Finfinal Fmcg Secb Grp2

INDIAN INSTITUTE OF MANAGEMENT INDORE

FINANCE PROJECT REPORT

FMCG SECTOR

FINAL SUBMISSIONSubmitted to

Prof. Kanagraj & Prof. Hariprasad

29 March 2008

SUBMITTED BY:

Group 2 Section B PGP 1

Ashish Saini Avinash ThagelaBalasubramanian Ranganathan Bhattar Naveen KumarC Srikanth Charkha Siddharth RajkumarDevesh Taparia Meghna PanwarMohit Verma Pavan Naik B.

Table of Contents

* Declaration

* List of Figures and Tables

* Introduction: FMCG Sector in India

* Part I & II: Corporate Governance Analysis & Stockholder Analysis

Management Interaction with Financial Markets and Ownership & Shareholding patterns The Firms and Society

* Part III: Market Analysis of risk and return in the FMCG industry

Calculating Top-Down Betas Estimating default risk and Cost of debt Cost of Equity Market value of equity: Estimating the Cost of Capital:

* Part IV: Measuring Investment Returns

Accounting Returns on Project Characteristics of the Project in the Industry ROC and ROE Analysis Economic Value Added

* Part V: Capital Structure Choices

Advantages of Taking Debt Disadvantages of Taking Debt Ability to Service Debt

* Part VI: Optimal Capital Structure

Current cost of capital and Financing Mix Optimal Mix Effect of changing the debt ratio Effect on stock price at optimal debt ratio Constraints on the company Constraint on the rating Sensitivity Analysis (The downside EBITDA)

* Part VII: Mechanics of Moving To the Optimal

Path to the Optimal

Influence of Macro Economic Variables on Firm Value and Operating Income

* Part VIII: Dividend Policies

* Part IX: Framework for analyzing dividends

Affordable dividend and actual dividend payout Management Trust and Changing Dividend Policy Dividend Comparison with sector

* Part X: Valuation

Historic Growth rates Discounted cash flow Comparative market valuation Valuation results Sensitivity Analysis Operating and Financial leverage comparison

* Appendix

Shareholding & Ownership patterns

List of Figures

Figure 4.1: ROE Percentage

Figure 4.2: ROC Percentage

Figure 5.1: Graphical representation of Debt-equity representation

Figure 10.1: Graphical comparison of firm valuation using DCF and market multiples method with CMP

Figure 10.2: Operating and Financial leverage comparison

List of Tables

Table 1.1: Chief Executive Officers (CEO)/Chairman & Managing Directors (CMD)

Table 1.2: Board of Directors

Table 1.3: Shareholding pattern

Table 3.1: α, β, Se values for FMCG companies

Table 3.2: R2 values for FMCG companies

Table 3.3: Cost of Debt

Table 3.4: Cost of Equity

Table 3.5: Market Value of Equity

Table 3.6: After Tax cost of Debt

Table 3.7: WACC for FMCG companies

Table 4.1: Characteristics of Projects in FMCG sector

Table 4.2: Comparison of ROE and ROC to COE and COC

Table 4.3: Calculated Equity EVA

Table 4.4: EVA for 9 FMCG firms

Table 5.1: Debt-equity ratios

Table 5.2: Debt obligations of the companies

Table 5.3: Depreciation/ Firm book value for the companies

Table 5.4: Interest Coverage ratios

Table 5.5: Free Cash Flow/ Total Debt ratios

Table 5.6: EBITDA/Firm value

Table 5.7: Variability Of Operating Income

Table 5.8: Deviation of Operating Income

Table 6.1: Current cost of capital and Financing Mix

Table 6.2: Optimal Mix

Table 6.3: optimal ratios and value without constraints for each firm (Assuming no growth)

Table 6.4: Optimal ratios and value without constraints for each firm (Assuming perpetual growth)

Table 6.5: Effect on stock price at optimal debt ratio

Table 6.6: Constraints on the company

Table 6.7: Sensitivity Analysis (The downside EBITDA):

Table 7.1: Path to the Optimal

Table 7.2: Influence of Macro Economic Variables on Firm Value and Operating Income

Table 8.1: Dividend Payout details

Table 9.1: Average FCFE and Dividend Payout

Table 9.2: Comparison between ROE, COE and ROC, WACC

Table 9.3: Dividend Comparison with sector

Table 10.1: CAGR of the companies

Table 10.2: Comparison with DCF and Market multiple valuations with market price of stock

Table 10.3: Sensitivity analysis of FCFE valuation using different growth rates

Declaration

We hereby declare that the following project has been successfully completed as per requirements by Group 2 of Section B PGP1 in partial fulfillment of the course Finance-II.

In the process, we have used secondary sources like Capitaline, Prowess and few websites like bseindia.com and nseindia.com along with the companies’ annual reports for our analysis.

The name of the participants and the corresponding companies on which each one of us has worked is given in the following table.

Name of the Participant Company Signature

Ashish Saini Godrej Consumer Products Ltd.

Balasubramanian Ranganathan Colgate Palmolive Ltd.

C Srikanth Hindustan Unilever Ltd. (HUL)

Devesh Taparia Collation Work on all companies

Mohit Verma Marico Industries Ltd.

Avinash Thagela Britannia Industries Ltd. (BIL)

Bhattar Naveen Kumar ITC Ltd

Charkha Siddharth Rajkumar Nestle India Ltd

Meghna Panwar Dabur India Ltd

Pavan Naik B. Glaxo Smithkline Consumer Healthcare Ltd

Date: 29-Mar-08

FMCG Sector in India

The Indian FMCG sector is the fourth largest sector in the economy with a total market size in excess of

US$ 13.1 billion. It has a strong MNC presence and is characterised by a well established distribution

network, intense competition between the organised and unorganised segments and low operational

cost. Availability of key raw materials, cheaper labour costs and presence across the entire value chain

gives India a competitive advantage.

The FMCG market is set to treble from US$ 11.6 billion in 2003 to US$ 33.4 billion in 2015. Penetration

level as well as per capita consumption in most product categories like jams, toothpaste, skin care, hair

wash etc in India is low indicating the untapped market potential. Burgeoning Indian population,

particularly the middle class and the rural segments, presents an opportunity to makers of branded

products to convert consumers to branded products.

Growth is also likely to come from consumer 'upgrading' in the matured product categories. With 200

million people expected to shift to processed and packaged food by 2010, India needs around US$ 28

billion of investment in the food-processing industry.

Automatic investment approval (including foreign technology agreements within specified norms), up to

100 per cent foreign equity or 100 per cent for NRI and Overseas Corporate Bodies (OCBs) investment, is

allowed for most of the food processing sector.

Companies under study:

(a) Britannia Industries Ltd. (BIL)

(b) Colgate Palmolive Ltd.

(c) Dabur India Ltd.

(d) Glaxo Smithkline Consumer Healthcare Ltd.

(e) Godrej Consumer Products Ltd.

(f) Hindustan Unilever Ltd. (HUL)

(g) ITC Ltd.

(h) Marico Industries Ltd.

(i) Nestle India Ltd.

PART I & II: Corporate Governance Analysis & Stockholder Analysis

A. Management

Due to the prevalent problems associated with agency issues, when analyzing a company it is important to understand the relationship between

managers and stockholders.

Chief Executive Officers (CEO)/Chairman & Managing Directors (CMD)

Britannia Col-Pal DaburGodrej (GCPL)

GSK (CH) HUL ITC Marico Nestle

NameMs. Vinita

Bali Mr. Ian Cook Mr. Sunil Duggal

Mr. Adi Godrej

Mr. Zubair Ahmed

Mr. Douglas Baillie

Mr. Y. C. Deveshwar

Mr. Harsh Mariwala

Mr. Martial Rolland

Age 51 55 50 65 NA NA 61 58 NA

Years at the Company

2 years 32 Years 13 years Founder 2 years 30 years 40 years 33 years 20 years

Years as CEO 2 years 1 year 6 years Founder 1 year 2 years 12 years 17 years 3 years

Total Compensation

24,692,630 NA 35,693,529 25,293,000 NA 45,906,560 28,725,000 16,992,455 43,671,000

Table 1.1: Chief Executive Officers (CEO)/Chairman & Managing Directors (CMD)

It is interesting to note that overall the CEOs have a long history with their respective companies averaging about 21 years as employees and 5

years as CEOs. While it is likely that their years of inside experience amassed them sharp understandings of their companies it is difficult to gage

their efforts in maximizing firm value. The power of the CEOs is certainly manifested by their large compensation packages averaging Rs. 3 crores

in 2007. The remuneration package includes salary, superannuation funds, stock options, etc. Their power, however, does not emanate from

their stockholdings, which is comparatively less. This separation of management and ownership detracts from the power that stockholders have

over the CEO and suggests little incentive for the CEOs to focus on increasing shareholder value.

Board of Directors



Number of members

14 8 10 8 11 10 12 9 9

Insiders 1 4 3 2 3 5 4 7 3

Table 1.2 : Board of Directors

Surprisingly, the Boards of Directors have very few insiders and are therefore less likely under the influence of the CEOs. There are a number if

independent and non-executive directors who are basically eminent personalities of the industry. For most boards, however, about half the

members are CEOs or high-position management personnel at other organizations. Therefore, it is likely that their loyalties as board members of

the FMCG companies will really depend on whether or not the FMCG Company’s CEO sits on the board of the company they manage. Because

they sit on each other’s boards, they are not truly independent monitors and cannot be fully protecting shareholders’ interests. In addition these

people most probably will not have the time, information and interest in being involved with internal issues.

B. Interaction with Financial Markets and Ownership & Shareholding patterns

A careful comparison of all these companies is shown below:



Total Shares 23890163 66636481 864022973 225844076 NA 2206831977 3755178860 609000000 96415716

Shareholders 24912 136012 104866 93931 NA 417563 NA 18932 45091

Demat Share 11651339 58123354 855433329 11024947 NA 964582958 NA NA 43749720

Table 1.3: Shareholding pattern

Britannia

The company is listed in both Bombay Stock Exchange and National Stock exchange.

NSE: Average trade volume 10120 / Total volume 2540067. BSE: Average trade volume 6631 and Total volume 1664448.

Although there are a total of 23890163 shares, 11.52% of shares are held by Foreign Institutional Investors and 18.27 held by individual

shareholders. The total public share holding is 49.04%. The marginal investor is promoter group (Foreign body) here who has majority of share

(51%) and can influence the market price of share. Also no individual has more than 4% of share which is a good sign. Institutional Investor

contain 29% of share which consists of insurance, pension fund etc. which means apart from promoter share rest of the share has been

distributed in market equally i.e. no one is having major stake apart from the promoter.

Quarterly, Half-Yearly and Annual Results: Quarterly results including half-yearly results are published as per the Listing Agreement in leading

newspapers, i.e., Financial Express (all editions) and Pratidin (Kolkata edition). The annual audited accounts are likewise published. The quarterly

and the half-yearly report are not separately sent to each shareholder.

Following firms are main investor in Britannia Industries: M/s Boribunder Finance and Investments Private Limited (Boribunder), M/s Flora

Investments Company Private Limited (Flora) and M/s Giltedge, Finance and Investments Private Limited (Giltedge).

Colgate Palmolive

CPIL is listed on both NSE and BSE. Traded volume as on Feb 1 2008 was 280,246 on NSE and 25,800 on BSE. ColPal India does not have listing in

foreign markets. Colgate-Palmolive Co. USA, Colgate-Palmolive (Asia) PTE Ltd, and Incorporated together hold 51% of the shares. Total

shareholding is 136012, out of which % held by institutional investors: 20.98%

Dabur

Dabur India Ltd. is a Mid-cap company on which investors have been bullish in recent times. Of late, Analysts have shown keen interests in the

market valuation of the firm. For e.g. in a very recent report dated January 30, 2008, IDFC SSKI has recommended outperformer rating on Dabur

http://www.moneycontrol.com/india/stockpricequote/personal-care/dabur-india/17/37/DI

India based on its competitive business model with its right mix of stable businesses (hair care, health supplements) and strong growth drivers

(oral care, foods, international business, health & beauty retail).

Dabur is listed on both NSE and BSE. The total numbers of shares are 864022973 out of which the public share holding is 29.19% and 74.31% of

total shares are held by the promoters. The promoter group is the marginal investor in case of Dabur India Ltd. with nearly 71% of the total share

holding. Also, no individual person in the Promoter’s group has more than 1% of the shareholding. This is a healthy sign. Also, no major activity

has taken place from the marginal investor so as to influence the actions of other investors. Any transaction by the insiders has regularly been

reported to SEBI – hence there has been no lapse at that end.

Godrej

The Company’s shares are listed and traded on the NSE and BSE. The GSPL stock saw an average daily trading of 54,647 shares on the BSE and

61296 shares on the NSE for FY06-07. Total numbers of shares held are 225844076 and out of these 67.81 shares are held by the promoters and

17.81% by the FII’s and only 9.51& by the Indian public. Small investors with 1-500 shares constitute around 90% of the firms’ shareholders.

