is highly above the ideal ratio this indicates that there has been an effective
utilization of fixed assets by the company. There was a downward movement in the fixed asset
turnover ratio from 2016 to 2018. However, in the year 2019, the Fixed assert turnover ratio

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has improved compared to the previous year. In 2020 and 2021 there is again a downfall in the
Fixed asset turnover ratio due to the pandemic and lockdown imposed by the company as it
affected the efficiency of the company.

Inventory turnover ratio:

This ratio indicates that in a given period how many times the company has made sales or used
the inventory, it shows to company’s efficiency towards inventory. A higher inventory turnover
ratio indicates reduced storage costs and any other holding costs for holding the inventory. A
lower inventory turnover ratio indicates poor sales, excess stock, or ineffective management.

Formula:
Inventory Turnover Ratio = Sales/ Average Inventory
Stock Velocity = 365 / Inventory Turnover Ratio (in days)
or = 12 / Inventory Turnover Ratio (in months)

Table 6: Inventory Turnover Ratio

Inventory Turnover Ratio 2021 2020 2019 2018 2017
Net Sales 47,028 39,783 39,310 36,238 35,759
Average Inventory 4962.5 4054 3830.5 3783.5 3914
Inventory Turnover Ratio 9.47668 9.81327 10.2624 9.5779 9.13618
Stock Velocity (in days) 38.5156 37.1945 35.5668 38.1085 39.9511
(Source: Computed)
Table 6 indicates that the Inventory Turnover Ratio of HUL Ltd ranges from 9 to 10.5 times.
This indicates that an average stock item remains in store for 40 days before it is sold or used.
The general thumb rule is higher Inventory Turnover Ratio is preferred as it reduces the number
of days the items in inventory remain as stock.

Capital turnover ratio:

Managerial efficiency is also calculated by establishing the relation between the cost of sales
or sales with the amount of capital invested in the business concern. A higher capital turnover
ratio indicates higher efficiency and a lower capital turnover ratio indicates ineffective usage
of capital.
Formula:
Capital Turnover Ratio = Cost of Sales / Capital Employed
Or = Sales / Capital Employed
Capital employed = Shareholder’s funds + Long term Debt or Total Assert – Current
Liability

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Table 7: Capital Turnover Ratio

Capital Turnover Ratio 2021 2020 2019 2018 2017 2016
Net Sales 47,028 39,783 39,310 36,238 35,759 34,616

Capital employed 57,654 10,836 9,962 8,975 7,992 7,727

Capital Turnover Ratio 0.82 3.67 3.95 4.04 4.47 4.48

(Source: Computed)
The above table 7 shows that there has been a diminishing trend in the Capital turnover ratio
of HUL for the past five years. In the year 2021, there is a significant decline in the Capital
turnover ratio as it fell from 3.67 to 0.82. This decline indicates that there is ineffective
utilization of capital by the company. This is due to lockdown restrictions imposed by the
government and the company’s inability to use its available capital effectively and efficiently
to generate maximum sales.

Total asset turnover Ratio:

This ratio indicates the efficiency of the company with respect to the company’s use of its
assets to produce sales. A high asset turnover ratio indicates that the company operates
efficiently and a low asset turnover ratio indicates an inefficient utilization of assets by the
company.
Formula:
Total asset turnover ratio = Total Sales/ Total Asset
Table 8: Total asset turnover Ratio
Total asset 2021 2020 2019 2018 2017 2016
turnover Ratio
Sales 47,028 39,783 39,310 36,238 35,759 34,616
Total assets 68757 20153 18629 17862 15706 14794
Total Assert
Turnover Ratio 0.68397 1.97405 2.11015 2.02878 2.27677 2.33987

(Source: Computed)
The above table 8 depicts that there has been a decline in the asset turnover ratio from 2016 to
2018. In the year 2019, the asset turnover ratio has improved from 2.029 to 2.110 because of
significant growth in the sales of the company. In the years 2020 and 2021 there is a downfall
in the ratio. The ratio drastically fell from 1.974 in 2020 to 0.684 in 2021because there has
been a huge rise in the total asset without any corresponding growth in the level of sales.
C. Profitability Ratio:
Return on investment:
This ratio measures the sufficiency or otherwise of profit in relation to capital employed. A
comparison of ROI with that of similar firms, with that of industry and with past ratios will
help determine how efficiently the long-term funds of owners and creditors are being put into
use. Higher ROI indicates efficient usage of capital employed by the company.

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Formula:
R.O.I. = Operating Profit / Capital Employed x 100

Table 9: Return on investment

2021 2020 2019 2018 2017 2016
Return on Investment
Profit 7,999 6,756 6,060 5,227 4,490 4,151
Investment 2,707 1,253 2,714 2,871 3,788 2,560
Return on Investment 295.493 539.186 223.287 182.062 118.532 162.148
(Source: Computed)
Table 9 shows that there has been a positive return on investment for the past five years.
However, there has been a decline in ROI after an exponential return of 539.186% to 295.493%
in the year 2020 to 2021 because the investment of the company has grown from 1253 to 2707
without any corresponding level of growth in profit.

Return on Equity:
This ratio shows the return on equity shareholders’ funds. The profit to calculate return on
equity id profit after payment of dividend to preference shareholders.

