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The best FMCG company in India is...

Dec 10, 2009

Return on equity is a measure that most investors are greatly concerned about as it is a measure of what return the company is able to generate on the shareholders money. Further analysis can be done using this ratio by breaking it down into 3 components. These are operating efficiency, asset turnover and leverage ratio. This breakdown in ratios called as DuPont analysis helps better understand where superior (or inferior) returns are derived from. Britannia

Britannia has seen its ROE drop from a high of 36% in FY05 to 19% in FY07. This recovered to 27% in FY08 and then fell to 22% in FY09. Reasons are not very hard to find. ITC had launched its Sunfeast biscuits in FY05. This coupled with a sharp increase in the price of wheat left Britannia with operating margins close to its all time low. While in FY08, the company's ROE improved due to a better business environment, margins again dipped in FY09. This was on the back of higher operating costs, depreciation and tax expense for the year. While asset turnover improved during the year pushing up the ROE level, leverage also increased. Higher leverage although supported ROE, it also indicates higher debt as a proportion to its equity being carried by the company on its books.

Hindustan Unilever

Hindustan Unilever (HUL) saw its ROE improve from a low of 57% in CY04 to a high of 134% in CY07 which then fell to 121% in FY09. CY04 was the time when the company faced off with P&G in the detergents segment. It was also the time when HUL started rationalising its product portfolio. The result of both these factors was that the revenue of HUL fell and the net margins recorded were close to the lowest for the company. However, HUL ploughed on and from there recorded a double digit growth in its bottom line the following year. In CY07, HUL initiated a share buy-back programme. The result was that its book size shrunk while its debt level increased. As a result of this, the leverage of the company shot up, resulting in ROE of over 120% since CY07.

NestleROE for Nestle has improved from 79% in CY04 to 113% in CY08. This has resulted from an increase in net profit margins. Net margins have climbed up from 11.3% in CY04 to 12.4% in CY08. This signifies the strength of the company's business. Leverage ratio of the company has been increasing over the years. However, on closer examination, we noted that this is not due to higher debt level but due to higher current liabilities in the form of provision for dividends to be paid.

Conclusion

Of all the 3 companies, we believe that Nestle has the strongest business as it has displayed a consistently increasing ROE over the last 5 years. Moreover, the ROE increase has been due to better profitability and the fact that it has been using internal accruals to finance its assets.


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9 Responses to "The best FMCG company in India is..."

madhu

Jan 30, 2012

wipro

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SUBRAMONIAN.M

May 29, 2010

Nestle

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Abhijit Haldar

Apr 8, 2010

Nestle India

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mayank

Dec 30, 2009

NESTLE INDIA LTD.

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Raghunathan

Dec 23, 2009

Nestle

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Vinay Kumar

Dec 21, 2009

Nestle

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Adi Daruwalla

Dec 19, 2009

Nestle

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Nilesh Kubal

Dec 16, 2009

Dabur India Ltd

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C.Subramania Barathiar

Dec 13, 2009

Dabur India Ltd.

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