GCPL does not have any outstanding GDRs/ADRs/warrants/convertible instruments.

GSK Consumer Healthcare

The total numbers of shares are 42055538 and of these 43.16 % are held by the promoters, directors and persons in control of power. Out of the

remaining, FII contribute 9.34% and public constitutes 25.96%. Analyzing the fund holding pattern, 25 schemes hold GAK Consumer Healthcare

Ltd. in their portfolios.

HUL

The total number of shares are 2206831977 and 51.42% of the shares are held by the promoters and directors and people in concert or control.

Unilever PLC has 33.70% of the total shares. FII constitute about 12.41% of the remaining. 11.88% shares are held by different schemes under

the fund holding pattern.

http://www.moneycontrol.com/india/stockpricequote/personal-care/dabur-india/17/37/DI

ITC Ltd

The total numbers of shares are 3,75,51,78,860. Banks and financial institutions and insurance co and mutual funds constitute for 36.19% and

the foreign companies own 32.19%. 14.34% is held by the FII. The shareholders who have more than 5% share, like UTI and LIC have their

representatives on the Board and take part in the decision making process.

Marico

Marico is listed on Bombay Stock Exchange (BSE), Mumbai and National Stock Exchange (NSE), Mumbai. To ensure a proper channel through

which price-sensitive information is managed in the organization, the company has devised a Code of Conduct and appointed a Compliance

Officer. There is also a Share Holding Committee, constituted by Board of Directors, to specifically look into the redressal of shareholder’s and

investor’s complaints relating to transfer of shares, non-receipt of balance sheet, non-receipt of dividends etc.

Insiders: After going through the detailed structure of the share holding pattern, it is certain that there are no Insiders in the company. Majority

of the shares are held by the CMD of the company. Next highest amount of shares are held by FIIs, closely followed by Trusts, individuals and

family persons. FIIs and Trusts on a whole can be called as insiders but no individual person is eligible for this insider title.

Nestle India ltd

It is evident from the shareholding pattern that the marginal investor of Nestle India is the Foreign promoter group (61 %), so it can influence the

share’s market prices. Also no individual has more than 4% of share which is a good sign. Institutional Investor contain 19% of share which

consists of insurance, pension fund etc. which means apart from promoter share rest of the share has been distributed in market equally i.e. no

one is having major stake apart from the promoter.

C. The Firms and Society

Britannia Industries Ltd.

The Company believes in creating sustainable models of Corporate Social Responsibility and in 2006-07

fostered a unique partnership with GAIN (Global Alliance for Improved Nutrition) and the Naandi

Foundation to supply iron-fortified Tiger biscuits as part of the mid-day meal program in schools. This

was initiated in Andhra Pradesh and currently caters to 150,000 children in Hyderabad. The Company

has been at the forefront of several initiatives in rural India, covering wide-spread school contact

programs in several states reaching 20,000 schools and 3 million children. The program highlights the

importance of nutrition and good food habits among children through interesting stories and games,

which also evoke a competitive spirit and make children more confident about themselves. Mothers of

these children and other important influencers like Aanganwadi didi etc are also educated about health

and nutrition and their role in the sound development of children. This program has also strengthened

Britannia's nutrition credentials. On the energy front the Company has reduced energy consumption

through process innovations and derived significant benefits by optimizing baking processes and

Using alternate energy sources like recycled waste gases. New technology initiatives are now under

way to further improve the energy consumption in our manufacturing

Colgate Palmolive Ltd.

CPIL has a good rep as a corporate citizen. Colgate-Palmolive (India) Ltd. undertakes its corporate social

responsibility through a variety of effective programs. Since 1976, the company has been delivering free

oral health education to children of rural and urban poor in partnership with Indian Dental Association

(IDA). Colgate's community outreach efforts have touched the lives of millions of children, providing the

information, insight and inspiration they need for a healthy life and a healthy smile. Its other initiatives

include Support for Meljol and Make a Wish Foundation, association with Dominic Savio Summer Camp,

Partnership with Pratham, etc.

Dabur India Ltd.

"What is that life worth which cannot give comfort to others?" - Thus said Dr. S K Burman, founder of

Dabur.

Dabur is committed to improving healthcare standards of the people in the area of its operation. The

company set up Sundesh - a welfare organization financially and managerially supported by Dabur and

Chunni Lal Medical Trust. The company through these organizations provides healthcare facilities to

women and children, gives non-formal education to children and adults and trains people in vocations

such as bee keeping, mushroom farming, tailoring etc. to provide them additional source of income.

The company is also committed to maintain ecological balance, as it understands its responsibility

towards Nature, which provides raw material for most of the products manufactured by the company.

Dabur India Limited is working on developing sustainable cultivated source for herbal ingredients. This

will help in reducing the strain on natural habitat of these herbs. Dabur has also set up the most modern

tissue culture facility for micro propagation of medicinal herbs.

The company is involved in reforestation in the Himalayan range, which would help in maintaining the

green cover there. The company has set up a state-of-the-art green house for saplings of more than 40

endangered plant species to help in averting the extinction of these plant species. This contract

cultivation activity provides additional source of income to farmers.

Godrej Consumer Products Ltd.

Godrej Group is one of the most respected corporate houses known for its philanthropy and initiation of

labor reforms besides being recognized for its values of fair, transparent and ethical dealings. Each

generation of the Godrej family has been deeply committed to worker welfare, human development and

environmental matters. The Godrej garden township for workers in Mumbai is but one of several

community initiatives that has won admiration at home and abroad. Every year the Pirojsha Godrej

Foundation dedicates funds to promote education, housing, social causes, conservation, population

management and relief in times of natural calamities. During the previous year, the Company supported

and encouraged various social and environmental initiatives. Towards this, the Company has created 4

SC/ST entrepreneurs during the year to build business partnership. The company’s Malanpur plant has

adopted a school at a nearby village ‘Singwari’ and granted financial help by way of scholarships to the

best performing child belonging to the SC/ST from the fifth to the eight standard. Presently the

Company has more than 10% employees under SC/ST category from its total employee strength.

Glaxo Smithkline Consumer Healthcare Ltd.

This Company, in its endeavor to serve the community, continues to contribute in and around the areas

where it operates. During the year, this Company won the prestigious Asian CSR 2006 Award, in the

category of “Improvement of Education”, for its work on the “Knowledge-based therapeutic recreation

for Children / youth and HIV/AIDS “programme in India. The programme was chosen out of a highly

competitive field of 178 projects submitted by 98 companies across 14 countries in Asia and it

acknowledged the company’s leadership in raising awareness in girl children about their rights against

trafficking and sensitizing them about hygiene and appropriate behaviours when dealing with People

Living With AIDS (PLWA). During the year the Nabha site received “The Best Environment Protection

Initiative 2006” award from the Punjab Pollution Control Board. The site proactively launched “Stop

Dengue” Campaign in the Nabha Town to improve sanitation and hygiene, in association with local

NGOs, civil administration and health authorities and the community. As in previous years, the site

organized regular animal welfare measures and subsidized vet medicines, supported several dairy

farming initiatives like Veterinary camps, milking Competitions, sponsoring awareness camps etc. in the

milk shed area. A multifaceted program has been launched in Sonepat for “Health & Education for

Women” under which health camp has been organized and vocational training (stitching & embroidery)

has been imparted to the rural womenfolk for empowering them. This endeavor is the stepping stone

for many such initiatives in the villages around your factory in Sonepat. Rajahmundry site has, in the last

two years, planted more than 2000 Bio-diesel saplings. The bio-diesel accrued from these plants shall be

used for the vehicles operated by the site

Hindustan Unilever Ltd.

HUL continues to involve itself in communities across the country, through charity and social investment

around issues of education, nutrition hygiene and disaster relief and rehabilitation as also through

commercial initiatives for economic development of women in rural areas. Such involvement is in the

form of finance, employee time and donations of products/services and equipment. In certain cases

requiring radical responses to endemic issues, HUL and Unilever work together. To illustrate, one of the

key agendas of the United Nations ‘Millennium Development Goals’ (MDGs) was combating maternal

health concerns and child mortality. With 40% of the world’s malnourished children being in India, a

Partnership for Child Nutrition (PCN) was formed for this initiative. Unilevers became the first corporate

house to join the PCN in the world's first multi-sectored approach to combat this issue in collaboration

with UNICEF and Synergos Institute. In India, as part of this PCN, the Company is working with leading

organisations like ICICI Bank, HDFC, TATA group of companies, UNICEF & Govt. of Maharashtra to work

together as a multi sectoral alliance. This initiative, aptly christened the Bhavishya Alliance would jointly

analyse the problem of child malnutrition, and design systemic solutions for implementation. While

Unilever has made financial commitment to this alliance, the Company has seconded a team of

managers to drive this initiative.

ITC Ltd.

ITC recently won the 'Corporate Social Responsibility Award 2004' from The Energy and Resources

Institute (TERI) for its e-Choupal initiative.

ITC’s International Business Division, one of India’s largest exporters of agricultural commodities, has

conceived e-Choupal as a more efficient supply chain aimed at delivering value to its customers around

the world on a sustainable basis. The e-Choupal model has been specifically designed to tackle the

challenges posed by the unique features of Indian agriculture, characterised by fragmented farms, weak

infrastructure and the involvement of numerous intermediaries, among others. ‘e-Choupal’ also

unshackles the potential of Indian farmer who has been trapped in a vicious cycle of low risk taking

ability > low investment > low productivity > weak market orientation > low value addition > low margin

> low risk taking ability. This made him and Indian agribusiness sector globally uncompetitive, despite

rich & abundant natural resources. Such a market-led business model can enhance the competitiveness

of Indian agriculture and trigger a virtuous cycle of higher productivity, higher incomes, enlarged

capacity for farmer risk management, larger investments and higher quality and productivity. Further, a

growth in rural incomes will also unleash the latent demand for industrial goods so necessary for the

continued growth of the Indian economy. This will create another virtuous cycle propelling the economy

into a higher growth trajectory. Appreciating the imperative of intermediaries in the Indian context, ‘e-

Choupal’ leverages Information Technology to virtually cluster all the value chain participants, delivering

the same benefits as vertical integration does in mature agricultural economies like the USA. ‘e-Choupal’

makes use of the physical transmission capabilities of current intermediaries – aggregation, logistics,

counter-party risk and bridge financing – while disintermediating them from the chain of information

flow and market signals.

Marico Industries Ltd.

Marico holds a very good reputation as a corporate citizen. As it was earlier a family run business and

was producing a product that was used in every home, Marico gained the reputation of a socially

responsible company. It understands the importance of giving back to society. It has its own way of

fulfilling this responsibility.

Marico has started Marico Innovation Foundation with a mission: “to provide the nation with first: a

belief that Innovation is possible and is the way to leapfrog India into the center stage of global business

leadership, and second: a framework to leverage innovation for quantum growth.”

Marico Innovation Foundation has helped a lot of social organizations to find innovative solutions to

various social problems existing in India and abroad. Few of its innovations have become case studies

and are famous of the social impact of the result.

Nestle India Ltd.

Nestlé India has always focused on long term, sustainable and profitable growth and helped

communities around its factories to improve their quality of life in a similar manner. Nestlé Agricultural

Services has used the experience gained by Nestlé across the world to set up a system of direct and

efficient contact with the farmers. Company veterinarians and agronomists supervise the milk routes

and advise farmers on various issues including proper feed for the herds. Milk storage facilities have

been set up close to the farmers. Veterinary services are provided free, and medicines provided at

wholesale cost. The company assists farmers in artificial insemination programs for their cattle, provides

subsidy and helps them in procuring loans.

Safe Drinking Water: Water is a scarce resource. In India, availability of clean drinking water is a major

concern for many communities. Almost 200 million people do not have access to clean drinking water.

Nestlé India is committed to improving the situation and believes that the first step is to create

awareness in the communities around its factories. A key focus area of our Corporate initiatives is to

help provide Clean Drinking Water and educate children in schools to conserve this scarce resource.

Education and Training: Nestlé supports initiatives to create awareness about the right to education and

encourages the communities around its factories to send their children to school. Nestlé India

employees have developed a special play 'Let Us Go to School' for this purpose. This has been staged

amongst the communities around our factories, and its recordings screened at smaller gatherings along

the milk routes.

PART III: MARKET ANALYSIS OF RISK AND RETURN IN THE FMCG INDUSTRY

1) Calculating Top-Down Betas:

For each company we ran a regression of the individual stocks monthly prices against the BSE 100 index

for the period 2003 to 2007. The results of the regression on which we concentrated were the intercept,

the slope (beta/risk), the R squared (to understand how much of the risk is diversifiable) and the

standard error of the Beta (to assess the validity of the top down prediction). The results are highlighted

in the following table.