Formula:
Return on Equity = Net Profit after interest, tax and preference dividend/ Equity Dividend *
100
The term equity shareholders’ funds (or) Equity (or) Net worth refers to equity share capital +
Reserves + Profits - Accumulated losses.
Table 10: Return on Equity
2021 2020 2019 2018 2017 2016
Return on Equity
Net Profit available to
equity shareholders
after Preference
dividend 7,999 6,756 6,060 5,227 4,490 4,151
Equity 47674 8229 7867 7281 6744 6573
Return on Equity 16.7785 82.0999 77.0306 71.7896 66.5777 63.1523
(Source: Computed)
The above table 10 shows that there has been positive growth in Return on equity from 2016
to 2020. At the end of the study period, the ROE of the company declined significantly from
82.09% to 16.77%, this indicates that the company is becoming less efficient in making profits
and increasing the value of the shareholders.

Return on capital employed:

This ratio measures the efficiency of the company, in using its capital to generate profit for the
stakeholders of the company.
Formula:

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ROCE = Profit Before Interest and Tax / Capital Employed * 100

Table 11: Return on capital employed
Return on Capital 2021 2020 2019 2018 2017 2016
Employed
Profit Before
Interest and Tax 10,845 9,373 8,832 7,337 6,242 6,073
Capital Employed 57,654 10,836 10,061 8,975 8,269 7,904
ROSE 18.81 86.4987 87.785 81.749 75.487 76.835
(Source: Computed)
Table 11 reveals that the ROCE of the company has consistent growth from the beginning of
the study period to 31st March 2019. It further reveals HUL experienced a downfall in the
ROCE marginally in the year 2020 and significantly in the year 2021because of the pandemic
and lockdown imposed by the government.

Net Profit Ratio:

This ratio is also called the net profit to sales ratio. It indicates the management’s efficiency in
operating the business successfully from the owner's point of view. It shows the return on
shareholders' investments. The higher the ratio better is the operational efficiency of the
business concern.
Formula:
Net profit ratio= Net profit after tax / Net sales x 100

Net Profit Ratio

10,000 20.00%
7,999
8,000 16.98% 17.01%
15.42% 6,756 15.00%
14.42% 6,060
6,000 11.99% 12.56% 5,227
4,151 4,490
10.00%
4,000
5.00%
2,000

0 0.00%
2016 2017 2018 2019 2020 2021

Net Profit for the year Net Profit Ratio

Figure 2: Net profit ratio

The above Figure 2 shows that there is an upwards movement in the net profit ratio of HUL
Ltd in the study period. This indicates that the company has the highest net profit ratio at the
end of the research period. The has consistent growth in the Net profit over for last five years.

EPS:
This ratio highlights the overall success of the concern from the owners' point of view and it is
helpful in determining the market price of equity shares. EPS show the ability of the company
to declare dividend to its shareholders.
Formula:
E.P.S.= Net profit after tax and preference dividend / No. of Equity shares

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Table 13: Earnings Per Share

2021 2020 2019 2018 2017 2016
Earnings Per Share
Net profit available to equity
shareholders 7,999 6,756 6,060 5,227 4,490 4,151
Number of Equity Shares 235 216 216 216 216 216
Earnings Per Share 34.0383 31.2778 28.0556 24.1991 20.787 19.2176
(Source: Computed)
Table 13 shows the EPS of the company. The company has a positive growth in the EPS till
the study period. There has been a consistent growth of ₹ 3 YoY in the earnings per share of
the company. This reveals that the company is profitable enough to pay sufficient money as
dividends to shareholders.

Dividend Payout ratio:

This ratio measures the amount of dividend paid to the equity shareholders with respect to the
total amount of net earnings generated by the company. It indicates the percentage of earnings
distributed as dividends to the shareholders.
Formula:
Dividend payout ratio = Dividend per share/ Earnings per share*100
Table 14: Dividend payout ratio

Dividend 2021 2020 2019 2018 2017 2016

payout Ratio
Dividend Per
Share 40.50 25.00 22.00 20.00 17.00 16.00
EPS 34.0383 31.2778 28.0556 24.1991 20.787 19.2176
Dividend
Payout 118.984 79.929 78.4158 82.6478 81.7817 83.257
(Source: Computed)
Table 14 shows that the dividend payout to equity shareholders is increasing YoY during the
research period. In the year 2021 the dividend payout ratio is significantly higher than the
average dividend payout in the preceding previous years because the dividend declared is
higher than the earnings per share as a dividend per share of ₹40.50 includes ₹34.04 of EPS
and the remaining ₹6.46 is paid using retained earnings of the company.

Conclusion
The fundamental analysis of the company provides information about the real value of the
company. This analysis provides the necessary information to investors on whether to invest
in the company or not. The objective of the study is to analyze the growth and financial
performance of HUL ltd. The study indicates that there has been a constant increase in the
wealth of the shareholders of the company and also growth in the profit earned from operations.
The pandemic has affected the company by way of a decline in ROCE which indicates
inefficient use of assets by the company and also the liquidity of the company. The debt-to-
equity ratio of the company has reduced significantly which shows that the risk associated with

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equity shareholders has reduced. The company can increase its profitability by improving its
efficiency in the utilization of assets.

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