α - value β - value Se

Britannia 4.341 0.377 6.05Dabur 4.466 0.271 5.98Nestle 3.882 0.557 5.64GSK 4.404 0.449 5.88Col-Pal 4.185 0.417 5.94HUL -3.437 0.805 7.23Marico 4.218 0.187 5.86ITC -0.474 0.588 13.45Godrej 4.776 0.058 6.68

Table 3.1 – α, β, S e values for FMCG companies

2) Intercept: The intercept of the regression line in the CAPM is called the coefficient. is a risk

adjusted measure of the excess return on an investment. For seven of the nine companies have positive

values and two have negative values.

3) Slope:

The slope of the regressions gave us the beta of the companies (their risk level). The figures reveal that

the firms analyzed are below average risk (Beta = 1).

4) R2:

The R2 values which are evidently low for the given companies indicates that the greatest part of the

risk faced by the companies comes from firm specific sources (which is diversifiable). The R 2 values for

the companies i.e. the percentage of their risk that can be explained by the market factors is given

below.

R2 (%)Britannia 19.24Dabur 21.06Nestle 29.80GSK 23.53Col-Pal 22.05HUL 35.90Marico 24.04ITC 7.90Godrej 1.35

Table 3.2 – R 2 values for FMCG companies

Estimating default risk and Cost of debt:

To calculate the cost of debt of the firms we have taken the bond ratings of the companies and the

associated spread and added the spread to the long term risk-free rate. The long term risk free rate is

7.89%.

The credit ratings of the companies and the cost of debt are given in the table below.

Risk free rate

Interest Coverage

RatioCredit rating

Default spread

Cost of debt

Britannia 7.89 17.13 AAA 0.75 8.64Dabur 7.89 45.96 AAA 0.75 8.64Nestle 7.89 1243.75 AAA 0.75 8.64GSK 7.89 67.08 AAA 0.75 8.64Col-Pal 7.89 222.30 AAA 0.75 8.64HUL 7.89 217.00 AAA 0.75 8.64Marico 7.89 10.29 AA 1.00 8.89ITC 7.89 268.43 AAA 0.75 8.64Godrej 7.89 21.69 AAA 0.75 8.64

Table 3.3 – Cost of Debt

Cost of Equity:

The cost of equity is calculated using the Capital Asset Pricing Model (CAPM).

The cost of equity is

Rs= Risk-free rate + Beta (Risk premium)

The risk free rate is 7.89% as established earlier. The values of Beta have been calculated earlier. To

calculate the market rate of return, we have taken the monthly returns of BSE FMCG index for the past

five years and arrived at the annual average returns for the sector. The average annual return for the

sector is 28.05%. The cost of equity for the companies is given in the table below.

Risk free rate

Market returns

BetaCost of Equity

Britannia 7.89 28.05 0.377 15.497Dabur 7.89 28.05 0.271 13.349Nestle 7.89 28.05 0.557 19.116GSK 7.89 28.05 0.449 16.952Col-Pal 7.89 28.05 0.417 16.304HUL 7.89 28.05 0.805 24.126Marico 7.89 28.05 0.187 11.663ITC 7.89 28.05 0.588 19.744Godrej 7.89 28.05 0.058 9.069

Table 3.4 – Cost of Equity

Market value of equity:

The market value of equity has been calculated by multiplying the number shares outstanding and the

price of the stock at the end of the examined period. The table below shows the number of shares

outstanding and the market value of equity for the companies.

No. of outstanding shares

Stock Price(Rs)Market Value of

Equity (Rs Crores)

Britannia 23890163 1387 3313Dabur 864022973 94 8130Nestle 96415716 1325 12773GSK 42055538 592 2488Col-Pal 135992817 377 5126HUL 2177463355 196 42667Marico 609000000 63 3828ITC 3765838830 185 69706Godrej 225844076 111 2508

Table 3.5 – Market Value of Equity

Estimating the Cost of Capital:

The Weighted average cost of capital WACC is calculated by the formula

WACC= Rs * Equity/(Debt+Equity) + Rb * (1-Tc) * Debt/(Debt+Equity)

The cost of debt after tax, Rb * (1-Tc), is given in the following table. Tc is the marginal tax rate of the

companies, the calculation of which is shown later.

Cost of debt (Rb)

Marginal tax(Tc)

Cost of debt(After tax)

Britannia 8.64 29.00 6.13Dabur 8.64 29.00 6.13Nestle 8.64 11.40 7.66GSK 8.64 9.37 7.83Col-Pal 8.64 26.97 6.31HUL 8.64 14.33 7.40Marico 8.89 26.93 6.50ITC 8.64 25.46 6.44Godrej 8.64 6.82 8.05

Table 3.6 – After Tax cost of Debt

The Weighted Average Cost of Capital (WACC) for the companies is shown in the following table.

Market Value of Equity

Cost of Equity

Book Value of Debt

Cost of debt

(After tax)

WACC

Britannia 3313.33 15.50 4.78 6.13 15.48Dabur 8130.46 13.35 20.08 6.13 13.33Nestle 12773.15 19.12 16.27 7.66 19.10GSK 2487.59 16.95 0.00 7.83 16.95Col-Pal 5125.57 16.30 0.98 6.31 16.30HUL 42667.39 24.13 72.60 7.40 24.10Marico 3827.57 11.66 167.25 6.50 11.45ITC 69705.68 19.74 200.88 6.44 19.71Godrej 2508.00 9.07 112.87 8.05 9.03

Table 3.7 – WACC for FMCG companies

PART IV – MEASURING INVESTMENT RETURNS

1. Accounting Returns on Project

This section analyzes the quality of the firms’ current projects and the managers’ abilities to contribute

to increasing the firms’ value. This section will also assess the companies’ future projects by considering

what characteristics the investments have within the industry.

Characteristics of the Project in the Industry

Business unitsTime Horizon Predictability

External factors Currency

New Brand Launch Long Term Low

Consumer behavior Local

New Product Launch Short Term Medium

Consumer behavior Local

Table 4.1 Characteristics of Projects in FMCG sector

Launching a Brand in the FMCG is a high risk, high investment proposition. It requires extensive market

survey and heavy expenditure on advertisement, which are mostly, sunk costs. Production facility or R &

D have a relatively lower share in the project cost.

New product launch enjoys lesser risk, as it is launched under existing brand itself. It also has

significantly less advertisement expenditure.

ROC and ROE Analysis

The following section shows the value of the Return on Equity (ROE) and Return on capital (ROC) of the

companies under Consideration.

ROE = Net Income / Book value of equity.

ROC = EBIT x (1- tax rate of 30%) /Book value of Firm

Based upon two above formulas we have calculated ROE and ROC for 9 FMCG firms. To see the pattern

of average return, historical return and to highlight the fact that whether company has taken high

worth project recently, we have compared current return, 3 average year return and 5 year average

return both in ROE and ROC case. Calculation of both the factors is in the excel files.

Depending on the calculations, to highlight the variations between different companies and within the

companies to highlight their average return pattern we have drawn a Histogram.

ROE Percentage

Figure 4.1 ROE Percentage

ROC Percentage

Figure 4.2 ROC Percentage

From the ROE and ROC chart we can deduce that Godrej is having a highest return .But there is

dip from 140% return to 100% return (ROC) when u compared five year average return with

current return similar dip is present in ROE chart also from which we can say that although

Godrej is having a better project than other companies but currently it engages itself in a

project which is earning them less return when `compared to historical projects. Other

observations from graph is Britannia is having a Higher ROE than its previous year which states

that company is taking highly profitable projects and increasing value for its stockholder.

Companies Return on Equity

Return on Capital

Cost of Equity

Cost of Capital

Godrej 130.4036354 100.6453789 15.497 14.43

ITC 27.6462467 32.38877021 13.349 13.23

Marico 51.08820657 35.35190137 19.116 18.19

HUL 61.37388126 77.33505262 16.952 16.95

Colgate - Palmolive

71.2304429 56.79885982 16.304 16.26

Britannia 71.72243284 23.45663342 24.126 23.90

Dabur 57.29090781 62.20113266 11.663 10.68

Nestle 85.51202509 100.4517839 19.744 19.39

GSK 24.98845583 56.41077404 9.069 8.71

Table 4.2 Comparison of ROE and ROC to COE and COC

Comparing the Return on equity with the cost of equity in order to understand the kinds of projects

taken by the company we come to conclusion that all the companies have been able to earn very high

return on equity and capital.

The companies present in the analysis had return on capital in excess of the cost of capital. This means

that companies have undertaken good projects as seen from the firm. So the value of the firm will

increase by undertaking such projects. Only Britannia had a return on capital less then the cost of

capital, which means its current projects are not good for the company, but once the income from

projects under implementation starts, it’ll augur well for the company.

The difference in return on equity and return on capital also depends on the capital structure changes;

the company might have gone for a debt or floated equity.

Although the accounting returns such as the ROE and ROC are good indicators of a company’s ability to

create value, they tend to look at the past performance rather than to future prospects. However, the

companies are enjoying a trend of increasing ROEs and ROCs (as shown by the comparison of the latest

year’s figure and the average of the last four years). Such trends lead us to believe that the companies

are picking better and better projects, and are able to generate higher returns from their resources

today than in the past five years.

Accounting return is a fair measure of the returns that the company is making on the projects. However

it does not take into account the opportunity cost of the capital used in the projects. To account the

opportunity cost into the analysis we can use the Economic value Added analysis where the total

economic value added to the equity shareholders and the firm through the new projects can be

calculated.

2. Economic Value Added

Both ROC and ROE is good method when it comes to quantify the returns on shareholders equity and

total value of the firm (debt + equity).They are methods when we want to compare the company

current return with past result. Moreover both these methods are use when we want to compare the

company return with the other company and stock market.

However these methods don’t take into account the opportunity cost of capital. So it’s a financial

performance method to calculate the true economic profit of corporation. EVA can be calculated as net

operating after tax profit minus opportunity cost of capital.

Equity EVA = NOPAT – Cost of Equity*Equity Employed

Unlike accounting profits method which we have discussed earlier EVA is economic and is based on the

idea that business must cover its operating cost and opportunity cost which is missing in ROE and ROC.

Equity EVA for 9 FMCG firms is calculated below:

PBIT Marginal Tax

NOPAT = PBIT(1-tax)

Cost of Equity(%)

Equity Employed

Equity EVA

Godrej 164.61 6.82308172 153.3785252 19.76 22.58 148.916717ITC 4,305.66 25.45642911 3209.592714 19.76 376.22 3135.25164Marico 205.98 26.93202385 150.5054173 11.71 60.9 143.374027HUL 2,328.40 14.33077022 1994.722346 24.13 220.68 1941.47226Colgate - Palmolive

217.85 26.96712133 159.1021262 16.33 135.99 136.894959

Britannia 152.45 9.37 138.165435 15.53 23.89 134.455318Dabur 313.01 11.4 277.32686 13.39 86.29 265.772629Nestle 547.25 29 388.5475 19.14 96.42 370.092712GSK 236.8 29 168.128 16.98 542.72 75.974144

Table 4.3 Calculated Equity EVA

While in ROC and ROE methods we see that GODREJ is the company with highest return here we see

that ITC which is having highest PBIT is having a highest EVA of 3135.So ITC has created maximum value

for its shareholders while GSK has created least value for its shareholders. We see that all industry has

created positive value for their shareholders.

EVA for 9 FMCG firms:

EVA = NOPAT – WACC*Capital Employed

PBIT Marginal Tax

NOPAT = PBIT(1-tax)

WACC Capital Employed

Equity EVA

Godrej 164.61 6.82308172 153.3785252 14.43 223.77 121.096318ITC 4,305.66 25.45642911 3209.592714 13.23 10,580.88 1810.26349Marico 205.98 26.93202385 150.5054173 18.19 350.74 86.7190116HUL 2,328.40 14.33077022 1994.722346 16.95 2,795.42 1520.85635Colgate - Palmolive 217.85 26.96712133 159.1021262 16.26 284.8 112.792924Britannia 152.45 9.37 138.165435 23.90 619.6 -9.9093878Dabur 313.01 11.4 277.32686 10.68 423.27 232.131008Nestle 547.25 29 388.5475 19.39 405.16 309.970344GSK 236.8 29 168.128 8.71 542.72 120.871858

Table 4.4 EVA for 9 FMCG firms

From above table we can see that ITC which also having highest equity EVA is also having highest EVA.

Also all companies except Britannia is having a negative EVA.

So we are getting negative value for Britannia also ROC-WACC for Britannia is negative so at present

Britannia is able to create value for its shareholder but still they are inefficient in their processes and in

covering opportunity cost of capital, mainly debt. Britannia should take project keeping in view of

opportunity cost of capital also it will increase its EVA.

PART V: CAPITAL STRUCTURE CHOICES

In this section we analyze the capital-structure of the firms as conceived of the debt and equity

contributions. We study the various debt instruments and their contribution in the company’s financial

mix. We then analyze the company’s interest payments vis-à-vis their earnings followed by an analysis of

the benefits and disadvantages of debt.

FMCG sector has traditionally been characterized by equity dominated capital structure. This is also

validated by our analysis of the capital structure of the 9 FMCG companies. Being a sector under stable

growth phase, there are no significant capital expansion plans. Hence these companies have the

advantage of low levels of debt and a large cash-reserve.

The table below computes the debt-equity ratios of various firms. Most of the firms have this ratio at

around 4-5% with the exception of Godrej (63%) and Marico (85%).

Britannia Colgate Dabur Glaxo Godrej HUL ITC

Marico Nestle

Share Capital 23.89 135.99 86.29 42.06 22.58 220.68 376.22 60.9 96.42

Reserves 590.93 144.53 316.9 500.66 88.32 2,502.81 10,060.86 122.59 292.47

Total Shareholders Fund

614.82 280.52 403.2 542.72 110.9 2,723.49 10,437.08 183.5 388.89

Total Debt 4.78 4.28 20.62 0 112.87 72.6 200.88 167.25 16.27

Debt-Equity Ratio

0.01 0.02 0.05 0 0.63 0.03 0.02 0.85 0.04

Long Term D/E Ratio

0.01 0.02 0.05 0 0.53 0 0.02 0.43 0

Table 5.1: Debt-equity ratios

Debt-Equity Ratio

0

20

40

60

80

100

Britannia Colgate Dabur Glaxo Godrej HUL ITC Marico Nestle

Company

Deb

t-E

qu

ity R

ati

o

Figure 5.1: Graphical representation of Debt-equity representation

From 2003-05 Godrej has aggressively bought shares from the open-market by raising its debt levels.

Company had said that it believes its shares are undervalued, hence the buy-back.

We have analyzed the debt obligations of the companies as secured loans and unsecured loans.

Britannia Colgate Dabur Glaxo Godrej HUL ITC Marico NestleTerm Loans Institutions

0 0 3.8 0 0 0 0 0 0

Term Loans Banks 0 0 15.48 0 33.34 0 0 0 0Deferred Credit 1.53 0 0 0 0.48 0 0 0 0Cash Credit 0 0 0 0 9.05 0 60.78 0 0Working Capital Advances

0 0 0 0 5 37.13 0 50.48 16.27

Total Secured Loans

1.53 0 19.28 0 47.87 37.13 60.78 50.48 16.27

Loans from Banks 3.25 0 0.26 0 65 34.3 46.29 116.77 0Advances 0 0 0 0 0 1.17 0 0 0Deferred Tax 0 0 0 0 0 0 93.81 0 0Unsecured Loans Others 0 4.28 0 0 0 0 0 0 0TOTAL DEPOSITS 0 0 0.54 0 0 0 0 0 0Security Deposits 0 0 0.54 0 0 0 0 0 0Total Unsecured Loans

3.25 4.28 1.34 0 65 35.47 140.1 116.77 0

Total Debt 4.78 4.28 20.62 0 112.87 72.6 200.88 167.25 16.27

Table 5.2: Debt obligations of the companies

Secured loans usually offer lower rates, higher borrowing limits and longer repayment terms than

unsecured loans.

Secured loans consist of mostly long term debt comprising of loans from institutions, banks, credit and

working capital advances. Unsecured loans are loans for shorter term. Most of the companies have

higher percentage of unsecured loans comprising of loans from banks. This implies that companies are

paying higher interest rates under their unsecured contracts.

Advantages of Taking Debt:

The FMCG sector in India has historically been a stable sector with constant growth rate of 6-7%

over the last decade. Also the prospects of the sector are promising with the rising disposable

income of a vast majority of population. Hence adding on more debt can provide these firms

with adequate leverage to increase the EPS.

As previously calculated there is a wide variation in the marginal tax rate across firms.

Companies with high marginal rate like Nestle and GSK (29%), ITC, Marico and Colgate (25-27%)

will benefit more by raising its debt levels as compared to companies like Godrej (6%), Britannia

(9%) and Dabur (12%).

Also since most of the companies have adequate cash reserves and not much capital intensive

projects the reduction in credit ratings of the firms, even if they increase their debt-equity

ratios, will not affect the investment plans. The tax savings that firms accrue depends on the

amount of depreciation each one has. In this regard Marico and Godrej have higher benefits due

to higher depreciation as a ratio of their book value. On the other hand, Britannia, Colgate and

Dabur benefit least by their low depreciation expenses.


Depreciation 25.27 15.2 21.98 42.71 12.49 130.16 362.92 35.19 66.28

Firm Book value 614.82 280.5 403.19 542.72 110.9 2,722.82 10,380.00 183.49 388.9

Depreciation/Book Value

4.11015 5.4189 5.4515 7.8696 11.262 4.78034 3.496339 19.178 17.043

Table 5.3: Depreciation/ Firm book value for the companies

Another factor to be considered is the current ability of the firm to service its interest

obligations. We have analyzed the companies’ yearly interest payments as a ratio of its EBITDA

(Interest Coverage Ratio). Higher this ratio is, better will be its interest-payment ability. The

table below provides the interest-coverage ratio for various firms.

We see that companies like Colgate, HUL and ITC have large interest coverage ratios, thereby signifying

safer debt servicing. Nestle have substantially lower interest commitments both in absolute terms and

as compared to its EBITDA. .Hence there is lower risk with these companies taking up more debt.

Companies like Britannia and Marico pay a large part of their earnings as interest payments. Hence it

provides a limit to their raising external borrowing.

Interest Coverage Ratios


Interest Paid 9.1 0.98 6.81 3.5 7.6 11 16 20 0.44

EBITDA 152.5 218 313 237 164.6 2328.2 4305 206 547.4

Interest Coverage 16.7582 222.45 45.962 67.714 21.658 211.65 269.06 10.3 1244.1

Table 5.4: Interest Coverage ratios

Interest Coverage Ratios

0

200

400

600

800

1000

1200

1400

Britan

nia

Colgat

e

Dabur

Glaxo

Godre

jHUL

ITC

Mar

ico

Nestle

Company

Inte

res

t C

ov

era

ge

Figure 5.2: Graphical representation of Interest Coverage ratios

All the companies are publicly listed with a majority of shares with institutional investors and

with general public. This implies that there is a wide separation between management and

shareholders. Hence debt obligations will also help in disciplining the management.

Disadvantages of Taking Debt:

The companies already have comfortable cash reserves signifying not much capital investment

opportunities availed by the firm. Also, the recent upswing in the stock markets has given fair

valuations to the company stock prices. Hence buy-back of shares at current prices at the cost of

debt is not advisable.

Higher debt obligations will negatively affect the company’s cash flows thereby reducing the

dividend amounts payable to shareholders

High debt financing of riskier projects can give rise to bankruptcy effects. Although latent, such

effects will have to be considered by the managers if they plan to take up more debt.

Ability to Service Debt:

A Free Cash flow to the firm analysis will help us gauge the amount of cash that these firms have to

service any debt under an emergency. The table below lists the figures for each firm as on Mar 2007:

Table 5.5: Free Cash Flow/ Total Debt ratios

When we compare the ratio FCF/Total debt, we get an idea of how healthy is the organization in terms

of free cash flow for timely and risk free debt servicing as well as the ability to fund new projects. A look

at the figures indicate that while market leaders like ITC and HUL boast of healthy and balanced figures,

firms like Godrej and Marico have a risky capital structure that may inhibit them from taking risks in

terms of new projects and product launches. Going forward, GPCL has plans to issue rights of Rs 3-4b,

which would reduce the interest burden and provide cash for funding future acquisitions. On the other

hand Marico has invested heavily in strategic global acquisitions as well as in its latest offering in the

form of Kaya Skin Clinics – which has already started bearing returns. Marico however needs to reduce

its debt liability. Britannia has very low debt liability and a relatively high level of free cash flow. Sitting

on top of such enormous free cash without utilizing it for funding new projects is not a very positive

sign.

Name of the Company

EBITDA Firm Value EBITDA/Firm Value

Britannia 152.45 3272.595946 0.04658Colgate Palmolive 217.85 5186.286292 0.04200Dabur 313.01 8582.547662 0.03647Glaxo Smith Kline 236.8 2463.403138 0.09612Godrej 164.61 3062.393633 0.05375Hindustan Unilever 2,328.40 49424.8 0.04710ITC 4,305.66 72034.25568 0.05977Marico 205.98 3809.07 0.05407Nestle 547.25 14466.09336 0.03782

Table 5.6: EBITDA/Firm value

When we compare the EBITDA/Firm Value ratios for all the firms, we find that while most lie in a similar

range Nestle has the highest value. This implies a healthy capital structure vis-à-vis earnings.

To have an idea of the variability of the operating income of the firms in consideration, we calculate the

variability i.e. Standard Deviation/Mean expressed as a percentage. Following table presents the data

for the ten years:

Name of Company

Mar-07 Mar-06 Mar-05 Mar-04 Mar-03 Mar-02 Mar-01 Mar-00 Mar-99 Mar-98

Nestle 418.55 403.06 365.18 358.78 335.45 264.46 249.21 242.41 173.62 103.19Marico 266.95 170.01 46.78 60.56 61.43 63.37 54.64 44.33 22.34 41.63HUL 1594.82 1967.45 1301.6 1476.48 1566.77 1307.46 1359.22 1112.51 723.09 859.35Colgate 115.34 75.09 175.54 124.7 118.91 56.23 132.38 89.83 77.32 54.81Britannia 87.08 64.9 196.15 82.59 76.76 53.08 24.98 53.42 64.3 7.24Dabur 234.43 194.34 206.99 198.55 128.93 99.84 113.68 44.51 82.23 38.08Glaxo 138.6 98.48 129.13 145.45 152.28 175.38 103.15 74.28 30.64 54.04Godrej 107.62 147.5 89.75 84.31 70.74 78.44 -0.21ITC 2141.19 1929.68 1851.2 1893.27 1914.04 1769.54 991.01 1078.41 649.83 751.74

Table 5.7: Variability Of Operating Income

The variability is as follows:

Name of Company

MeanStd

Deviation

Std Deviation\Mean

(expressed as %)Nestle 291.39 102.61 35.21Marico 83.20 75.84 91.15HUL 1326.88 364.11 27.44Colgate 102.02 38.17 37.42Britannia 71.05 50.53 71.13Dabur 134.16 70.49 52.54Glaxo 110.14 46.41 42.14Godrej 82.59 44.55 53.94ITC 1496.99 561.47 37.51

Table 5.8: Deviation of Operating Income

We observe that a variability of more than 90% for Marico is not a good indicator. This is justifiable as

Marico is currently in a growth and expansion mode. However, the management needs to curt such high

variability as it denotes high riskiness in the operating income of the firm. Britannia is another firm with

a high ratio. The ratios of healthy firms hover in the 30-50% range.

PART VI: OPTIMAL CAPITAL STRUCTURE

The objective of this section is to come up with the optimal financing mix for each firm. The optimal

capital structure is the ideal debt to Equity ratio that a firm should maintain to maximize its value.

Though cost of debt is mostly less than that of cost of Equity, but the debt carries a distress cost with

itself and therefore above a certain level, the actual cost of debt to the firm increases by a huge value.

Thus to ensure that the firm maximize its value, all the firms must have a ideal debt to Equity ratio.

This was first done on a quantitative basis using the Minimization of Cost of Capital Approach. After the

model determined the optimal financing mix, we built constraints to determine the costs of maintaining

a determined credit rating classification.

As the results of the quantitative analysis could be way off what is considered normal for the industry,

we enriched our analysis by using a comparative analysis between the firms under analysis and the oil

sector and with the total market as a whole.

Current cost of capital and Financing Mix

Britannia Col-Pal Dabur Godrej GSK HUL ITC Marico Nestle

Cost of Equity

15.49% 16.30% 13.35% 9.06% 16.94% 24.12% 19.74% 11.66% 19.12%

After-tax Cost of debt

7.83% 6.31% 7.66% 8.05% 6.13% 7.40% 6.44% 6.31% 6.13%

Cost of Capital

15.48% 16.29% 13.34% 9.02% 16.94% 24.09% 19.71% 11.43% 19.10%

MV Firm(crores Rs)

3273 5186 8583 3062 2463 49425 72034 3882 14467

Rating AAA AAA AAA AAA AAA AAA AAA AAA AAAs

Value/share 1367.85 381.05 99.10 130.60 585.75 226.65 190.75 61.00 1498.70

Table 6.1 Current cost of capital and Financing Mix

Optimal Mix

The cost of capital at different financing mixes:

Debt Ratio Britannia Col-Pal Dabur Godrej GSK HUL ITC Marico Nestle

0% 15.48% 16.29% 13.34% 9.02% 16.94% 24.10% 19.72% 11.54% 19.11%

10% 15.49% 15.98% 13.34% 9.10% 16.50% 23.88% 19.32% 11.34% 18.68%

20% 16.37% 16.36% 14.37% 9.58% 16.20% 24.38% 19.09% 11.74% 19.07%

30% 17.19% 17.74% 16.45% 10.93% 16.15% 25.04% 19.67% 12.32% 21.20%

40% 19.78% 19.59% 17.65% 13.46% 16.82% 27.74% 20.26% 14.94% 22.40%

50% 20.98% 20.79% 18.85% 14.66% 17.15% 28.94% 23.50% 16.14% 23.60%

60% 22.18% 21.99% 20.05% 15.86% 19.50% 30.14% 24.70% 17.34% 24.80%

70% 23.38% 23.19% 26.88% 17.06% 22.02% 31.34% 25.90% 18.54% 26.00%

80% 24.58% 30.92% 28.88% 18.26% 23.22% 39.09% 27.10% 19.74% 27.20%

90% 25.78% 32.92% 30.88% 26.67% 24.42% 41.09% 28.30% 28.20% 35.76%

Table 6.2 Optimal Mix

It can be clearly seen in the table above that there is no fixed industry wide ideal debt ratio. The ratio is

more specific to the company that we are analyzing. But mostly it is evident that the optimal debt ratio

for the companies is low (0-10%).

Some of the factors that make a major impact on debt ratio are:

1. EBITDA of the company, as it ensures the cash flow that the company is going to face.

2. Interest expenses paid by the company on the long term debt.

3. Effective Tax rate that the company pays.

4. Current market value of the company

5. Beta of the company

6. Market value of the current debt and the Rating that the company enjoys

Therefore the optimal ratios and value without constraints for each firm are:


Cost of Equity

15.49% 16.97% 13.88% 9.06% 19.70% 25.64% 21.92% 11.84% 20.00%

After-tax Cost of debt

7.83% 7.00% 8.50% 8.05% 7.87% 8.04% 7.75% 6.86% 6.81%

Cost of Capital

15.48% 15.98% 13.34% 9.02% 16.15% 23.88% 19.09% 11.34% 18.68%

MV Firm(crores Rs)1

3273 5288 8583 3062 2584 49865 74370 3913 14798

MV Firm(crores Rs)2

3273 5402 8583 3062 2718 50134 76329 3993 15086

1- Assuming no growth 2- Assuming perpetual growth

Table 6.3 optimal ratios and value without constraints for each firm (Assuming no growth)


Current Market Value

3273 5186 8583 3062 2463 49425 72034 3882 14467

Increased Market Value 1

3273 5288 8583 3062 2584 49865 74370 3913 14798

Increase (decrease) in market

value 1

0 101 0 0 121 440 2335 31 331

Increased Market Value 1

3273 5402 8583 3062 2718 50134 76329 3993 15086

Increase (decrease) in market

value 1

0 216 0 0 255 709 4925 110 619

Table 6.4 optimal ratios and value without constraints for each firm ( Assuming perpetual growth )

Looking at the above table, it can be clearly seen that except for Britannia, Dabur and Godrej, all the

other companies can increase their market value by changing their debt structure. However, GSK and

ITC show the most promising increase in the market values.

The current market values of Britannia, Dabur and Godrej are same as their ideal values because they

are working on the optimal financing mix already.

Effect of changing the debt ratio: As we keep on changing the debt ratio, what we have observed for all

the companies is that the debt ratio kept on decreasing up to a certain value and then started

increasing. This occurs because after that point distress cost becomes very prominent, increasing the

value of the capital for the company.

It can be clearly seen that the maximum cost of debt for all the companies occur at 90% level of debt. It

means no matter what the financial health of the company is, beyond a certain point distress cost

overtakes all the other factors and become the most prominent factor.

Effect on stock price at optimal debt ratio: As is shown in the table above, the value of the firm will

increase with change in debt ratio, it can be clearly concluded that the stock price of the firm will also

increase. One point of importance here is to what use the raised debt is being used, if it used to buy

back some shares or invested in a project giving the same return as the overall firm the market value

and the share price of the firm will surely increase. But if the raised capital is not used properly or is paid

as dividends to the stock owners, the market value of the firm may fall also post dividend payment.


Current Value/share

1367.85 381.05 99.10 130.60 585.75 226.65 190.75 61.00 1498.70

Value/share (at optimal) 1

1367.85 388.50 99.10 130.60 614.49 228.67 196.95 61.51 1533.07

Value/share (at optimal) 2

1367.85 396.93 99.10 130.60 646.37 229.91 202.15 62.81 1562.91

1- Assuming no growth 2- Assuming perpetual growth

Table 6.5 Effect on stock price at optimal debt ratio

Constraints on the company

After the issue of debt by the company, the rating of the company will fall down, and some cases a huge

fall. In that case any further attempt to increase the debt may not be possible as the cost of issuing debt

would be high.

Below are the updated ratings of all the companies under analysis:

Debt Ratio Britannia Col-Pal Dabur Godrej GSK HUL ITC Marico Nestle

0% AAA AAA

10% A- AAA A A A-

20% BB+ BBB

30%

40%

50%

60%

70%

80%

90%

Table 6.6 Constraints on the rating

Constraint on the rating:

The current ratings for all companies are AAA. Here we see that for going towards the optimal financing

mix, come companies have to sacrifice their investment rating. Ideally a company should at least remain

in the investment grade. Here we see that all the companies have a rating equal to or better than BBB,

with ITC at BBB and GSK at BB+. All others are A- and better.

The changes in investment ratings do affect the stock prices of the company. But since there isn’t a big

degradation in the ratings, there would not be much effect of this on the stock prices.

One major analysis to be noted is that since the cost of maintain the current investment rating is not too

big (in terms of the difference in current and optimal market value), the decision is entirely in the

company’s hands whether it needs to give a priority to a higher investment rating, or an optimal

financing mix.

Sensitivity Analysis (The downside EBITDA):

Since the calculations of the previous optimal ratios were based on the latest available EBITDA, the

whole process of optimization could lead to biased results if this value (the EBITDA) was abnormally high

or low. To make sure that the results of our process are robust, we repeated the optimization process

but used a conservative level of EBITDA (EBITDA*). This EBITDA* was calculated for each company using

the following formula:

EBITDA* = EBITDA– S(EBITDA)× EBITDA

where,

EBITDA: is the latest available level of EBITDA

S(EBITDA): is the standard deviation of EBITDA for the last 5 years.

The optimal ratios for each company get changed to:


EBITDA 152.45 217.85 313.01 164.61 236.9 2328.4 4305.66 205.98 547.25

S(EBITDA) 23.84% 11.14% 24.01% 22.00% 15.21% 13.88% 18.40% 26.78% 13.20%

EBIT* 116.1023 193.58 237.87 128.39 200.77 2005.30 3513.51 150.81 475.04

Optimal Debt Ratio

0% 10% 10% 0% 30% 10% 20% 10% 10%

Optimal Debt ratio*

0% 10% 0% 0% 30% 10% 20% 10% 10%

Table 6.7 Sensitivity Analysis (The downside EBITDA):

After comparing the optimal ratio (using EBITDA) with the optimal ratio using a normalized EBITDA, we

conclude that the majority of the results are robust to changes in the level of EBITDA. Only Dabur and

ITC experienced a impressive decrease in its optimal debt ratio with the inclusion of the normalized

EBITDA.

PART VII: MECHANICS OF MOVING TO THE OPTIMAL

Path to the Optimal

The following table provides information on how the firms should move towards their optimal debt

ratios. The suggestions on how they should achieve their optimal ratios are also provided.

Company Current Debt Ratio

Optimal Debt Ratio

Rating How Should it move towards the optimal

Britannia 0.15% 0.00% AAA No new debt or arrangement of debt should be taken. It they want to take on projects they should use equity to finance them.

Dabur 0.23% 10.00% AAA Currently at good level of debt ratio. Should maintain this level.

Nestle 0.11% 10.00% A- Currently at good level of debt ratio. Should maintain this level.

GSK 0.00% 30.00% BB+ They should use debt to expand and invest over the next 5 years.

Col-Pal 0.08% 10.00% A- Currently at good level of debt ratio. Should maintain this level.

HUL 0.15% 10.00% A Earning above its cost of capital recently, but is the firm finds good projects it should use debt to pay for them.

Marico 4.31% 10.00% A They are currently at their optimal level and should try to stay there.

ITC 0.28% 20.00% BBB Earning above its cost of capital recently, but is the firm finds good projects it should use debt to pay for them.

Godrej 3.69% 0.00% AAA No new debt or arrangement of debt should be taken. It they want to take on projects they should use equity to finance them.

Table 7.1 Path to the Optimal

None of the firms is in serious danger of a takeover due to the high value of the firms. As the large

number of shares of Marico is held by family member, it also diverts the risk of takeover on this front

also. GSK and ITC are the firms with lowest ratings, but due to large size, are in little risk of bankruptcy.

Each of these firms (except Britannia and Godrej) can use debt to expand since they are all below their

optimal debt ratios and they can maximize firm value by approaching the optimal debt ratios.

Influence of Macro Economic Variables on Firm Value and Operating Income

Here we assess the sensitivity of the firm value and operating income to various macro economic factors

such as long term interest rates, real GDP growth rate, inflation and exchange rate, to understand how

the firms should move towards their optimal debt target.

Regression tests for all 9 companies were done to analyze the effect of these factors on firm value and

operating income.

Macro Variable Company/Results of Regression

Implications for Financing

Long Term Interest Rates 1 2 Regression Coefficients for: Britannia -21.43 4.25 Although some of the individual

regressions show some signs of long term duration, on average the combined averages do not show signs of long term duration. It appears as the firms become stable, they should use short-term duration debt.

(1) Firm Value Dabur 2.12 8.68(2) Operating Income Nestle -2.71 -8.72 GSK 2.91 10.85 Col-Pal -22.42 -7.67 HUL 2.28 6.72 Marico -9.68 6.4 ITC -23.08 6.01 Godrej -39.03 -0.42

Real GDP Growth Britannia -31.37 7.55 The firms with negative coefficients for income are negatively correlated to the GDP growth rate. Most of the firms have non-cyclic firm values. The firm values, however, decreases for most.

(1) Firm Value Dabur 5.18 -9.52(2) Operating Income Nestle -1.98 0.97 GSK -4.29 -9.63 Col-Pal -43.28 -4.09 HUL 3.35 5.23 Marico -17.85 -18.93 ITC -14.34 0.47 Godrej -34.66 -9.11

Inflation Rate Britannia -19.25 9.5 Every company's income (except Britannia and ITC) decreases with inflation. Increase is more for Britannia. Marico's income is most severely hit by rise in inflation. The firm value for all the firms is decreasing with the inflation.

(1) Firm Value Dabur -3.51 -4.07(2) Operating Income Nestle -9.26 -1.65 GSK -7.28 -7.21

Col-Pal -27.82 -0.79 HUL -5.47 -2.47

Marico -8.96 -14.2 ITC -12.57 2.8 Godrej -16.95 -5.6

Exchange Rate Britannia -5.78 -7.64 The effect of the exchange rate does not seem to have a large effect on these firms therefore the majority of the debt should be issued in INR, but there is evidence to suggest that some of the debt should be issued in foreign currencies. This should be evaluated on a firm by firm basis.

(1) Firm Value Dabur -15.01 2.6(2) Operating Income Nestle -2.65 -1.49 GSK -5.75 0.81 Col-Pal -5.34 0.2 HUL -2.57 3.14

Marico -8.96 3.96 ITC -11.98 0.89 Godrej -6.8 -0.11

Table 7.2 Influence of Macro Economic Variables on Firm Value and Operating Income

Looking at the regression, a general sense of the types of the debt that these firms should use is evident.

It appears that the firms should use medium to long duration debt, but as the firm becomes more

stable, the duration should decrease.

On average the firms do not appear to be cyclical, with the exception of Dabur and HUL. They do appear

to be influence by fluctuations in the Exchange rate. The majority of the debt should be issued in INR

and does not need to be shielded from cyclicalities. The firm’s incomes seem to be effected by the

inflation rate; thus, some of the debt should be issued with floating interest rates.

Part VII: Dividend Policy

The past dividend distribution data of companies chosen in the FMCG sector have been collected. From

the data, it is observed that companies in general have an increasing trend of dividend payouts in

absolute terms. In the span of 8 years, it is observed that Dabur’s dividend payout has increased by

about 9 times whereas that of Colgate has increased by 3 times. The dividend payout percentage also

has increased over time in line with the increase in absolute percentage of dividend payout.

The dividend yield also has been on the rise. This shows that the dividend payouts have been in line with

the movement of the scrip value in the market. The general trend shows that companies are not in

favour of stock buybacks. The only exception to this trend is the buyback executed by GSK in the year

2004.

Thus, the dividend policies of companies in the FMCG sector seem to be in unison – largely in favour

of dividend payouts than share buyback.

Company 2007 2006 2005 2004 2003 2002 2001 2000 1999

Britannia

Dividends (Rs. Crore) 35.83 35.83 33.45 27.23 25.11 20.14 15.32 12.53 10.01

Stock Repurchase(Rs. Crore) 0 0 0 0 0 0 0 0 0

Cash to Stock Holders (Rs. Crore) 35.83 35.83 33.45 27.23 25.11 20.14 15.32 12.53 10.01

Dividend Yield % 1.2 0.84 1.58 1.76 2 1.39 0.8 0.73 0.56

Dividend Payout % 150 150 140 110 100 75 55 45 55

Dabur




Dividend Yield % 1.84 3.03 6.76 7.63 11.7 2.7 4.93 36.62 23.01

Dividend Payout % 175 250 250 200 140 50 100 100 50

Nestle




Dividend Yield % 2.24 2.67 4.19 2.9 3.44 2.71 2.55 1.86 1.42

Dividend Payout % 255 250 245 200 180 140 140 80 65

GSK


Stock Repurchase(Rs. Crore) 0 0 0 123.03 0 0 0 0 0


Dividend Yield % 1.79 1.43 2.13 2.16 2.68 1.77 1.44 1.1 0.95

Dividend Payout % 100 80 70 70 70 70 63 57 50

Col Pal

Dividends (Rs. Crore) 129.2 102 95.2 81.6 57.8 57.8 112.19 40.8 40.8


Cash to Stock Holders (Rs. Crore) 129.2 102 95.2 81.6 57.8 57.8 112.19 40.8 40.8

Dividend Yield % 2.86 1.74 3.86 4.61 3.5 3.02 5.34 2.07 1.67

Dividend Payout % 95 75 70 60 42.5 42.5 82.5 30 30

HUL




Dividend Yield % 4.21 2.77 2.53 3.48 2.69 3.03 2.24 1.7 12.89

Dividend Payout % 900 600 500 500 550 550 500 350 290

Marico




Dividend Yield % 1.07 11.49 22.02 64.89 74.02 210.53 170.07 144 48.81

Dividend Payout % 65.5 62 53.5 85 55 140 100 90 90

ITC




Dividend Yield % 2.06 1.36 34.6 28.81 35.74 29.06 18.42 15.31 8.57

Dividend Payout % 310 265 310 200 150 135 100 75 55

Godrej

Dividends (Rs. Crore) 84.69 79.04 67.93 51.32 46.36 32.47 0 0 0

Stock Repurchase(Rs. Crore) 0 0 0 0 0

Cash to Stock Holders (Rs. Crore) 84.69 79.04 67.93 51.32 46.36 32.47 0 0 0

Dividend Yield % 2.58 7.81 15.67 22.27 31.04 34.94 0 0 0

Dividend Payout % 375 350 300 225 200 137 0 0 0

Table 8.1 – Dividend Payout details

Part IX: Dividend Policy - Framework

The purpose of this section is how much is company is returning to its shareholder in terms of dividend

and compares it to with sector average value. We will see whether company is exhausting all its cash to

pay dividend or how much it is retaining its cash to invest in new project. And in case if its retaining its

cash we will see that whether company manager is investing in good project by looking at the past data

(ROC, ROE).

1. Affordable dividend and actual dividend payout

To see how much company could have paid to its stockholder we have calculated FCFE for every

company and compared it with the returns stockholders have got in terms of dividend and stock

buyback. To calculate the FCFE for each company, we took into account the average debt ratio of each

firm.

CompanyAverage

FCFEAverage Dividends

PayoutCash to Stock

Holders

HUL 3176.41 610.00 1420.41

Nestle 461.12 226.00 217.90

Marico 889.88 64.20 28.90

ITC 6264.22 247.00 760.26

GSK 197.90 78.00 58.81

Godrej 400.67 290.00 65.87

Dabur 253.58 203.00 78.26

Col-Pal 245.28 68.50 93.16

Britannia 213.81 130.00 31.49

Table 9.1 Average FCFE and Dividend Payout

05

101520253035404550

HUL

Nestle

Marico IT

CGS K

Godrej

Dabur

C ol-Pal

B ritannia

C as h to s toc kholder as perc entag e of F C F E

Dividend/F C F E

Fig 9.1 Cash to stockholder as percentage of FCFE

From above graph we can infer that all 9 of the FMCG companies is paying dividend within their capacity

that is they are not going for excessive dividend payout by taking debt or by liquidating the assets.

Nestle is having highest dividend: FCFE ratio which means that among the firms we have chosen, nestle

is paying more dividend than any other company. How correct is this decision to not to pay whole cash

to its stockholder we have to look into the projects which these companies is undertaking whether they

will generate high return on equity with respect to cost of equity and can create Economic value to its

shareholder. For getting into more detail we will look into next section.

2. Management Trust and Changing Dividend Policy

Company ROE(%) COE(%) DifferenceROC (%)

WACC (%)

Difference

Godrej 130.40 15.50 114.91 100.65 14.43 86.22

ITC 27.65 13.35 14.30 32.39 13.23 19.16

Marico 51.09 19.12 31.97 35.35 18.19 17.16

HUL 61.37 16.95 44.42 77.34 16.95 60.39

Colgate - Palmolive 71.23 16.30 54.93 56.80 16.26 40.54

Britannia 71.72 24.13 47.60 23.46 23.90 -0.44

Table 9.1 Average FCFE and Dividend Payout

Dabur 57.29 11.66 45.63 62.20 10.68 51.52

Nestle 85.51 19.74 65.77 100.45 19.39 81.06

GSK 24.99 9.07 15.92 56.41 8.71 47.70

Table 9.2 Comparison between ROE, COE and ROC, WACC

To calculate the excess return of the projects to the firm and equity investors, we used the Average ROE

and ROC over the last five years then we calculated the difference between ROE and COE, ROC and

WACC, we are using difference value to predict the nature of investment company is doing in the

projects and whether investor should remain satisfy if they are getting less dividend. By looking into

above table we see that all these companies is creating a positive value to its stockholder. Godrej is one

company which is having creating highest value to its stockholder this data can also be cross checked by

EVA in B4.All these companies is doing well by keeping some cash for investment in business as they are

creating positive higher returns for its stockholder.

However Nestle which is having a highest cash : FCFE ratio creating value by taking very good project

from the perspective of return on project and cost of equity .so Nestle should reconsider its dividend

policy to reduce some dividend and invest more in the business. On the other hand Britannia ROC is less

than WACC so it should revised its divided policy as it is not able to create positive value for its

stakeholder which will push the investor away from the firm than the only way to retain them

reconsider its dividend policy and increase dividend payout.

3. Dividend Comparison with sector

CompanyDividend

Yield

Dividend Yield

SectorDifference

Payout ratio

Payout Ratio sector

Difference

HUL 3.14 10.04 -6.90 610.00 212.97 397.03

Nestle 3.09 10.04 -6.95 226.00 212.97 13.03

Marico 34.70 10.04 24.66 64.20 212.97 -148.77

ITC 20.51 10.04 10.48 247.00 212.97 34.03

GSK 2.04 10.04 -8.00 78.00 212.97 -134.97

Godrej 15.87 10.04 5.84 290.00 212.97 77.03

Dabur 6.19 10.04 -3.84 203.00 212.97 -9.97

Col-Pal 3.31 10.04 -6.72 68.50 212.97 -144.47

Britannia 1.48 10.04 -8.56 130.00 212.97 -82.97

Table 9.3 Dividend Comparison with sector

The dividend yield and payout ratios for the sector were calculated taking average of individual dividend

yield and payouts.

These values suggest some firms’ dividend yields and payout ratios are high relative to the sector, with

Marico paying more dividends relative to its earnings (34%). Godrej's payout ratio reaches 290%, this is

above the sector average - 212.96%. Regarding the dividend yield, ITC is paying the most to its

stockholders (given the high amount of dividends paid when compared to its current stock price of Rs

206).

Part X: Valuation

In this section we present the valuation of the firms based on various parameters that we have

calculated in the previous calculations.

The various steps that we have followed to carry out the valuations are:

1) Finding the right valuation technique

2) Assuming the appropriate growth rates to be used

3) Calculating the discounting rate (calculated previously)

4) Comparing with the current market price of the security to determine if it is overvalued or

undervalued

Historic Growth Rates:

Historic Growth Rates


CAGR 12.62 5.08 15.5 10.15 13.2 8.84 17.25 18.14 13.67

Table 10.1: CAGR of the companies

Most of these firms have been clocking a CAGR in the range of 10-15% during the past 10 years. Analysts

predict an overall growth rate of around 10-12% in the FMCG sector upto 2015. Most of the firms are

expected to echo a similar market trend.

Traditionally FMCG industry has been a competitive one with many large players already present in the

market. These companies enjoy substantial economies of scale and brand preference among consumers

to limit the threat of new players. But already high competition in this domain itself will restrict the

growth rate of all these companies

Discounted cash-flow

We had the option of using FCFE, FCFF or DDM for evaluating the cash flows. As we found out in the

previous sections that firms in the FMCG sector operate with lower amounts of debt approx (5-7%) or

even lower. Hence we do not foresee much change in the operating structure of the firm. Therefore for

all these forms we have used FCFE basis for valuing the PV of the future cash-flows.

Assumptions taken:

Two stage growth model

Terminal value of 7% growth: Aligning it with medium run growth target of India’s GDP which is

slated to grow at 6-7% for the next 10 years and adding a 1% premium for FMCG sector as we

believe this sector has long term growth potential due to burgeoning middle class.

Cost-of-equity as calculated in B3 earlier.

The expected growth in EBITDA is the basis on which we estimated the companies’

growth potential.

Cash flows have been calculated as:

FCFE = Net income - Capital Expenditure + Depreciation - Change in Working

Capital

Comparative Market Valuation

We also used comparative valuation techniques such as P/E multiple, P/Book Value

ratio and Price/ cash EPS. We have taken the average of previous 10 years for each

of these ratios.

Valuation Results

The following table gives the price per share of the companies calculated using various methods. FCFE is

used to calculate the price by discounted cash flow model.

The P/E ratio, P/BV ratio and P/CEPS ratio are used to arrive at the price using Market Multiples.

Valuations FCFE P/E P/BV P/CEPS CMP

Britannia 515 861 1352 982 1312

Dabur 48 73 63 81 104

Nestle 345 790 860 955 1470

GSK 382 565 486 550 608

Colgate Palmolive

66 294 283 291 387

HUL 86 223 138 220 235

Marico 37 39 31 47 65

ITC 85 135 151 149 200

Godrej 130 122 172 135 126

Table 10.2: Comparison with DCF and Market multiple valuations with market price of stock

The above valuations are depicted in the following chart.

0

200

400

600

800

1000

1200

1400

1600

Britan

nia

Dabur

Nestle

GSK

Colgat

e Palm

olive HUL

Mar

ico ITC

Godre

j

Sto

ck

Pri

ce

FCFE

P/E

P/BV

P/CEPS

CMP

Figure 10.1: Graphical Comparison of firm valuation using DCF and market multiples method with CMP

In almost all the companies the Current market price is greater than the price arrived at through

different valuation techniques. Only in the case of Britannia and Godrej is the price arrived through P/BV

method is greater than the current market price. From the above valuations and chart we can conclude

that almost all of the above companies are trading at a premium to their valuations. Marico, Dabur and

Godrej have close valuations through all the methods.

We find that the current stock prices of almost all the companies tally closely with their historic P/E

values, signifying an almost constant market valuation accorded to these companies by investors.

The FCFE method, in almost all the companies, gives a lower value to the firms. We believe one reason

for this can be comparatively high cost of equities associated with all these firms. We have taken the

present cost of equity to discount the terminal value flows as well in absence of any major indicator for

long term cost of equity.

Sensitivity Analysis

Sensitivity Analysis

g= 5% g= 6% g= 7%

CompanyNo of shares outstanding

DCF ValuesPrice of share



Current Market

Price

Britannia 23890163 1037.5 434.2792 1123.44 470.2521 1229.61 514.693 1307.6

Dabur 864022973 3310.33764 38.31307 3655.72717 42.31053 4109.91793 47.56723 107.65

Nestle 96415716 3017.24449 312.9411 3161.70606 327.9243 3330.01404 345.3808 1493.1

ITC 3765838830 27767.6488 73.73563 29521.092 78.39181 31675.7807 84.11348 206.3

Godrej 225844076 2941.58824 130.2486 3702.28092 163.9308 5187.44281 229.6913 126.4

Marico 609000000 1676.43257 27.52763 1926.60884 31.63561 2284.1569 37.50668 67.4

Colgate 135992817 790.506766 58.12857 836.745935 61.52869 892.929011 65.66001 387.6

Glaxo 42055538 1434.66951 341.1369 1511.46471 359.3973 1603.61894 381.3098 606.15

HUL 2177463355 16265.9732 74.70148 17344.583 79.65499 18692.8453 85.84689 242.2

Table 10.3: Sensitivity analysis of FCFE valuation using different growth rates

As seen from the table shown above, Discounted Cash Flow value using Free Cash Flow to Equity was

calculated for every firm using different growth rates, namely 5%, 6% and 7%. Then, using this value and

the number of shares outstanding, we calculated the price value of share. It was observed that, for all

the firms, the share price varied from 4% to 10% for every incremental change of growth rate from 5%

to 7%. But Godrej, Dabur and Marico were exceptions in this regard. Especially, in case of Godrej, the

variations were 20.73% and 41% for the incremental change from 5% to 6% and 6% to 7% respectively,

which is considerably higher than the industry average. Thus Godrej share price, in particular, is very

sensitive to growth rate changes

One of the reasons for such high sensitivity is that the cost of equity for Godrej was amongst the lowest

in the industry. As a result, the terminal value of FCFF saw significant variations with every percentage

change in growth rate.

When compared with the current market price of the shares, we can see that, with the exception of

Godrej, all other stocks are overpriced, hence overvalued.

Operating & Financial Leverage Comparison:

Britannia:

-200.00%

0.00%

200.00%

400.00%

600.00%

800.00%

1000.00%

1200.00%

1400.00%

1999 2000 2001 2002 2003 2004 2005 2006 2007

Change in Sales

Change in EBIT

Operating leverage

-100.00%

-50.00%

0.00%

50.00%

100.00%

150.00%

200.00%

250.00%

1999 2000 2001 2002 2003 2004 2005 2006 2007

Change in EBIT

Change in EPS

Financial leverage

Colgate:

-1000.00%

-500.00%

0.00%

500.00%

1000.00%

1500.00%

2000.00%

1999 2000 2001 2002 2003 2004 2005 2006 2007

Change in Sales

Change in EBIT

Operating leverage

-2000.00%

-1500.00%

-1000.00%

-500.00%

0.00%

500.00%

1999 2000 2001 2002 2003 2004 2005 2006 2007

Change in EBIT

Change in EPS

Financial leverage

Godrej:

0.00000%

50.00000%

100.00000%

150.00000%

200.00000%

250.00000%

300.00000%

2002 2003 2004 2005 2006 2007

Change in Sales

Change in EBIT

Operating leverage

-800.00000%

-600.00000%

-400.00000%

-200.00000%

0.00000%

200.00000%

400.00000%

600.00000%

2002 2003 2004 2005 2006 2007

Change in EBIT

Change in EPS

Financial leverage

ITC:

0.00%

100.00%

200.00%

300.00%

400.00%

500.00%

600.00%

700.00%

1999 2000 2001 2002 2003 2004 2005 2006 2007

Change in Sales

Change in EBIT

Operating leverage

-1600.00%

-1400.00%

-1200.00%

-1000.00%

-800.00%

-600.00%

-400.00%

-200.00%

0.00%

200.00%

400.00%

1999 2000 2001 2002 2003 2004 2005 2006 2007

Change in EBIT

Change in EPS

Financial leverage

Marico

-200.00%

0.00%

200.00%

400.00%

600.00%

800.00%

1000.00%

1200.00%

1400.00%

1999 2000 2001 2002 2003 2004 2005 2006 2007

Change in Sales

Change in EBIT

Operating leverage

-600.00%

-500.00%

-400.00%

-300.00%

-200.00%

-100.00%

0.00%

100.00%

200.00%

300.00%

1999 2000 2001 2002 2003 2004 2005 2006 2007 Change in EBIT

Change in EPS

Financial leverage

Dabur:

-1000.00%

0.00%

1000.00%

2000.00%

3000.00%

4000.00%

5000.00%

1999 2000 2001 2002 2003 2004 2005 2006 2007

Change in Sales

Change in EBIT

Operating leverage

-2000.00%

-1500.00%

-1000.00%

-500.00%

0.00%

500.00%

1000.00%

1500.00%

2000.00%

2500.00%

3000.00%

1999 2000 2001 2002 2003 2004 2005 2006 2007

Change in EBIT

Change in EPS

Financial leverage

Glaxo:

-300.00%

-200.00%

-100.00%

0.00%

100.00%

200.00%

300.00%

1999 2000 2001 2002 2003 2004 2005 2006 2007

Change in Sales

Change in EBIT

Operating leverage

-100.00%

-50.00%

0.00%

50.00%

100.00%

150.00%

200.00%

250.00%

1999 2000 2001 2002 2003 2004 2005 2006 2007

Change in EBIT

Change in EPS

Financial leverage

HUL:

-400.00%

-200.00%

0.00%

200.00%

400.00%

600.00%

800.00%

1000.00%

1200.00%

1400.00%

1600.00%

1999 2000 2001 2002 2003 2004 2005 2006 2007

Change in Sales

Change in EBIT

Operating leverage

-2500.00%

-2000.00%

-1500.00%

-1000.00%

-500.00%

0.00%

500.00%

1000.00%

1500.00%

1999 2000 2001 2002 2003 2004 2005 2006 2007Change in EBIT

Change in EPS

Financial leverage

Nestle:

-400.00%

-300.00%

-200.00%

-100.00%

0.00%

100.00%

200.00%

300.00%

400.00%

1999 2000 2001 2002 2003 2004 2005 2006 2007

Change in Sales

Change in EBIT

Operating leverage

-50.00%

0.00%

50.00%

100.00%

150.00%

200.00%

250.00%

300.00%

350.00%

1999 2000 2001 2002 2003 2004 2005 2006 2007

Change in EBIT

Change in EPS

Financial leverage

Figure 10.2 Operating & Financial Leverage Comparison

High fixed costs and low variable costs provide the operating leverage of a greater percentage change in profits

both upward and downward. We can see that the operating leverage of Godrej – during the period 2003-05 went

up owing to investment in fixed assets. The change in Sales of Godrej was positive during this period – hence the

high operating leverage paid off. Operating leverage of Dabur was very high during 2002. Since change in Sales or

EBIT has not been substantial, the operating leverage for most of the firms above are in reasonable limits.

Financial leverage affects the debt-equity mix and determines how the benefits received will be allocated – for

most of the firms above it reflect a capital structure with fair amount of risk. Due to low EBIT, the financial

leverage of Dabur in 2004 is very high which reflects a risky situation.

Appendix

Britannia Industries Limited

Share Holding pattern

Ownership Pattern as on 31-

12-2007

No of

Shares

% Share

HoldingShare Holder Demat Share

Foreign (Promoter & Group) 12173219 50.9549 6 1392319Indian (Promoter & Group) 750 0.0031 2 450Total of Promoter 12173969 50.958 8 1392769Non Promoter (Institution) 7091674 29.6845 82 7075683Non Promoter (Non-Institution) 4624520 19.3574 24822 3182887Total Non Promoter 11716194 49.0419 24904 10258570Total Promoter & Non Promoter 23890163 99.9999 24912 11651339Custodians(Against Depository Receipts) 0 0 0 0Grand Total 23890163 100 24912 11651339

Category of shareholder

No. of shareholders

Total no. of shares

Total no. of shares held in

dematerialized form

Total shareholding as a % of total no. of shares

As a % of (A+B)

As a % of (A+B+C)

(A) Shareholding of Promoter and

Promoter Group(1) IndianIndividuals /

Hindu Undivided Family

1 450 450 - -

Bodies Corporate

1 300 - - -

Sub Total 2 750 450 - -

(2) ForeignBodies

Corporate6 12173219 1392319 50.95 50.95

Sub Total 6 12173219 1392319 50.95 50.95Total shareholding of

Promoter and Promoter Group (A)

8 12173969 1392769 50.96 50.96

(B) Public Shareholding(1) Institutions

Mutual Funds / UTI

25 1681435 1680505 7.04 7.04

Financial Institutions / Banks

21 15619 13395 0.07 0.07

Insurance Companies

10 2641892 2629055 11.06 11.06

Foreign Institutional

Investors26 2752728 2752728 11.52 11.52

Sub Total 82 7091674 7075683 29.68 29.68(2) Non-

InstitutionsBodies

Corporate548 251390 227794 1.05 1.05

IndividualsIndividual

shareholders holding nominal share capital

up to Rs. 1 lakh

24227 3482198 2422823 14.58 14.58

Individual shareholders holding nominal share capital in excess of Rs. 1 lakh

38 881188 522526 3.69 3.69

Any Others (Specify) - - - - -

Trusts 9 9744 9744 0.04 0.04

Sub Total 24822 4624520 3182887 19.36 19.36Total Public

shareholding (B)24904 11716194 10258570 49.04 49.04

Total (A)+(B) 24912 23890163 11651339 100 100(C) Shares held by

Custodians and against which

Depository Receipts have been issued

- - - - -

Total (A)+(B)+(C) 24912 23890163 11651339 - 100

Fund Holding Pattern

Fund

Mkt

Value

Mkt

Value

Change

in%

Change

No of

Shares

No of

Shares

Jan-08 Dec-07 Value Jan-08 Dec-07

Birla Sun Life Mutual Fund 0.12 5.35 -5.23 -97.76 798 36279

Franklin Templeton Mutual Fund 0.12 6.39 -6.27 -98.12 798 43337

HDFC Mutual Fund 228.93 222.33 6.6 2.97 1582678 1508898

Kotak Mahindra Mutual Fund 1.99 2.02 -0.03 -1.49 13723 13723

UTI Mutual Fund 8.28 8.44 -0.16 -1.9 57268 57268

Colgate Palmolive Ltd.

Shareholding Pattern

Category of shareholderNo. of share

holders

Total no. of shares


dematerialized form

Percentage

A) Shareholding of Promoter and Promoter Group (1) Indian (2) Foreign Bodies Corporate 3 69356336 51Sub Total 3 69356336 51

Total shareholding of Promoter and Promoter Group (A) 3 69356336 51 B) Public Shareholding

(1) Institutions Mutual Funds / UTI 47 6787682 6782265 4.99

Financial Institutions / Banks 108 345880 337713 0.25

Insurance Companies 7 10308430 10308430 7.58

Foreign Institutional Investors 67 11086066 11082616 8.15

Sub Total 229 28528058 28511024 20.98 (2) Non-Institutions Bodies Corporate 1621 4763374 4737322 3.5Individuals

Individual shareholders holding nominal share capital up to Rs. 1 lakh 133315 32377707 23931795 23.81

Individual shareholders holding nominal share capital in excess of Rs. 1 lakh 2 610101 610101 0.45

Non Resident Indians 832 349045 326196 0.26

Overseas Corporate Bodies 2 3220 1940

Trusts 11 4976 4976 Sub Total 135783 38108423 29612330 28.02 Total Public shareholding 136012 66636481 58123354 49

Stock holder analysis:

Ownership Pattern as on 31-12-2007 No of Shares % Share Holding

Bajaj Allianz Life Insurance Company Ltd 1416964 1.04

Colgate Palmolive Asia Pte Ltd 14879426 10.94

Colgate Palmolive Company USA 54476347 40.06

Government of Singapore 1561000 1.15

HDFC Trustee Company Ltd 1400000 1.03

LIC of India 8265538 6.08

Norwood International 563 0.00

Dabur India Ltd.

Share holding pattern

Category of shareholderNo. of

shareholdersTotal no. of shares


dematerialized form

Total shareholding as a % of total no. of

shares

As a % of

(A+B)

As a % of

(A+B+C)

(A) Shareholding of Promoter and Promoter Group

(1) Indian

Individuals / Hindu Undivided Family 15 978000 969000 0.11 0.11

Bodies Corporate 11 61057447361056697

370.67 70.67

Sub Total 26 61155247361153597

370.78 70.78

(2) Foreign

Individuals (Non-Residents Individuals / Foreign Individuals)

4 282000 276000 0.03 0.03

Sub Total 4 282000 276000 0.03 0.03

Total shareholding of Promoter and Promoter Group (A)

30 61183447361181197

370.81 70.81

(B) Public Shareholding

(1) Institutions

Mutual Funds / UTI 22 12755295 12749295 1.48 1.48

Financial Institutions / Banks 8 195959 195959 0.02 0.02

Insurance Companies 13 55817035 55817035 6.46 6.46

Foreign Institutional Investors 86 11476176111475876

113.28 13.28

Sub Total 129 18353005018352105

021.24 21.24

(2) Non-Institutions

Bodies Corporate 1742 9982322 9965321 1.16 1.16

Individuals

Individual shareholders holding nominal share capital up to Rs. 1 lakh

100223 47930472 41766329 5.55 5.55

Individual shareholders holding nominal share capital in excess of

Rs. 1 lakh19 6263732 6263732 0.72 0.72

Any Others (Specify) - - - - -

Non Resident Indians 2723 4481924 2104924 0.52 0.52

Sub Total 104707 68658450 60100306 7.95 7.95

Total Public shareholding (B) 104836 25218850024362135

629.19 29.19

Total (A)+(B) 104866 86402297385543332

9100 100

(C) Shares held by Custodians and against which Depository Receipts have been issued

- - - - -

Total (A)+(B)+(C) 104866 86402297385543332

9- 100

Shareholding pattern based on ownership

Promoter’s Shareholding Pattern

Sr. No.

Name of the shareholder No. of sharesShares as a % of total

number of shares1 Gauri Tondon 339000 0.04 2 Ashok Chand Burman 201000 0.02 3 Pradip Burman 244000 0.03 4 Sudha Burman 18000 0 5 Chetan Burman 15000 0 6 Vivek Chand Burman 15000 0 7 Aditya Burman 15000 0 8 Pradip Burman HUF 15000 0

9 GC Burman HUF 15000 0 10 Asha Burman 77000 0.01 11 AC Burman HUF 15000 0 12 Indira Burman 3000 0 13 Indira Burman 3000 0 14 Naresh Talwar 2010 0 15 Umesh Talwar 990 0 16 Chowdhry Associates 115175020 13.33 17 Gyan Enterprises Pvt. Ltd 98241490 11.37 18 Gyan Enterprises Pvt. Ltd 5977500 0.69 19 VIC Enterprises Pvt. Ltd 108867000 12.6 20 Acee Enterprises 106025970 12.27 21 Puran Associates Pvt Ltd 94606000 10.95 22 Ratna Commercial Ent.Pvt

Ltd64222993 7.43

23 Ratna Commercial Ent.Pvt Ltd

17436000 2.02

24 Sahiwal Investment and Trading Company

7500 0

25 Milky Investment & Trading Company

7500 0

26 Upvan Farms & Services Pvt. Ltd.

7500 0

27 Sidharth Burman 6000 0 28 Anand Burman 111000 0.01 29 Minnie B urman 15000 0 30 Sidharth Burman 150000 0.02

Total 611834473 70.81

Fund Holder analysis

Fund

Mkt Value

Dec 2007

Mkt Value

Nov 2007

Change in

Value% Change

No of Shares

Dec 2007

No of Shares

Nov 2007

Change in No of

Shares% Change

Birla Sun Life Mutual Fund 5.57 -5.57 - 504026 -504026 -Franklin Templeton Mutual Fund 1.14 1.11 0.03 2.70 100000 100000 0 0.00HDFC Mutual Fund 28.73 27.88 0.85 3.05 2515396 2515396 0 0.00ICICI Prudential Mutual Fund 3.31 3.88 -0.57 -14.69 290000 351113 -61113 -17.41Principal PNB Mutual Fund 2.36 2.29 0.07 3.06 206497 207312 -815 -0.39Standard Chartered Mutual Fund 0.01 2.29 -2.28 -99.56 1042 207312 -206270 -99.50Tata Mutual Fund 0.01 3.32 -3.31 -99.70 1042 300000 -298958 -99.65Taurus Mutual Fund 0.48 0.51 -0.03 -5.88 42171 46235 -4064 -8.79UTI Mutual Fund 22.87 19.98 2.89 14.46 2002425 1802425 200000 11.10

Statement showing Shareholding of persons belonging to the category "Public" and holding more than 1% of the total number of shares:

Sr. No.

Name of the shareholder No. of shares Shares as a % of total number of shares

1 Matthews Pacific Tiger Fund 28958736 3.35 2 Matthews India Fund 18336659 2.12 3 LIC of India Money Plus 12545800 1.45 4 DWS Invest DWS Invest

Bric Plus10600000 1.23

5 ICICI Prudential Life Insurance Company Ltd

19094658 2.21

6 Life Insurance Corporation of India Market Plus

8883683 1.03

Total 98419536 11.39

Godrej Consumer Products

Stockholder Analysis

Distribution of shareholding by size class as of March 31, 2007

Distribution of shareholding by ownership as of March 31, 2007

Glaxo SmithKline Consumer Healthcare

Shareholding pattern

Particulars of the

shareholdersCurrent shareholdings Percentage of the sharecapital

Promoters, directors of the promoters and / or persons who are in control / or acting in concert

39.99%43.16%

International investors(fii) 9.34% 56.84%Indian financial institution 17.6%Indian mutual funds 6.84%Nri and ocbs 0.26%Public and others 25.96%

Fund holding pattern

Scheme DateNo. of

SharesValue %*

Birla MNC Fund 31-DEC-07

99392 73.57 3.73

HDFC Long Term Advantage Fund 31-DEC-07

155000 114.72 1.13

Principal Dividend Yield Fund 31-DEC-07

56213 41.61 2.48

Lotus India Contra Fund 31-DEC-07

28662 21.21 2.53

Franklin FMCG Fund 31-DEC- 10000 7.36 2.58

http://myiris.com/mutual/scheme/index.php?icode=KOTFMCG&fcode=TEMPLE_MF&cat=Equity&family=Franklin+FMCG+Fund

http://myiris.com/mutual/scheme/index.php?icode=LOTINDCONFU_SC&fcode=LOTINDMUTFUN_MF&cat=Equity&family=Lotus+India+Contra+Fund

http://myiris.com/mutual/scheme/index.php?icode=PRIDIVYIEFU_SC&fcode=IDBI_MF&cat=Equity&family=Principal+Dividend+Yield+Fund

http://myiris.com/mutual/scheme/index.php?icode=HDFTAXPLA_SC&fcode=HDFC_MF&cat=Equity&family=HDFC+Long+Term+Advantage+Fund

http://myiris.com/mutual/scheme/index.php?icode=MNCFUNPLAB_SC&fcode=BIRLA_MF&cat=Equity&family=Birla+MNC+Fund

http://myiris.com/shares/company/mfHolding.php?mfsrch=SMIBEECH&ord=PER_ASS&bmf=&prm=&fccode=&src=&flg=&icode=SMIBEECH

http://myiris.com/shares/company/mfHolding.php?mfsrch=SMIBEECH&ord=MKT_VALUE&bmf=&prm=&fccode=&src=&flg=&icode=SMIBEECH

http://myiris.com/shares/company/mfHolding.php?mfsrch=SMIBEECH&ord=NUMBERS&bmf=&prm=&fccode=&src=&flg=&icode=SMIBEECH

http://myiris.com/shares/company/mfHolding.php?mfsrch=SMIBEECH&ord=NUMBERS&bmf=&prm=&fccode=&src=&flg=&icode=SMIBEECH

http://myiris.com/shares/company/mfHolding.php?mfsrch=SMIBEECH&ord=DATE_R&bmf=&prm=&fccode=&src=&flg=&icode=SMIBEECH

http://myiris.com/shares/company/mfHolding.php?mfsrch=SMIBEECH&ord=SCHEME_FAMILY&bmf=&prm=&fccode=&src=&flg=&icode=SMIBEECH

07DBS Chola Midcap Fund 31-DEC-

07950 0.70 0.18

HDFC Prudence Fund 31-DEC-07

1000000 740.15 2.11

HDFC Top 200 Fund 31-DEC-07

465000 344.17 1.33

UTI MNC Fund 31-DEC-07

105026 77.74 3.71

Birla India Gennext Fund 31-DEC-07

76036 56.28 3.36

Birla Dividend Yield Plus 31-DEC-07

91027 67.37 1.82

UTI Equity Fund 31-DEC-07

630785 466.88 2.21

HSBC Equity Fund 31-DEC-07

298683 221.07 1.50

Principal Resurgent India Equity Fund 31-DEC-07

116859 86.49 2.38

HDFC Mid-Cap Opportunities Fund 31-DEC-07

480000 349.90 2.08

HDFC Equity Fund 31-DEC-07

1382663 1023.38 1.86

Lotus India Growth Fund 31-DEC-07

45004 33.31 1.64

HDFC Monthly Income Plan - Long Term Plan 31-DEC-07

269346 199.36 1.42

Birla Sun Life Capital Protection Oriented Fund - 3 Years

30-NOV-07

647 0.47 0.21

Tata Dividend Yield Fund 30-NOV-07

133794 96.48 5.69

Birla Sun Life Capital Protection Oriented Fund - 5 Years

30-NOV-07

856 0.62 0.52

Tata Life Sciences and Technology Fund 30-NOV-07

29878 21.55 3.93

Tata Young Citizens Fund 30-NOV-07

8457 6.10 0.34

Birla Sun Life Long Term Advantage Fund - Series - I

30-NOV-07

134447 96.95 2.20

Principal PNB Long Term Equity Fund - 3 Year Plan - Series I

30-SEP-07

144152 94.88 4.07

http://myiris.com/mutual/scheme/index.php?icode=BIRSUNLIFCA01_SC&fcode=BIRLA_MF&cat=Debt&family=Birla+Sun+Life+Capital+Protection+Oriented+Fund+-+3+Years

http://myiris.com/mutual/scheme/index.php?icode=BIRSUNLIFCA01_SC&fcode=BIRLA_MF&cat=Debt&family=Birla+Sun+Life+Capital+Protection+Oriented+Fund+-+3+Years

http://myiris.com/mutual/scheme/index.php?icode=BIRINDGENFU_SC&fcode=BIRLA_MF&cat=Equity&family=Birla+India+Gennext+Fund

http://myiris.com/mutual/scheme/index.php?icode=CENPRUDG&fcode=HDFC_MF&cat=Balanced&family=HDFC+Prudence+Fund

http://myiris.com/mutual/scheme/index.php?icode=CHOMIDFUN-G_SC&fcode=CHOCAZ_MF&cat=Equity&family=DBS+Chola+Midcap+Fund

Hindustan Unilever Ltd. (HUL)

Shareholding Pattern

Fund holding pattern

Sl

No.Name of the shareholder No. of Shares

Shares as a percentage of total

no. of shares

1 FID Funds (Mauritius) Limited 45804746 2.08

2 National Insurance Company Ltd 23485505 1.06

2 The New India Assurance Co Ltd

33623640 1.52

3 Life Insurance Corpn. Of India

159202663 7.22

TOTAL 262116554 11.88

ITC Ltd.

Categories of Shareholders:

Category No.of shares held Percent

Banks, Financial Institutions,

Insurance co. and Mutual Funds 1,35,91,45,869 36.19

Foreign Companies 1,20,86,86,701 32.19

Foreign Institutional Investors 53,84,43,002 14.34

Shares Underlying GDR’s 6,87,00,497 1.83

NRI’s/ OCBs/Foreign Nationals

2,39,41,653 0.64

Public and Others 55,62,61,138 14.81

Total 3,75,51,78,860 100.00

Shareholders with more than 5% share:

Sl.No Name of the Shareholder No.of shares held Percent

1 Tobacco Manufacturers Ltd 99,27,82,440 26.44

2 Unit Trust of India 44,55,54,160 11.87

3 Life Insurance Corporation of

India

44,08,83,480 11.74

Marico Industries Ltd.

Share Holding Pattern

Table below shows the distribution of share holding as on date 31-12-2007:

No. of Equity Shares

Held

No. of Share Holders No. of Shares Held Percentage of

Shareholding

0-50 2,581 87.127 0.0151-500 9,690 2,301,995 0.38501-1000 2,496 2,291,137 0.381001-5000 3,057 8,483,150 1.395001-10000 515 3,990,969 0.6510001-50000 401 8,623,438 1.4250001 & above 192 583,222,224 95.77

Total 18,932 609,000,000 100.00

Ownership Pattern

The table below shows the categories of Share Holding as on December 31, 2007:

Category No. of Shareholders No. Of Shares heldPercentage of

Shareholding

Promoters 25 386,406,520 63.45Foreign Institutional Investors 44 104,003,333 17.08NRIs and OCBs 401 2,274,648 0.37Insurance Companies, Banks, and Other Financial Institutions

8 18,213,461 2.99

Mutual Funds, including Unit Trust of India

45 50,620,015 8.31

Public/Private Ltd. Companies 557 13,276,362 2.18Resident Individuals , Trusts and In Transit

17,852 34,205,661 5.62

Total 18,932 609,000,000 100.00

Nestle India Limited

Ownership Pattern

Ownership Pattern as on 31-12-2007 No of

Shares

% Share

Holding

Share

Holder

Demat

Share

Foreign (Promoter & Group) 59629954 61.8467 2 10457938

Indian (Promoter & Group) 0 0.0000 0 0

Total of Promoter 59629954 61.8467 2 10457938

Non Promoter (Institution) 18760834 19.4583 201 18739581

Non Promoter (Non-Institution) 18024928 18.6950 44888 14552201

Total Non Promoter 36785762 38.1533 45089 33291782

Total Promoter & Non Promoter 96415716 100.0000 45091 43749720

Custodians(Against Depository Receipts) 0 0.0000 0 0

Grand Total 96415716 100.0000 45091 43749720

Stock holding pattern (

Public Share holding)

Institutions

No of

Shares

% Share

Holding

Share

Holder

Demat

Share

Mutual Funds/UTI 5300951 5.5 63 5289861Financial Institutions/Banks 34459 0.03 47 24446Insurance Companies 5789323 6 14 5789223Foreign Institutional Investors 7636101 7.92 77 7636051

Non-InstitutionsNo of

Shares

% Share

Holding

Share

Holder

Demat

Share

Bodies Corporate 1437754 1.5 927 1358019Individual shareholders with share capital up to 1 lakh

10386840 10.77 43330 7809361

Individual shareholders with share capital excess of 1 lakh

5846229 6.06 141 5042830

Any others – NRI + OCB 354109 0.37 490 341991

Documents

Finfinal Fmcg Secb Grp2